In practical terms that makes sense. Of course if the government could commit to an exogenous level of spending, then it would be fine to use the funds to reduce income taxes 🙂

“Thanks for the blog by the way Matt, and the chance to have a decent level of discussion over this stuff”

No worries, it is the comments from you guys that add most of the value anyway 😉

Of course that’s a huge deviation from current ETS thinking and I’d much prefer we just got on with SOMETHING that exposed the creators of our liability to at least some of that cost…

(Thanks for the blog by the way Matt, and the chance to have a decent level of discussion over this stuff).

Very interesting.

“This is one of the National Party’s criticisms of the New Zealand ETS: that it is not revenue neutral”

And it is a fair criticism if the policy is not revenue neutral – however it is not a criticism of emissions trading in of itself as the comment was stating.

As you say, if we could replace income taxes with externality taxes without hammering up compliance costs it appears to be a no-brainier 🙂

Canada is still a party to the Kyoto Protocol, but its emission levels are well ahead of its obligations (its Kyoto target is to be at 94% of 1990 emissions over the 2008-12 period, and the report out yesterday had its 2006 emissions at 154% of the 1990 baseline). Their domestic policy is a complete muddle, made worse by an infestation of beetles that are destroying large tracts of forests. It is unclear what they are going to do.

On revenue recycling, the economic literature favours market instruments like emissions trading and carbon taxes because they produce a “double dividend”: they correct a market failure and generate revenue that can be used to reduce other, distorting, taxes. But in reality, governments are not so pure and tend to (a) put in place instruments that don’t (fully) correct market failures and (b) use the revenue to fund further programmes that create further distortions. This is one of the National Party’s criticisms of the New Zealand ETS: that it is not revenue neutral.

The purpose of the ETS is the create funds to pay off a liability by making those who create the liability pay for it. Anything that states that the scheme will just take the money and spend it on other things is not a study – it is an assumption.

I am in partial agreement with almost everything you say except:

“Moving to the issue of the ETS itself, not only is it about the least cost method of meeting our international obligations, it is also about how we can encourage and support international efforts to address the risks of climate change”

I do not think this is a reason why we should implement an ETS ahead of other methods (tax, direct regulation) – I think this is part of the reason why we may want to join the Kyoto protocol even though it costs us, and part of the reason why we may not wish to renege on the deal. Once we are part of the protocol the issue of “cost” is the driver behind the choice of an ETS.

Hi Gareth,

“How that hasn’t always been the main thrust of the media coverage I don’t know.”

I agree – it is crazy, someone has to pay. If we don’t pay with an ETS the taxpayer pays – I’m not happy with that.

Hi Eric and Gareth,

“Canada abandoned Kyoto. There’s been zero international sanction or penalty.”

“Eric, note that Canada have NOT withdrawn from Kyoto.”

I don’t know whether Canada has or not but I think this all raises an important question.

If Canada did or could leave Kyoto without sanction, why? How trade exposed are they to Europe (who are the main people threatening to impose sanctions?).

If Canada did leave with no repercussions it does not necessarily mean that we won’t be hit if we leave – after all we trade with different people and have a different bargaining position. The cost of leaving the agreement should be dealt with in policy analysis – I do not think that we can act like the cost is zero or infinite.