I see that the Greens have announced a carbon tax to replace the emissions trading scheme (with details and analysis by BERL here). The authors of TVHE have long been a fan of this type of switch when discussing the issue (eg here and here). And the idea of pricing an externality and using it to lower other tax burdens is a good one. Note: John Small also discusses here, with specific discussion about dairy. Aaron Schiff discusses here.
So it should be unsurprising that I broadly agree with the aim Green party policy here, and this should be kept in mind while reading my post.
However, TVHE isn’t about saying what policies I think are good or bad – it is about considering trade-offs and thinking about the details of policy when we can. In that context, there are a few points I must raise.
Households, consumers, firms
The use of households by the Greens is a touch, disingenuous. We need to be very clear about what the externality is before we make claims like this – an issue we will get to at the end (in fact, the most important question I have regarding the Green party policy).
Assume for now that there is a type of externality, which requires taxpayer funding to clean up, and is due to the decisions of producers. In that case, pricing the externality is a way to get us towards “user pays” for pollution – excellent.
Now the ETS already does this in a form, so the question is how the relative burden is being shifted. What forms of household/consumer/firm are currently being subsidised, and which forms are paying more in tax for the pollution?
This is a complex question, and doesn’t actually lend itself to points like this:
“The Green Party’s plan will future-proof our economy and put New Zealand firmly back in the global green race, all while leaving households better off.
From what I can tell, the main difference will be including agriculture in the tax – thereby switching burden from general taxpayers towards agriculture. Whether that is fair (I think it is) and the impact on aggregate income (which is unclear) are two hard questions to ask, but important ones. As always there is some type of trade-off here.
Let me give an example. There is a lot of talk about “rural communities” struggling, and yet they are implicitly subsidised at present. This scheme involves removing this subsidy for those regions, making whatever issues we are inherently concerned about there worse. This isn’t to say we shouldn’t do it, just that we also need to consider side-effects in this manner – even IF the average household was better off, there are distributional consequences 😉
The nature of the tax rebate
By giving everyone except the poorest a lump sum payment, the tax rebate involved from the ETS has its own distributional consequences – consequences we can argue about regarding both fairness and efficiency.
We shouldn’t just “throw” some type of tax rebate in the scheme, we need to ask about what the best type of tax rebate is to meet a given policy objective.
I am not going into detail here – but a tax-free threshold isn’t what economists usually consider when discussing this type of policy. Instead this is a targeted form of progressivity – and so needs to be justified on that basis as well.
The ETS, Kyoto, and the externality
The externality is an interesting one. To quote myself from Keith Ng’s facebook wall. [Note: At the start of this comment I talk about whether the costings are reasonable – I’m not covering that in this post, so take that as my comment 😉 ]:
Hmmm the report does cover it – but it decides to work with partial equilibrium discussions of the price change in a few categories, rather than doing a CGE model of the full impact. So by default the benefits will be exaggerated – but not as badly as if costs had been completely ignored.
I also didn’t see reference to payments due to Kyoto liabilities, which was the justification for an ETS initially. I wonder what happens there? Without the justification of Kyoto payments this becomes a very different question.
Essentially, we face a prisoner’s dilemma in the world for dealing with climate change – but the actions of NZ are inconsequential (due to our small size). We joined Kyoto to try to solve the PD – but if that is out of the question we have to ask what our “best response is” given what the rest of the world will do. In this case, investing in ways to mitigate the costs to NZ becomes the most sensible way forward – rather than targeting a non-existent externality (due to NZ’s small size once again).
John touches on the small size argument here, but I don’t find his reasons sufficient to undermine the small size argument in this scenario (eg demand is irrelevant if we are in a world with no agreement, and taxing industries for a “technological” dividend isn’t a compelling argument).
If we are discussing a world where Kyoto liabilities disappear, where is the externality from our production of carbon emissions? Whether NZ cuts emissions to zero, keeps emissions unchanged, or doubles emissions, the probability of a GWE (global warming event) and the intensity of said event will be unchanged. Just like with most of our commodity prices, the chance of global warming is outside the hands of our policy makers.
In this case, producers arguably AREN’T creating an externality. We are just taxing them for kicks. Now there are arguments for a tax (showing the rest of the world we are serious about climate change, having the moral high ground on an incredibly important and scary issue), but it isn’t the externality argument. Kyoto, by putting in a liability for nations, creating the externality regime we justified the NZ ETS/tax argument on – if that is gone, the argument is different.
I have no doubt these words are incredibly unpopular, but I couldn’t really care less – instead, if we are accepting a policy framework where Kyoto has failed and a GWE is very likely we need to change tack in terms of our concern. Namely, the role of policy is now about investigating the risks NZ faces in light of such an event, and helping us co-ordinate preparation. It becomes one of insurance and civil defence.
Now, if we do believe in a central agreement about global warming – and that we need an ETS/tax in place to pay for this and give firms/households certainty, that is cool. But then the tax is used to fund these liabilities NOT to cut taxes – something that I haven’t been able to find reference too so far in the report! To me, this is an extremely important issue to get clarity on!