In the lead up to this election there has been some debate about how New Zealand should respond to climate change and, in particular, about how we should go about lowering our emissions.
There are two main options to provide price signals to help both businesses and consumers to reduce their emissions: an emissions trading scheme (which is what New Zealand has currently) and a ‘carbon tax’ (which can involve taxing both carbon dioxide and other greenhouse gas emissions).
If a carbon tax is used, the government can choose to change the level of the tax, either up, or down. In Australia, the government chose to get rid of the carbon tax altogether when the government changed in 2013 and the new government wanted to weaken climate policy. The Australian emissions price went to zero and has not yet recovered.
If in contrast, an emissions trading system is used, the government can choose to decrease or increase the level of emissions. If a government wants to decrease emissions within an ETS it reduces the number of emission units it issues and constrains the use of international units. To increase emissions, the government issues more units or allows more international units.
In Aotearoa, the government chose to allow our domestic level of emissions to increase by allowing overseas credits and giving emitters a two for one deal on their emissions. For a while, New Zealanders did not experience any increase in costs for high-emission activities and emissions were not constrained and kept going up.
At its lowest point the emissions unit price in NZ was around 20c. The price has been back around $17 per unit since mid-2016.
New Zealand’s emissions have increased due to the way government has used the ETS – this is not the fault of the ETS mechanism, but a result of political choices.
There is no doubt that being able to be certain about an emissions price is better for business and often for the country. It is impossible to prove logically however, that a carbon tax will provide that certainty. There is certainly no empirical evidence that it does.
If you want more certainty, work for stronger political consensus and stable policy. The key issue here is emissions quantity and price, not the specific policy instruments used to control them.
Dr Kerr is an international emissions pricing expert and co-leader of the 2016 World Bank and International Carbon Action Partnership report 'Emissions trading in practice: A Handbook on Design and Implementation'.
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