Carbon needs a price; tax would get ball rolling

Going by the mildly hysterical reaction from Climate Change Issues Minister Tim Groser, the Green Party's proposal last weekend to swap income tax for carbon tax was the work of lunatics.

In fact, it's not just a good idea. It's an old idea.

Taxing environmental bads as a way to curb their use is how the world has dealt with a number of serious contaminants already, not least tobacco.

Price signals work well most of the time. When they don't, governments can regulate. Most often, a judicious combination of the two works best.

The current alternative to a carbon tax, the emissions trading scheme (ETS), sought to price carbon by joining an emerging global market. It was hoped this would create a more dynamic version of what a tax is intended to do - incentivise less use and lower emissions, leading to an impact on climate change.

Unfortunately, everywhere an ETS is in place - basically here and Europe - it is failing.

The concept isn't necessarily wrong, but execution has been extremely difficult for a variety of reasons, including the price-depressing influence of over-issued credits from Europe and special pleading by most countries in some area or another.

New Zealand's special case was to include carbon sequestered in plantation pine forests, grown for eventual harvest.

At first, farm foresters thought this would make marginal pine forests profitable. After a burst of new planting, based on the promise of carbon heading to $25 a tonne, they have since stopped planting as New Zealand carbon credits became briefly virtually worthless and have only staggered back to about $4.70 a tonne today.

That can't have been anyone's intended policy outcome, but it remains the policy in place.

Labour has not been swift to praise the Greens' position. The former pursued a carbon tax under Helen Clark, got beaten up by industry and the farmers and went for the ETS instead.

Too many bad memories. Better to let Groser attack the "loopy" Greens for an idea which achieves two of the things all tax policymakers love: broadening the tax base with a simple measure and flattening the tax bands.

To that could be added the desirable aim of reducing reliance on personal income tax to pay the state's bills.

Income tax is barely a century old, and it has replaced many other taxes. That evolution should continue.

The Greens' announcement also shows signs of painful fiscal responsibility. As first proposed, their tradeoff offered no income tax on the first $10,000 of income in exchange for a $25 per tonne carbon tax.

But the tax-free zone is now slashed to just $2000.

That is almost certainly because the economists Business and Economic Research Ltd had sobering news for the Greens about just how much tax you give up by leaving alone the first $10,000 of every New Zealander's taxable income untouched. Roughly speaking, it's a lot more than you'd think.

The Greens also recognise farming needs a predictable and longer route into whatever the future of carbon charging becomes, and would impose the tax at only half the proposed rate.

That would give agriculture time to find ways to reduce nitrogen and methane emissions, which continue to account for about half the country's total greenhouse gas (GHG) output.

But should we be so swift to abandon carbon markets?

It's sometimes argued that carbon prices reflect weak First World countries and will rebound with growth, but that argument has had too long to be acceptable anymore. Price signals on carbon need to start moving. A carbon tax would get the ball rolling.

Something needs to change, as New Zealand has already signalled by siding with the US and China by preferring a new global deal at the crucial summit scheduled for December 2015, in Paris, rather than one based on the Kyoto Protocol, to which New Zealand is a signatory.

Neither the US nor China is a party to Kyoto, which has governed global climate change reduction efforts to date, but expired in 2012.

Groser, a life-long participant in international treaty negotiations, judges a post-Kyoto deal more likely. That has cost him politically, as opponents see this as evidence the Nats will welch on their Kyoto carbon reduction deal, given half a chance.

Compounding that impression, a feeble offer to cut emissions to 5 per cent below 1990 levels by 2020 is on the table from New Zealand, although that offer could quickly be upped when bigger players show their hand.

That is starting to happen. On Tuesday, a Chinese policymaker signalled China may impose an absolute cap on GHG emissions for the first time from 2016. A day earlier, US President Barack Obama offered a 30 per cent reduction by 2030 in emissions from the electricity industry, against 2005 levels. That leaves out transport fuels and heating oil and implies a huge switch to natural gas for electricity instead of coal.

Both the Chinese and US plans would see the world's two largest emitters adopting policies to reduce total national emissions for the first time. That is historic stuff and should help shape the lead-up to Paris.