The visible hand in economics

Carbon taxes again…

Posted on: September 20, 2007

It looks like Matt’s not the only brilliant economist campaigning for Pigovian taxation of carbon emissions. Now Greg Mankiw’s weighed in on the side of taxation. To those who claim a carbon tax is regressive because poor people are forced to live in the suburbs and drive more than the wealthy, Mankiw says

Gilbert Metcalf, a professor of economics at Tufts, has shown how revenue from a carbon tax could be used to reduce payroll taxes in a way that would leave the distribution of total tax burden approximately unchanged.

In addition, the Economist points out that

…it’s possible that a carbon tax might sharply reduce carbon output without any fall in oil consumption, so long as consumers of other fuels affected by the tax reduce their use of such pollutants and their consequent emissions,

although this seems like a bit of a long shot.
In NZ, the government has preferred a cap-and-trade system to carbon taxes. Mankiw mentions that this is equivalent to a carbon tax only if the permits are auctioned off. If they are allocated for free based on previous emissions, as I believe the case will be in NZ (please correct me here if I’m completely mistaken), then “…the prices of energy products would rise as they would under a carbon tax, but the government would collect no revenue to reduce other taxes and compensate consumers.” In other words, a cap-and-trade with grandfathered permits IS regressive and it’s expensive to redress the burden on the poor.

7 Responses to "Carbon taxes again…"

Which makes the current government stance utterly incomprehensible. Colin Espiner hits the nail on the head when he highlights the government’s inconsistent stance:

“Climate Change Minister David Parker says any rise in the price of petrol or power will be “very small” as a result of the new scheme. “These costs are not substantial, they are not going to happen tomorrow and they are certainly not 4 percent per annum,” he said on Radio New Zealand.

This poses an interesting question. If the price rises will be very small, then surely they will not change consumer behaviour, which, after all, is what the carbon charge is all about, surely? Labour can’t have it both ways. If it wants consumers to sit up and take notice of their energy consumption it must sock them in the wallet and suffer the electoral consequences.”

I agree that the government should be collecting revenue from the permit scheme, not handing out permits.

However, the exact details of the scheme are coming out at 10.30 today, so I’m not quite sure what they will be doing. Once they have announced what they are doing we can discuss it.

If they are auctioning off permits then I am pro the scheme. I don’t agree with Colin Espiner, he is only looking at reducing emission, when the true goal of any policy on externalities should be to set the social marginal cost equal to the social marginal benefit. We might have perfectly inelastic demand in a product that has an externality, however it should still be taxed. Although quantity will not fall, the funds could be redistributed to those that suffer from the externality.

In the case of carbon emissions, we will all have to pay money towards the Kyoto liability. The fairest way to fund this is to make people pay based on the emissions they produce (note that this will be shared between production and consumption based on the relative market fundamentals). Like most middle class people in NZ, Colin gets upset about the idea that his power and petrol prices will go up with taking a step back and thinking about what is fair for society as a whole.

The environmental guy from work just came in with some details. He said that free allowances were set at 90% of 2005 emission levels. What is our Kyoto target?


There is some revenue to be re-allocated. This is predominantly from electricity generation in the form of ‘windfall profits’ that the government will get most of. ie the way the stack is set in NZ it is the marginal price of electricity (ie highest price of generation at any one time that meets demand) that sets the market price for ALL generation. Thermal is always highest. MC of renewables is usually next to nothing. An increase in electricity costs for GHG emitting generators means all the non GHG generators get that increased price w/out a corresponding increase in cost. With 3/4 of the main generators government owned, this means more dividends (hundreds of $millions) for the government, and more tax revenue from Contact.

As far as free allocation, my understanding is that it falls to two groups. The first is stationary energy (not generation) – ie firms who directly use energy in manufacturing, who are considered “competitive at risk” – the sudden imposition of the cost increase to these energy dependent firms will be a shock that would potentially make them unable to compete with internationl firms. The idea is that some allocation gradually reducing will give time for a more orderly reduction.

In total there are only about 200 firms that will be DIRECTLY affected (ie needing to buy credits) by the scheme, since most will be effected downstream.

The one thing that I am not 100% happy about is the treatment of farmers. 2013. Ok. Supposing that is alright (I think 2012 would be better), why also give free allocations (admittedly reducing over time). The technology is there, and EVEN IF IT ISN’T, this is no excuse for them not paying their share. Not imposing it is a distortion. Farmers will not go out of business because of these rather small cost increases – our farmers have an international competitive advantage. This is the only sector of our scheme that stinks of lobbying.


“This is the only sector of our scheme that stinks of lobbying.”

Big time. The pork is this: take the level of emissions that agriculture produced in 2005, and multiply it by 0.9. Then take that many emissions credits (‘NZUs’) and hand them out for free to the agriculture sector in 2013, the first year in which they actually need to hold any NZU’s at all.

So for instance, if the agriculture sector emitted the same amount in 2013 as they did in 2005, they would only need to cover 10% of the costs of those emissions out of their own pockets (the rest comes out of yours – giving them out for free deprives the governments revenue of the amount that would have been paid for them if auctioned). Maybe we could call this the “polluter pays (a teency bit) principle”.

I think the same 90% rule is going to be applied to industrial process emissions – ie they get roughly 90% of the NZU’s they’ll need in their first year for free (actually, less than 90% because their annual emissions will have grown from 2005 to 2010 which is when they enter).

The most ridiculous figure is that the gifting of credits to these sectors will only be finally phased out in 2025.

If the government could demonstrate that any meaningful reductions are actually going to be happen then this scheme might be good, but are there any projections of this actually happening?? It seems all very… weak. I can hardly imagine farmers having any reason to get het up about it (note this doesn’t imply they WON’T kick up a stink about it anyway). There have also been promises of subsidies for certain other emissions reducing schemes for them. The current top brass of Federated Farmers will certainly all be dead by the time anyones profits even look like falling.

Also, as far as I’m aware, the number of NZU’s that will be auctioned off during the first few years of the scheme hasn’t been decided. Will this decision be a means to bribe interested groups during election year? After all, if the government auctions off every single unit that NZ is annually entitled to under Kyoto, but only requires 1 or 2 sectors to actually hold such units to compensate for emissions, then the price of an NZU will be very low and thus not induce any behaviour change. I’m not sure I understand this part of the scheme yet though…

The whole bloody thing is a load of socialist horse shit and John Key should be shot for supporting it, along with sundry economists who have not yet been able to demonstrate (a) what effect this transfer of wealth will have on climate change -(that’s because it will have zero effect) and (b) what benefit will be derived for the populace of NZ. It’s an election year gimmick aimed at dim wits and apparently lapped up by ivort towered theorists.

[…] Silicon Valley Blogger wrote an interesting post today onHere’s a quick excerptGilbert Metcalf, a professor of economics at Tufts, has shown how revenue from a carbon tax could be used to reduce payroll taxes in a way that would leave the distribution of total tax burden approximately unchanged. … […]

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