Jun 9, 2008

Monday Essay For Busy Politicians, Journalists and Policy Makers

We thought that we would try and start each week with a short essay on a topic of relevance to the week ahead. It might help focus on the essential issues on a topic of importance and allow greater clarity of debate for the week ahead.

We thought we would start with a simple one. Why we don't like Cap and Trade as a model.

Imagine a country that had a business tax. The size of the business tax varied daily, and was subject to international forces - global supply and demand and exchange rate variation. No one therefore knows the size of the tax but estimates suggests that the size will be somewhere between $15 and $75 per tonne of carbon emission equivalent (in the short term, long term prices in the $100 plus range are regarded as conservative).

Investors don't like uncertainty. This tax would add considerable uncertainty. Would investors invest in a country that had such a regime?

Even though it is called an emissions trading scheme, the New Zealand version of cap and trade will have the same impact as just the type of tax just outlined above. Indeed the scale of this tax, as even the Government admits, enormous (total revenue over the period 2013 to 2030 based on Treasury's central projections may approximate $21 billion. Before the Government tinkered with the scheme a few weeks ago, the revenue was going to be $34 billion. And this is using quite conservative estimates of the global price for carbon credits).

Compare the cap and trade regime with a carbon tax - it is simple, predictable and the size of the tax in the immediate future doesn't need to be large to meet our liabilities under the Kyoto Protocol. $3 a tonne starting 1 January 2009 is all that is needed.

We also hate the fact that so many people are lining up to make money out of the proposed cap and trade regime. NZX, the major accounting firms, lobbyists, lawyers, banks, journalists. Be very careful who you listen to on the ETS. You might be talking to a vested interest.

So at The Hive, we agree fully with the policy that the Green Party has been advocating since the early 1990s. A carbon tax offset against reductions in general taxation is the best way forward. We just can't understand why so many people have decided to support the cap and trade alternative. Those on the left, we understand - it will screw the economy. But on the centre and right?

Next week will tell you why we think New Zealand is going to move back to #1 in the global per capita income stakes (so long as our ETS doesn't stuff things up).