It’s of academic interest only now, in a week when the Govt has rushed to ram an extensively modified, highly contentious and economically bothersome version of the emissions trading scheme into law. But a paper from the Centre for Independent Studies earlier this year, Emissions Tax: The Least Worst Option, said an emissions trading system is the wrong way to go. Researchers John Humphreys and Luke Malpass reckoned an emissions tax linked with other tax cuts would be smarter. Among their objections: emissions trading – like import quotas – is a costly, bureaucratic and inflexible approach. An emissions tax, in contrast, is a relatively efficient and flexible alternative which “allows market participants the maximum freedom to do business.” It would lead to less lobbying and rent-seeking, lower administrative and compliance costs, provide price stability, and avoid wasteful handouts to business. Best of all, an emissions tax could be accompanied by cuts to other taxes – if well designed, therefore, there should be no net cost to the economy.

Wide Support. Such a tax is championed by a raft of eminent economists. As Harvard professor Greg Mankiw points out, public finance experts favour consumption taxes over income taxes for long-run economic growth, because income taxes discourage saving and investment. Moreover, they tax something we want to reduce if not be rid of (such as pollution) rather than something we want to stimulate (work and enterprise). The Economist magazine rejects tradable emissions permits as “a popular, but inferior, way to tackle global warming.” Among its reasons: misjudging permit numbers could send permit prices skywards or through the floor, with immediate, and costly, economic consequences.

Taxes can be easily adjusted. The Business Roundtable is among NZ advocates of a carbon tax. Federated Farmers, surprisingly, announced its conversion to the cause last week, although it was advocating only a low-level carbon tax to fund research on science and technology. Yep. President Don Nicolson recalled the Feds’ bitter opposition to the farming levy (the “fart tax”) proposed by Labour in 2003 to fund research into agricultural emissions. The Clark Govt backed off, just as heavy political pressure discouraged its pursuit of a carbon tax. National and ACT opposed a carbon tax, too, which is why we have the ETS, a clunky instrument with profound implications for the economy. Ominously, no-one seems to be able to convincingly foretell what those consequences or (more important) costs will be.

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