A carbon tax could reduce income tax

A carbon tax could reduce income tax or petrol prices

The New Zealand government’s emissions trading system, due to come into force in 2010 for energy and 2013 for agriculture, is the wrong approach, says a new report being released on Thursday.

In a paper being released by the Centre for Independent Studies, Emissions Tax: The Least Worst Option, researchers John Humphreys and Luke Malpass argue that an emissions tax linked with other tax cuts would be a big improvement over the proposed emissions trading system.

‘Despite including the word trading in the name, an emissions trading system is not the best market solution for creating an emissions price,’ say Humphreys and Malpass. ‘Like import quotas, emissions trading is a costly, bureaucratic and inflexible approach. In contrast, an emissions tax is a relatively efficient and flexible alternative that allows market participants the maximum freedom to do business.’

An emissions tax would also lead to less lobbying and rent-seeking, lower administrative and compliance costs, provide price stability, and avoids wasteful handouts to business. The biggest benefit is that an emissions tax can be more easily linked with other tax cuts.

If designed well, a revenue-neutral emissions tax could have no net cost to the economy.

‘The rationale for pricing emissions is not to reduce the use of energy, transport or agriculture. The goal is to speed up the shift to new ‘cleaner’ technologies. By excluding agriculture, an emissions price would still provide important incentives towards new technology while not unduly harming the NZ economy,’ say Humphreys and Malpass.

It is vital that an emissions tax is linked with tax cuts:

Income Tax Reform:
A $40 per tonne CO2-e non-agriculture emissions tax would raise over $1.4 billion, which could be used to increase the cut-off point for the 21% and 33% tax bracket, moving more average workers into lower tax brackets and stimulate employment and economic growth.

Environment Tax Reform:
An already existing environment tax applies to fuel and diesel. Replacing this with an emissions tax would offset the higher costs of electricity with lower transport costs.

Company Tax:
A $30 per tonne CO2-e non-agriculture emissions tax would raise about $1.1 billion, enough for the government to reduce the company tax rate from 30% down to 25%. This would result in stronger business growth, higher wages, and lower prices.

Luke Malpass is a Policy Analyst and John Humphreys is a Research Fellow at the Centre for Independent Studies.
The embargoed report is available at www.cis.org.nz/issue_analysis/IA113/IA113.pdf

ENDS

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