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Coverage
Negotiated Greenhouse Agreements and business adjustment assistance
Expected impacts of the carbon tax
Fiscal matters
The climate change policy package
International approaches to incorporating the price of carbon in domestic economies

2.1     The objectives of the proposed carbon tax are to help New Zealand to reduce its greenhouse gas emissions^[3] resulting from human activities, and to prepare the New Zealand economy for a smooth transition to more challenging commitments after 2012.

2.2     The 35 developed countries that have ratified the Kyoto Protocol have agreed to a cap on their national greenhouse gas emissions. Each country starts with an allocation of emissions units equal to its target — in New Zealand's case, this is 1990 emissions levels. If a country reduces emissions below its target level, it will have surplus emissions units that it is able to sell. Conversely, countries that choose not to cut emissions to their target level will need to buy additional emission units to cover the excess. This trading of units between countries allows cuts to be made where they are most cost-effective and establishes an international price for emissions.

2.3     Putting a price on greenhouse gas emissions is a fundamental element of the Kyoto Protocol. It means that the price of fossil fuels will better reflect the environmental costs of using them, and that business and consumer choices will begin to take these environmental costs into account.

2.4     The carbon tax will signal to investors and consumers that they should reduce emissions when the cost of doing so is less than the cost of the tax. Over time, the broad awareness that there is, and will continue to be, an emissions price will mean lower emissions than would have been the case without a carbon tax.

2.5     Moreover, as international agreements become increasingly challenging beyond 2012, countries that have already integrated a price for emissions into their economies will see a growing competitive advantage over those countries that delay and need to act more abruptly.

Coverage

2.6     The carbon tax aims to price all major greenhouse gas emissions, other than methane and nitrous oxide from the agricultural sector, according to their global warming impact, when doing so is feasible and cost-effective.

2.7     Although farming emissions^[4] of methane and nitrous oxide are exempt from the tax in the first commitment period, farming groups are contributing to research to help reduce these emissions.

2.8     The tax will apply to New Zealand's emissions from fossil-fuel based energy supply and use, industrial process emissions, and fugitive energy emissions^[5] of carbon dioxide, methane and nitrous oxide. It will also include perfluorocarbons (PFCs) that result from industrial processes.

2.9     For the present, the government is not considering applying the carbon tax to sources of emissions that will be covered by other policies. They include emissions of synthetic gases, other than PFCs, from process emissions and methane from the waste sector.

Negotiated Greenhouse Agreements and business adjustment assistance

2.10     The government has introduced Negotiated Greenhouse Agreements (NGAs) to reduce the risk of economic activity moving from New Zealand to countries with less stringent climate change policies. This "carbon leakage" could occur if the carbon tax reduced the international competitiveness of some firms or industries relative to producers in other countries that do not have similar climate change policies.

2.11     In return for reducing emissions intensity to World's Best Practice (WBP) levels, eligible firms that successfully negotiate an NGA will receive either a partial or full exemption from the carbon tax. WBP will be determined with reference to the performance of the applicant's international peers.

2.12     The government has also agreed on policy to assist energy-intensive small to medium-sized enterprises adjust to a carbon tax, and will be working directly with energy-intensive sectors on its implementation. Further details are available at www.climatechange.govt.nz.

Expected impacts of the carbon tax

2.13     With the introduction of the carbon tax, consumption and investment are expected to shift to less carbon-intensive goods and services. Responses to the tax could take a wide variety of forms, ranging from investment in more fuel-efficient technology, to improved logistical planning, to substitution of fossil fuels with renewable energy sources. Investors and firms involved in carbon-intensive activities may invest in forest sinks^[6] or the Projects to Reduce Emissions programme^[7] to manage their exposure to the price of greenhouse gas emissions.

2.14     The tax is expected to lead to a one-off increase in some prices. There will be some costs to the economy as a result of the carbon tax, but these are a necessary consequence of New Zealand playing its part in reducing global emissions. However, there will also be offsetting benefits to the economy from the business tax reforms that will be financed by the carbon tax.

2.15     Overall, estimates of the macroeconomic impact vary, although a small but negative impact on economic activity (measured by GDP) is expected. Depending on the international emissions price, GDP in 2010 is likely to be in the order of 0.03% lower than it would otherwise have been.^[8]

2.16     The effect of a $15 a tonne carbon tax on household budgets is difficult to predict precisely. The complex nature of the electricity supply industry makes a key element, the expected increase in electricity prices, difficult to pin down, and households have a wide range of patterns of energy use. From a current residential price of around 17 cents per kWh, electricity could increase in price anywhere between 0.7 cents and 1.1 cents per kWh. The cost of a $15 a tonne CO₂ tax to a typical household is estimated to total in the order of $4 a week for electricity, petrol and other fuels, assuming average energy usage.

2.17     The table sets out a range of specific energy price increases that could result from the carbon tax, assuming a tax rate of $15 a tonne of carbon dioxide or carbon dioxide-equivalent greenhouse gas and that all of the cost of the tax is passed on to customers, and the wholesalers and retailers do not price to retain their margins (in percentage terms).

Fiscal matters

2.18     The revenue from carbon tax will not be used to improve the Crown's net fiscal position, but will be recycled through the tax system. Tax changes will be announced in the 2005 Budget.

2.19     The carbon tax is also expected to have a number of incidental effects on the government's fiscal position. Renewable electricity generators, many of which are state-owned, are likely to benefit. The government's own energy costs will increase. Some forms of income support are also expected to increase as price rises caused by the tax flow through to the Consumer Price Index. These incidental effects will be managed through the normal budget process.

The climate change policy package

2.20     In October 2002, following extensive consultation, the New Zealand government confirmed the policies that will assist it to achieve its obligations under the Kyoto Protocol. Among these policies are a number of price-based measures that are designed to provide financial incentives to reduce greenhouse gas emissions. They include the carbon tax, Negotiated Greenhouse Agreements and the Projects to Reduce Emissions programme.

2.21     Policies have also been developed for specific sectors such as agriculture, forestry, small to medium-sized businesses and local government.

2.22     Other foundation policies which have been in existence for some time and will assist New Zealand to achieve emission reductions include:

• the National Energy Efficiency and Conservation Strategy, or NEECS, which promotes energy efficiency and conservation and renewable energy through establishment of energy efficiency and renewable energy targets, research, education and some financial support;
• the New Zealand Transport Strategy, which guides use of transport services and infrastructure, including support for public transport;
• the New Zealand Waste Strategy, which manages waste streams and has contributed to reductions in greenhouse gas emissions from landfills;
• the government's Growth and Innovation Framework, since there is a strong relationship between growth in output, energy and CO₂ emissions;
• public funding, through the Foundation for Research, Science and Technology, of research into energy technologies, including those enabling greater use of renewable energy;
• a programme of raising awareness of greenhouse gas emissions and what the public can do about them, run by the Climate Change Office — for example, the "4 million careful owners" campaign; and
• the Sustainable Energy Framework work programme, led by the Ministry of Economic Development, which examines longer-term energy options from a sustainability perspective, of which climate change is a major component.

2.23     The policy package is built around commitments made by New Zealand when it ratified the United Nations Framework Convention on Climate Change in 1993, signed the Kyoto Protocol in 1998, and ratified the Kyoto Protocol in 2002. These commitments signal New Zealand's commitment to working with the international community to address the global problem of climate change, and allow New Zealand entities to take advantage of the international demand for Kyoto Protocol-compliant emission units.

2.24     Under the Protocol, New Zealand has agreed to limit its greenhouse gas emissions in the first commitment period (2008 to 2012) to 1990 levels or take responsibility for emissions over this target. The long-term goal is to achieve lasting reductions in human-caused emissions.

2.25     See www.climatechange.govt.nz for more details about the government's climate change policy package.

International approaches to incorporating the price of carbon in domestic economies

2.26     Countries such as Denmark, Norway, the UK and the Netherlands have implemented climate change-related taxes^[11] (such as a duty on CO₂ in the Netherlands) and Switzerland has recently decided to do so.

2.27     Although developing countries and some economies in transition do not have legally binding emissions targets under the Kyoto Protocol some are implementing emission reduction initiatives. In some cases they are doing this in co-operation with developed countries using the Kyoto Protocol's "Clean Development" mechanism.^[12]

2.28     Emissions trading has begun in the European Union and in Norway, and is planned to begin in Canada from 2008.

2.29     Japan is considering possible emission pricing instruments.

2.30     Although the USA and Australia have not ratified the Kyoto Protocol, they have a number of national and state policies aimed at greenhouse gas emissions (such as Australia's Mandatory Renewable Energy Target scheme) as well as some voluntary regimes.

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