Matt Burgess: The ‘ute tax’ will not cut emissions

OPINION:

Last week’s protests by farmers show it is only a matter of time until the Government’s punitive approach on emissions will fail.

With each new policy the Government is burning political capital at a faster rate than it is cutting emissions.

The policy that most attracted the ire of protesters was the Government’s Clean Car Discount, the so-called “ute tax”.

From January, the policy will add thousands of dollars to the cost of some petrol and diesel vehicles. The money raised will subsidise low-emissions vehicles.

It is an awful policy. For all its disruption, it will reduce New Zealand’s emissions by a paltry 0.4 per cent over the next 18 years, according to the policy’s Cabinet paper.

Ministers and their advisors might ask themselves where the other 99.6 per cent of emissions reductions are coming from, which will be needed to reach net zero emissions by 2050.

Unfortunately, the Cabinet paper overstates the emissions benefits of the new tax because it overlooks the important fact that the Government has already capped emissions.

Capping emissions means other policies in the cap cannot reduce emissions any further.

The ute tax will not lower emissions at all.

Which means the Government’s demands for sacrifices from farmers, households and businesses are wholly gratuitous.

The emissions cap was added to the Emissions Trading Scheme (ETS) by the Climate Change Response (Emissions Trading Reform) Amendment Bill, which passed in June 2020.

This unheralded bill is arguably the most significant environmental legislation since the ETS itself in 2008.

The cap requires the Government to set emissions budgets, then issue a limited number of ETS emissions permits consistent with that budget. The hard limit on the number of permits is the emissions cap.

Climate Change Minister James Shaw described the new cap at the first reading of his bill.

“The emissions trading scheme is known as a cap-and-trade system, but ours has been operating with no cap.

“For the first time since it was introduced in 2008, we will actually be able to cap emissions covered by the scheme,” Shaw said.

Shaw’s cap is a momentous achievement. However, its consequences have not yet sunk in.

The cap means other policies, including taxes and subsidies on vehicles, are unnecessary.

To see why, consider fishing quotas, a close parallel to the ETS emissions cap.

The Government uses quotas to determine how many tonnes of fish can be caught each year. For example, it has set the snapper quota for a zone northeast of Auckland, called SNA1, at 4500 tonnes per year.

If the Government were to reduce that annual allowable catch by 500 tonnes a year, it would achieve a zero catch in nine years.

To subsidise fishing for, say, hoki, having set a quota for snapper would be a waste of money. Any quota owner who switched to hoki would sell their snapper entitlement to someone else, leaving the snapper catch unchanged.

Equally, new vehicle taxes will not lower overall emissions once the Government has capped emissions.

Although the taxes will reduce vehicle emissions, that will simply free up emissions permits for somebody else to use. Those permits will postpone emissions reductions elsewhere, offsetting the fall in vehicle emissions. Overall emissions will not change.

This logic applies to every emissions policy under the emissions cap.

New Zealand has a far-reaching cap by world standards, which means it neutralises most of the Government’s emissions policies, including coal boiler conversions in schools, the new cycling bridge in Auckland, EV subsidies, and the proposed pumped hydro scheme at Onslow.

It is not clear how the Government’s emissions strategy reduces emissions.

The Government knows an emissions cap can neutralise policies. Officials even have a name for it: “the waterbed effect”.

But they have not explained how to get around it.

Shaw’s solution to the waterbed effect is unconvincing. He suggests linking the emissions cap with the emissions benefits from policies. For each tonne of CO2 avoided by a policy, the cap would be lowered by 1 tonne.

The problem is that emissions only fall because the cap is lowered — nothing to do with the policy. The Government could reduce the cap without the policy, which has the considerable advantage of reducing emissions at least cost. Linking the cap with individual policies adds costs for no emissions benefit.

Until now, officials have been able to mostly ignore the emissions cap, taking a halfway position of never quite agreeing a cap neutralises policies but never properly showing where the argument is wrong.

But now livelihoods are on the line. Officials are going to find a public that is more willing to test the logic.

Soon, a critical mass of the public will realise the Government is demanding sacrifices from households and businesses, knowing they will contribute nothing towards our emissions targets.

But it is worse than this. Not only will the Government’s policies fail to cut New Zealand’s emissions. Attacking our agriculture sector could end up raising global emissions.

Why? Because New Zealand farmers are among the most carbon-efficient in the world.

According to a study by AgResearch, commissioned by DairyNZ, New Zealand dairy farmers have the world’s smallest carbon footprint.

Each kilogram of milk made in New Zealand produces 770g of CO2 or equivalent, 48 per cent less than the average in other surveyed countries.

Which raises the question of whether downsizing New Zealand agriculture and meeting less of the world’s demand for dairy from here could raise global emissions.

It says volumes about the Government’s whole approach on climate that siloed thinking and a lack of serious analysis could have led it to put the wrong sign on the direction of travel for our largest export earners.

The Government’s thinking on climate has become so divorced from reality that emissions are now a secondary consideration in climate policies. Leftish fads like the “circular economy” dominate.

Climate policies only help future generations by cutting emissions.

Farmers did us all a favour last week. They did not reject a noble cause. They said no to bad policies and woolly thinking.

– Matt Burgess is a senior economist with the New Zealand Initiative. He owns a small number of New Zealand Units through the New Zealand SALT Fund.

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