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Carbon Tax - Questions And Answers

CARBON TAX - QUESTIONS AND ANSWERS

Why a carbon tax ?
New Zealanders want economic prosperity that also protects the environment and our quality of life. Globally, we cannot continue our present course of ever-increasing emissions without serious environmental, societal and economic impacts.

A carbon tax signals that certain options for fuel and energy come at a cost to society and the environment. This cost can no longer be ignored. The carbon tax ensures that consumers and producers begin to take this cost into account in the choices they make.

In 2002, the Government announced its intention to introduce a carbon tax as part of New Zealand’s response to climate change. Revenue from carbon tax will not be used to improve the Crown’s fiscal position, but will be returned to the economy through other tax changes. A carbon tax won’t change emissions overnight, but it begins a process of transition to a low emissions future that is needed to help reduce the risks of climate change for future generations.

Isn’t this just the Government adding more money to its coffers?
No. The aim of the tax is to protect our environment, not to raise revenue. Revenue collected as a result of the tax will be used for tax changes elsewhere. The details of how the Government will use the carbon tax revenue will be announced as part of the business tax package in the 2005 Budget.

How much money is involved?
After Negotiated Greenhouse Agreements are accounted for, the carbon tax is expected to raise approximately $360M per year. The details of how the Government will recycle this revenue back into the economy will be announced as part of the business tax package in the 2005 Budget.

What other countries have a carbon tax ?
Several European countries have carbon taxes including the United Kingdom, Denmark, and Switzerland. Most countries also collect various forms of excise duty on some or all sources of energy, and have done so for some time. The European Union introduced an emissions trading scheme in January 2005, which places annual caps on CO2 emissions. Carbon taxes and emissions trading systems are different ways of achieving the same outcome: that greenhouse gas emissions carry a price that becomes part of normal business decision-making. Other greenhouse gas emissions trading schemes are being developed or implemented in Korea, Norway, Canada, among the Australian states, and among the northeastern states of the USA.

Why is New Zealand taking on binding commitments when developing countries like China and Malaysia haven’t?
When the Kyoto Protocol was negotiated in 1997, it was recognised that developed countries have caused most of the greenhouse gases to date. Even today, New Zealand’s per capita emissions are more than five times those of China. So, to start with, it was developed countries that took on binding targets to reduce emissions, with developing countries instead having obligations to track and report emissions. After 2012, once developed countries have demonstrated that they are willing to take the lead, developing countries will be expected to follow by taking on appropriate commitments.

Why has New Zealand ratified when Australia and the United States have not?
Of the 38 developed countries that negotiated the Kyoto Protocol in 1997, all have ratified except Australia, Monaco and the United States. The government believes it is in New Zealand’s best interests to work with the other 149 countries that have ratified the Protocol, rather than acting independently.

What will the overall impact be on the economy?
A very 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. [NB 0.03% total change, not 0.03% per annum]

How will the tax be implemented?
The obligation to pay the tax will be imposed as early in the supply chain as possible i.e. for NZ-produced coal and gas the obligation will be at point of first sale, for imported coal it will be when it crosses the border, and for liquid fossil fuels it will be when they leave the Marsden Point oil refinery or when they cross the border. This means that most firms will not be directly involved in paying the tax. Instead, they will see its effect through costs passed on by energy suppliers, especially fossil fuels and electricity.

Couldn’t the carbon tax put New Zealand’s international competitiveness at risk?
No. The Government has introduced Negotiated Greenhouse agreements (NGAs) to prevent the risk of businesses moving from New Zealand to countries with less stringent climate change policies. That policy has also been recently reviewed in order to improve the effectiveness and timeliness of the process.

Then aren’t Negotiated Greenhouse Agreements simply a ‘free ride’ for big business?
No. In return for exemption from the tax, NGAs comprise a contractual agreement by the firm or industry to reduce emissions intensity to ‘world’s best practice’ levels. This involves a legally-binding commitment by the company regarding the greenhouse gas emissions intensity of its operations. There would be financial consequences if their commitments are not met.

What is the government doing to assist small and medium sized businesses manage the transition to the carbon tax?
There is a range of services available to assist businesses to reduce the effect of the carbon tax by improving energy efficiency. These services include information about simple, no or low-cost actions available to all firms (see www.eeca.govt.nz). Businesses can benefit from undertaking measures to improve energy efficiency and save on fuel costs, particularly in the areas of fleet management and efficient electrical equipment.

The government will also run pilot grants and demonstration schemes from 2005 to evaluate measures to assist small energy intensive businesses to adjust to a carbon tax. This includes the irrigated dairying and arable crops farming sectors. It will be targeted at technologies that offer significant potential energy savings. EECA and the Ministry for the Environment’s Climate Change Office will work with industry associations to identify firms that would be willing to host demonstration projects. The pilot will enable business and government to work together to further assess and address the adjustment needs of industry prior to the introduction of the carbon tax in 2007.

So where will the majority of New Zealanders see the impact of the carbon tax?
Most New Zealanders will notice the carbon tax through increases in the price of petrol, diesel, gas and electricity. Whilst small in comparison with the price fluctuations often experienced due to changes in world oil prices or the New Zealand exchange rate for example, the price increases from the carbon tax begin to signal the environmental and economic costs of climate change.

In the two years between now and when the tax is implemented, New Zealanders have time to make energy and fuel-efficient choices, and the government will be providing information to assist consumers who want to implement low and no-cost actions to save energy and reduce their bills.

What about commuters – they still need to get from A to B and now its going to cost them more?
Simple things can be done to keep costs down. Basic energy efficient practices around the home and on the road can also save money on power bills and fuel costs. For example, keeping tyre pressure correct and cars tuned regularly can save on fuel costs, while good insulation is not only warmer and healthier but can also save money on electricity. There are also two years before the tax is implemented for New Zealanders to make their energy and fuel choices that may include more fuel-efficient car purchases.

What about people on fixed incomes?
Superannuation is now indexed to CPI changes, so benefits will be adjusted to account for price changes such as those resulting from the carbon tax.

What does the carbon tax mean for coal-fired electricity generation?
The carbon tax does not rule out use of coal, it simply means that environmental costs will now be taken into account in project economics. If coal or gas-fired power generation can still compete once environmental costs are included, then companies can still choose to bring such projects forward.

Won’t a carbon tax just make it harder for electricity security?
No. In fact electricity generators have indicated that the setting of the price of carbon as soon as possible will give greater certainty for business planning and investment decisions.

What about coal use at home?
The price impact will be 68cents on a 20kg bag of coal. To help those consumers who wish to make a change in their coal-burning home heating, the Ministry for the Environment is investigating ways to help New Zealanders improve the warmth of their homes and upgrade to cleaner heating sources. The primary driver for these investigations is to improve the air quality in New Zealand’s towns and cities, but it will also have climate change and health benefits.

Some countries have opted for emissions trading instead of a carbon tax. Why did New Zealand not pick that route ?
At present, international emissions markets are immature, making trading difficult and prices variable and unpredictable. We view the carbon tax as a transitional path toward full or partial emissions trading, which may become a better option as world markets develop. A tax gives firms a greater level of certainty about the price of emissions in the interim.

Why not wait until after 2012 and go straight to emissions trading then?
If New Zealand does nothing while awaiting the development of international markets, our emissions will continue to rise as will the future cost of reducing them. A low-level carbon tax (offset by the reduction of other taxes) sends a signal about the price of emissions that will, at the margin, influence investments in energy generation and use. If we can begin to curb our growth in greenhouse gas emissions now, we will be better placed to make a smooth transition to more challenging commitments after 2012.

Why not use our forestry sinks to free ride until 2012, instead of introducing a carbon tax?
When the National Party’s Simon Upton negotiated the Kyoto Protocol in 1997, he made a commitment that sink credits would not be used to shield the New Zealand economy from the international price of emissions. This commitment was important in getting agreement for sinks to be included in the Kyoto framework. Future negotiations on the inclusion of sinks after 2012, worth billions of dollars to New Zealand, could be hampered if New Zealand was to backtrack on this commitment.

More importantly, sinks provide us with a temporary buffer that will allow New Zealand to make the transition to a low-emissions future at a lower cost than many other countries. The responsible approach is to use this buffer period to undertake the necessary economic shifts, so that the New Zealand economy will be positioned well to take advantage of a low-emissions future, rather than struggling to catch up.

Why are you announcing further information about the tax now, when it doesn’t come in until 2007 ?
There is a need for certainty about how the tax will be applied, particularly for energy supply investment decisions over the next few years. To address any uncertainty the Government is indicating now the level of the carbon tax, how it will be applied and when it will come into effect.

How did the Government come up with the price of $15 per tonne?
This price was deemed appropriate given the current and projected price of emissions globally. If the international price changes dramatically and for a sustained period, it is possible this rate could be reconsidered. However, the Government is clear that the price will be capped at NZ$25 per tonne to the end of the first commitment period in 2012.

What greenhouse gas emissions will be subject to the carbon tax?
In general the tax will be applicable to emissions of carbon dioxide and methane from fossil fuel and geothermal sources. The tax will also apply to all greenhouse gases that are emitted from industrial processes. The NGA process will result in exemption from the tax for some emitters in return for binding obligations managing their emissions.

Methane and nitrous oxide from the agriculture sector accounts for almost half of New Zealand’s greenhouse gases – why are they not being taxed?
It has been the government’s policy since 2002 that no carbon tax will be imposed on methane or nitrous oxide for the first commitment period of the Kyoto Protocol. This is because, unlike most sectors that produce emissions, there are currently limited means of reducing agricultural emissions without reducing output.

The Government and the agriculture sector have signed a Memorandum of Understanding agreement on voluntary research to find ways of reducing these emissions. This partnership is supported by an industry-led research strategy which aims to develop safe, cost-effective greenhouse gas abatement technologies that will reduce methane and nitrous oxide emissions from livestock and soils.

What will happen after 2012?
In international negotiations, New Zealand will be seeking broader international participation in binding commitments after 2012. It is also likely that deeper cuts in emissions from all parties will be needed.

New Zealand may move to an emissions trading regime once international markets are sufficiently robust. Implementing a carbon tax from 2008-2012 will set the New Zealand economy up better for deeper commitments and emissions trading than if we were to do nothing in the interim.

ENDS

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