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Russell’s Carbon Tax equivalent to 4.5% rise in company tax

Russell’s Carbon Tax equivalent to 4.5% increase in company tax

ACT Leader Jamie Whyte

Last week, the Greens announced a plan to replace the emissions trading scheme (ETS) with a greenhouse gas tax.

Industrial firms that emit greenhouse gases will have to pay $25 per tonne. Farmers will have to pay $12.50 per tonne. This is a BIG new tax, the equivalent to lifting the corporate tax rate from today’s 28% to 32.5%.

The tax will, of course, be harmful to the owners, employees and customers of businesses that emit greenhouse gases.

But the policy is even worse than that. It will also defeat its own purpose.

The Greens claim that this tax will reduce the amount of greenhouse gas emitted and thereby reduce the chance of the climate warming. In fact, their policy will increase global greenhouse gas emissions.

They have again made the mistake of ignoring what other governments are doing.

Suppose that to produce a kilo of milk (dairy fat) farmers in country A emit more greenhouse gas than farmers in country B do. If the governments of both countries impose an equal greenhouse tax, then producing milk in country A will become more expensive than in country B, and profits will be lower. The production of milk will migrate from A to B and less greenhouse gas will be emitted globally. The desired result.

But now suppose that only country B, where emissions are lower, imposes the tax. Now production costs are higher in country B, and production will migrate to country A. This will increase the global greenhouse gas emissions caused by milk production. This is the effect of The Greens’ policy.

New Zealand milk production releases less greenhouse gas than American and European production because our benign climate means production here consumes less fossil fuel, even accounting for exportation.

But the governments of the US and EU do not tax their farmers for emitting greenhouse gases. The Greens’ policy will therefore divert dairy production from low-emitting Kiwi dairy farmers to high-emitting European dairy farmers.

Such a policy bungle would be funny if only the Greens did not have a material chance of being an influential part of the next New Zealand government.

Actions to reduce CO2 emissions in other countries will be limited to modest unilateral reductions of a largely token character. The Green Party should stop saying that the transition to a carbon neutral economy will be easy and painless.

The equivalent of a 4.5 percent rise in the company tax is a major burden on the economy, wages and jobs.

The chances of India, China and the rest of the Third World agreeing to forego or even slow their economic development to fight global warming is zero. Unilateral reductions in CO2 emissions by New Zealand simply make us poorer and less able to cope with the uncertainties of the future. Becoming richer and adapting to change is the only game in town for both the developed and the developing worlds.

As the economist David Friedman noted this year, preventing global warming is an international public good, which will therefore be greatly under-supplied. Adaptation to climate change is a private good that will be supplied at the optimal level by the market like any other privately produced good. Adaptation reduces the negative aspects of any global warming without stopping any of its positive effects, such as increased agricultural productivity.

Unless most other countries contribute in reducing carbon emissions, New Zealand’s efforts make no difference to the extent of global warming. The Greens want to make us poorer and deprive us of resources we could use to adapt to any warming that might happen.

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