Carbon Tax Study unconvincing

16 December 2005

Carbon Tax Study unconvincing

Associate Professor Ralph Chapman, of Wellington’s Victoria University, today cast doubt on some of the conclusions reached by Business NZ and three other industry associations (the Coal Association, the Seafood Industry Council and the Vegetable and Potato Growers’ Federation) about the impact of New Zealand’s forthcoming carbon tax. The conclusions are based on a study of seven enterprises carried out by PricewaterhouseCoopers (PwC). Associate Professor Chapman welcomed the recognition by business that something must be done about the climate change problem, but commented:

- The study, and the conclusions which the industry associations draw from it, are unconvincing. The findings cannot be generalised since the enterprises that the study looks at are, as stated by the authors, not representative of the business sector. The analysis is based on unaudited data, some of which are selectively adjusted.

- The analysis, commissioned by the four industry associations, excludes any consideration of how recycling the carbon tax revenue would reduce business costs, a policy to which the Government is committed. This omission weakens the validity of the study, since offsets to higher costs are ignored.

Dr Chapman, who is an economist, added that:

- The enterprises selected are energy-intensive (except for one) and this is why fuel costs tend to go up with a carbon tax

- Some of the numbers are not credible (e.g. a 45% increase in fuel costs due to the carbon tax, for a sawmill)

- Even so, the weighted average increase (taking business staff numbers into account) in the businesses’ total costs is only 1.25%. This is not enough to sustain the conclusion reached by Business NZ in its media release that the carbon tax would make business uncompetitive.

- The study argues that rather than buying emission reduction units on the international market, the Government should subsidise business to install lower-emission technology. However, unless a carbon tax were to provide the funds for such technology subsidies, these subsidies would impose a cost on other businesses or households in the economy.

In fact, introducing a carbon tax would be likely to increase the chances of a business being able to install lower-emission technology, since the Government has indicated it will recycle revenue through enhanced depreciation allowances for businesses.

Dr Chapman concluded that:
- He would like to see Business NZ providing leadership in showing how businesses can economise on energy, and use of fossil fuels in particular.

- If New Zealand does not find constructive and innovative ways to reduce greenhouse gas emissions now, we face the prospect of a higher price penalty for purchasing emission reduction units on the international market after 2008, and may also face higher costs of making big emission reductions in a hurry, should climate change accelerate.

Associate Professor Ralph Chapman is an economist and Director of Victoria University of Wellington’s Graduate Programme in Environmental Studies.

Notes :

The Business NZ press release can be found at:
http://www.businessnz.org.nz/doc/979/Carbontaxwouldmakebusinesslesscompetitive

ENDS

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