ETS Better Than Carbon Tax For Farmers – Westpac
March 16th, 2009
Westpac is warning in its latest bulletin if NZ farmers are required to pay a carbon tax or participate in an ETS, they might be placed at a competitive disadvantage relative to overseas farmers who do not face a price on carbon. An ETS can overcome this problem, whereas a carbon tax cannot. Under an ETS, the Govt could give NZ Units to farmers gratis, meaning they are not actually exposed to any increase in cost unless they expand production. Crucially, farmers would still have an incentive to be careful with carbon, because if they reduce their emissions they can sell the credits profitably. Equally, activities which increase carbon emissions will be carefully considered against the world price of carbon.
The Govt’s proposed scheme was to start with an annual allocation of NZUs based on 90% of a firm’s 2005 emissions, with a gradually declining allotment of NZUs thereafter. There are a number of factors to consider in allocating units. It says the system must be fair to those who invest in capital before the ETS becomes a problem, while bearing in mind every unit given away is a direct cost to other NZers. However, as the Govt balances these fairness considerations, economic efficiency requires the allocation scheme preserve incentives around carbon:
• Any allocation must be set in stone and not change according to future behaviour. For example, if a dairy farmer receives an allocation of carbon credits but then converts to sheep farming, they should not lose their carbon credits – otherwise (s)he would have no incentive to convert in the first place. Likewise, firms which cease trading should be allowed to sell their carbon credits – otherwise the most carbon-intensive firms would have no incentive to close. (The ETS as currently legislated does not allow this).
• Any allocation should use a past reference date, to avoid permit-seeking behaviour. It supports the current proposal to base allocations on 2005 emissions levels.
• The total number of credits allocated need not be equal to NZ’s national allocation of emissions. The Govt can subsidise emitters exposed to international competition by allocating more credits, while still preserving useful incentives around emissions.
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