New Zealand's ETS is not enough, claims researcher

University of Auckland doctoral researcher Sina Mashinchi has claimed that a carbon tax targeting emissions-intensive industries, along with a revamped emissions trading scheme (ETS), could boost economic growth, with the extra tax generated used to cut New Zealand’s GST from 15% to 12.5%.

The study was conducted by Mashinchi in collaboration with experts at Cambridge University. Mashinchi explained, “I wanted to show that we could move closer to our Kyoto emission targets and still have good economic growth.”

Currently, the ETS is the main economic tool in use in New Zealand to lower carbon emissions. Industries start with a set number of carbon credits and, when they use them up through generating greenhouse gases, they have to buy more. This is meant to encourage practices that will lower emissions.

However, critics argue that the ETS is hamstrung by its lenient application, providing freebies and two-for-one deals to many industrial emitters. And even though agriculture is responsible for half of New Zealand’s emissions, it is entirely exempt from the scheme. New Zealand has also bought many fraudulent credits from Eastern Europe.

Furthermore, it has been recognised that the price of carbon credits, currently sitting around $17 per tonne, is too low to change behaviour. But the new modelling shows that even if the price was gradually raised to $300, New Zealand still wouldn’t reach its target of cutting emissions by 50% below 1990 levels by 2050. Indeed, in 2013 the country’s emissions were up 21% from 1990 levels.

Mashinchi claims that the ETS is based on a weak and ill-fitting model, whereas his own model is more sophisticated and finely tuned to real New Zealand experience. While the model on which the ETS is based used only one year of data, the new model draws on 45 years of economic, environmental and energy data from 1970 to 2014.

“It shows how New Zealand reacted to global events such as the oil shocks and the Great Financial Crisis,” Mashinchi said.

It also shows how New Zealanders responded to past policies, he said — not always as an economist might expect. The model that the ETS is based on assumes people act rationally, responding to policies and trends in predictable ways — “but people don’t always act rationally”, he said.

Mashinchi found if the price of carbon credits increased to $75 and rose by $20 a year from now on, and a carbon tax for non-ETS sectors was introduced and set at the same levels, the government could use the extra tax take to lower GST by 2.5% to 12.5%. A business would either pay for carbon credits or pay a carbon tax — not both.

According to the modelling, this would stimulate the economy, encouraging investment in new technologies, energy efficiencies and public transport, which would create jobs. GDP would rise by an average 2.2% per year, while emissions would fall 14.2% from current levels in 2030.

“This still falls short of our Kyoto target, but it’s a lot better than emissions going up,” said Mashinchi.