Motu Tackles Emissions Trading

Motu Economic and Public Policy Research, New Zealand’s leading independent economic research institute, is leading a Foundation for Research, Science and Technology-funded research programme that looks at climate change and ways to lessen its environmental and economic impact. Part of this research involves designing an effective emissions trading system for New Zealand and involves internationally recognised experts in emissions trading.

Motu is a charitable trust that makes all its findings readily available for the New Zealand public. We have put together some information here to be used as an aid for those interested in the use of emissions trading to address climate change.  We hope that this technical information can help make the public debate on emissions trading better informed and hence more constructive.

Essential information about emissions trading systems
 

Part 6 – Issues relating to equitable and efficient allocation of emission units

New Zealand Inc. will be better off overall if we meet our international obligations with an emissions trading system than without. Some groups will however win while others lose. With no free allocation of emission units, the distribution of costs across the economy is equivalent to under a carbon tax.  There will be one-off costs/gains to ‘stranded assets’ when the system is introduced.  Stranded assets are capital assets (including land, forests and human skills specific to a particular industry) that are suddenly worth a different amount once the system is introduced.  For example an aluminium smelter is worth less when operating it requires purchasing emission units.  Dairy land will be worth less when dairy farmers will have to pay a higher cost or receive a lower payout because of the methane cows emit. A forest that is eligible for sequestration units will suddenly be worth more. These are one time adjustments in value.  There will also be adjustment costs (and benefits) in some communities.  In the long run, all costs are borne by consumers.

If we want to change this distribution of costs we can use free allocation or other compensation measures.  Consumers can most easily and efficiently be compensated with lower taxes; owners of capital in 2007 could be compensated with a one-off free allocation of emission units.  New firms have no stranded assets so should not get free allocations.  Allocations are compensation for fall in asset value so should not be withdrawn if the firm closes – the costs have already been borne.

Free allocation that is not linked to levels of output has no impact on leakage issues.  It should be thought of as a completely separate issue.  It can also be completely de-linked from the point of obligation.  Free units could be given to anyone. 

If units are not freely allocated, they belong to the tax payer and can be sold to generate revenue.  This minimises the cost to the government of meeting our international commitments and leaves open the possibility of tax cuts.

For more information on emissions trading see www.ecoclimate.org.nz/ETS.htm

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