By Eric Crampton 09/10/2018

New Zealand has an emissions trading scheme. It isn’t perfect. But for the sectors covered by the ETS, including transport, best policy for reducing carbon dioxide emissions is fairly simple: buy and retire credits. 

The government simply cannot know whether the cheapest way of reducing CO2 emissions is by getting the least efficient cars off the road; having people switch to electric cars; planting trees; improving methane capture at landfill – or something else entirely.

So stories like this are a bit depressing:

As well as looking to revamp the Government’s car fleet, there are number of other options Shaw is considering.

These include exploring the idea of increasing tail pipe emission standards – something the Productivity Commission recommended in a recent report.

“We’re also examining the Productivity Commission’s proposal for a feebates scheme – which lowers the upfront cost of EVs and makes them competitive with internal combustion engine cars.”

This would mean highly emitting combustion vehicles would be penalised by having to pay higher registration fees.

Shaw has also been exploring the idea of exempting EVs from fringe benefit tax – a tax paid on most non-cash benefits provided to employees.

He is hoping to be able to announce the full work programme in a month or so – “then different components of that programme will drop through over the next 18 months”.

Cars that use more fuel already pay more for the related carbon dioxide emissions because petrol is in the ETS. Tailpipe emission standards for CO2 then wind up imposing disproportionately higher costs on the owners of older vehicles that are less fuel efficient. If CO2 emissions are proportionate to fuel use, somebody driving an old Toyota Estima van that uses (say) twice as much fuel per kilometre as somebody driving a more fuel efficient car, then the Estima driver’s already paying twice as much in ETS charges. Emission standards that are binding would pull older affordable cars off the market, hurting poorer families that rely on them for transport. And higher rego fees for high-emitting vehicles would have similar effect.

But it’s dumber than that. If the government makes it more expensive to own a car that has high emissions, but not more expensive to use a car that has high emissions, then that encourages more relatively more intensive use of the more inefficient cars. If the ETS charge on petrol went up, that would discourage the use of the most-emitting vehicles. The registration fee is a fixed cost of owning the car, no matter how many kilometres you drive. The ETS component of petrol prices is proportionate to use.

FBT exemptions would bring back the stupidity of the early 80s, where companies had incentive to provide higher earning employees with in-kind benefits instead of cash. I suppose it would be one way of addressing measured inequality though – if the cars then don’t get counted as income, it would knock top-earners’ reported earnings down a bit and make inequality look lower, just as it did in the 80s before the FBT reforms.

And it isn’t like electric cars aren’t already subsidised: they do not pay for any of the road maintenance and construction costs that are covered by road user charging or petrol excise. Light diesels pay $68 per 1000 kilometres in RUC; electrics really should be covered by the same scheme.

If the government instead simply bought back ETS credits and retired them, the cost of carbon dioxide emissions would go up for all sectors covered by the ETS. Owners of inefficient cars would drive them a bit less as petrol prices went up and would be more likely to choose a more efficient vehicle when buying their next car. But people in every other sector would also weigh up carbon costs and make adjustments.

The general principle: if you have an ETS and want to reduce emissions within the sectors covered by the ETS, just buy back and retire credits.