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New Zealand Journal of Environmental Law |
Last Updated: 13 February 2023
129
The Role of Economic Instruments to Reduce Carbon Emissions and their Implementation:
A Comparison of Environmental Policies in New Zealand and Germany
Lars Hoffmann*
This article compares the different approaches that New Zealand and Germany have taken to implement economic instruments in order to reach compliance with the Kyoto Protocol into their environmental policies. It only focuses on the economic instruments of carbon emission trade and carbon taxes as these are currently the most discussed tools in this field. Both countries have commitments under the Kyoto Protocol to reduce their carbon emissions in the First Commitment Period between 2008 and 2012. Currently, it seems that New Zealand and Germany are succeeding differently in employing economic instruments for the climate change policy. While Germany introduced a carbon tax as well as an emissions trading scheme, New Zealand has not made serious attempts to employ these instruments so far. As it appears, both approaches lead to different outcomes. While Germany is currently on a good way to achieving its reduction target, the figures of New Zealand’s carbon emissions are still rising. The article will outline how New Zealand can adopt certain elements of the German approach towards a more efficient implementation of economic instruments. Furthermore, the German approach will be judged and it will be outlined where it is to be improved to guarantee more efficiency of those instruments.
*The author is currently studying for the Master of Laws (LLM) at The University of Auckland, New Zealand. He finished his First State Examination in Law in Berlin, Germany in 2006 and has studied law at Humboldt University, Berlin since 2001.
1. INTRODUCTION
The Kyoto Protocol has been one of the most disputed issues in international environmental law and is still present in the media and the public discussion. Even though the United Nations Framework Convention on Climate Change (“UNFCCC”)1 has already been declared in 1992 and the Kyoto Protocol2 was signed by most countries in 1998, the international process of legislation and agreements to refine the Kyoto agreement is still in progress and several countries are still debating to join the Protocol.3 The Kyoto Protocol came into force in 2005, after it was ratified by Russia.4 With this ratification, the required amount of 55 per cent of the world’s greenhouse gas emissions was covered.5
The implementation of appropriate climate change policies is often com plicated because of uncertainties concerning outcome of these policies. Even countries that usually are counted as pioneers of environmental standards and politics like New Zealand and Germany experienced several obstacles in their attempts towards a reduction of carbon emissions. At the moment, approximately one year before the first commitment period begins, there is a critical stage in which the governments have to decide which way they want to go to reduce carbon emissions in order to reach compliance with the Kyoto Protocol and whether the action they have taken so far leads to satisfying results. Following the requirements of the Kyoto Protocol, that establishes an international trading system for carbon emission units and the suggestions of several commissions demanding the use of economic instruments to reduce carbon emissions, both countries have basically decided to employ economic instruments.
2. GREENHOUSE GASES AND THE GREENHOUSE EFFECT
The natural greenhouse effect was already discovered around 1827 when Fourier described in his article a significant link between the atmosphere
and the global temperature.6 Later, in 1896, Arrhenius discovered a link between an increase of the CO2 level in the atmosphere and the global earth temperature,7 the phenomenon which is nowadays known as the “enhanced greenhouse effect”. Almost one hundred years later, in 1979, the first World Climate Conference was held in Geneva.8 Although the discovery of the global warming was revolutionary, the public interest only focused slowly on this issue.9 Among scientists, there have been contradictions, whether there is a global warming caused by human behaviour or not.10 Nowadays it has become a consensus, that there is an enhanced greenhouse effect caused by greenhouse gas emissions.11 The global temperature clearly shows a steady increase over the last hundred years.12 Since the late 19th century there has been an increase by around 0.6°C.13 Further, it is said that the 1990s have been the warmest decade since the instrumental records started, where the year 1998 has an outstanding position as the warmest year since the records started.14 Different scenarios predict an increase of the global temperature by between 1.4 and 5.8°C within the next hundred years if the current level of carbon emissions stays constant.15 This increase would lead to a change in sea level between 0.1 m and 0.85 m until the year 2100.16 The impact of a sea level rise like this will be severe. Even a small rise in the sea level will cause massive problems for countries that are situated next to the coasts and especially to those who are already exposed to floods. The most vulnerable regions of the world are also the poorest regions, like Bangladesh. An increase of the sea level of about 1.5 m will lead, according to current scenarios, to a total affection of 17 per cent of the land area and of 15 per cent of the people.17
Responsible for this warming process is the socalled “enhanced greenhouse effect”.18 Gases in the atmosphere are absorbing the sunlight energy and are
2
delivering the absorbed energy back into the atmosphere as thermal energy.19 The main greenhouse gases are carbon dioxide (CO2 ) and methane (CH4 ). Other greenhouse gases are fluorocarbons (“CFCs”) and nitrous oxide (N O).20 A part of this greenhouse effect is natural and needed to ensure a constant level of the atmospheric temperature.21 This is the socalled “natural greenhouse effect”.22 An increase of the greenhouse gases in the atmosphere means more energy absorbance and a higher rate of thermal energy in the atmosphere.23 This leads to a rise of the overall atmospheric temperature.24 The latter phenomenon is popularly known as the “enhanced greenhouse effect” and is subject to the public concern.25The main cause for CO2 emissions is the burning of fossil fuels like coal and petrol which are still the main motors of energy generation and public transport.26 As a country with a huge agricultural industry, New Zealand takes a special position among the emitters of carbon dioxide.27 Nearly half of the emissions are caused by agriculture.28 In contrast, the main part of the carbon emissions in Germany is caused by power plants and transport.29 Germany has the highest CO2 emissions in the EU with 10,175 million tonnes in 2003 compared to the next lower emitter the UK with a rate of 651 million tonnes in the same year.30 With the emerging economies of China and India, the global CO2 emissions are not at their highest point yet. China increased its carbon emissions between 1992 and 2002 by 33 per cent.31
Among scientists it is undisputed, that it will be already too late for a complete reversion of the effects of the global warming process.32 These effects
(2001) at: http://www.grida.no/climate/ipcc_tar/wg2/007.htm.
can only be mitigated to some extent.33 This, however, will depend on the multilateral action, taken under the UNFCCC and its Kyoto Protocol. Current studies predict that even if the Protocol was successfully and completely implemented, it will reduce the temperature increase by only about 0.15°C by the year 2100.34 But this will be far too little to ensure a high quality of life on earth over the next decades. Even official statements declare that the emission reduction targets were inadequate. They should have been at least about 60 per cent of the 1990 levels.35
3. INTERNATIONAL AGREEMENTS TO REDUCE CARBON EMISSIONS
The first approach to globally solve the climate change issue was taken in 1979, when the First World Climate Conference took place in Geneva.36 It was followed by a number of intergovernmental conferences focusing on climate change, held in the late 1980s and early 1990s. In 1988, the Intergovernmental Panel of Climate Change (IPCC) was founded by the World Meteorological Organisation.37 The IPCC is responsible for the exploration and monitoring of the causes and impacts of climate change. In 1990, the United Nations General Assembly agreed to start negotiations about a multilateral treaty on climate change issues.38 At the World Climate Conference in Rio de Janeiro in 1992, the UNFCCC was passed and signed by a number of nations including New Zealand and Germany.39 It came into force on 14 March 1994. Later, in 1997, a multilateral agreement to reduce carbon emissions was made at the third meeting of the conference parties in Kyoto, Japan and was integrated into the UNFCCC.40 The Kyoto agreement is the basis for the commitments of all parties to the treaty to reduce their carbon emissions. It is the part of the treaty that sets legally binding targets and provides compliance mechanisms and tools to reach compliance.41
3.1 The United Nations Framework Convention on Climate Change
The UNFCCC sets an overall basis for intergovernmental efforts to tackle climate change issues. Its objective is the
[...] stabilisation of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system.42
Nowadays 189 countries are members of the Convention, including New Zealand which entered on 4 June and Germany which signed the Convention on 12 June 1992.43 The UNFCCC establishes a legal framework for a multilateral cooperation on the climate sector and creates a legal platform for further achievements.44 The main aim of the Convention is that member countries are to gather and share information on greenhouse gas emissions, national policies and best practices.45 Governments have to establish strategies to solve the greenhouse effect issue and support developing countries by approaching these problems.46 According to Article 4 of the Convention, every member State has to take efforts to mitigate the climate change. Even though there are no compliance mechanisms, it is a legally binding duty for the member States.47 Further, the Convention demands a reduction of the greenhouse gas emissions back to 1990 levels for the year 2000.48 This aim has not been achieved by many countries, including New Zealand49 and the US, while Germany has managed to reduce greenhouse gas emissions in 2000 below the 1990 levels.50
3.2 The Kyoto Protocol
The Kyoto Protocol was the first broad multilateral action taken to reduce global carbon emissions.51 The Protocol to the UNFCCC was adopted in Kyoto, Japan on 11 December 1997 at the third session of the conference parties to the
Key GHG Data, ibid.
UNFCCC. Until now, it has been signed by 164 nations including New Zealand and Germany. It has come into force on 16 February 2005. The agreement includes the duty for every Annex I country to reduce carbon emissions to a certain level.52 Among these countries are the economically developed countries such as New Zealand and Germany and countries that are in the process towards a developed economy (countries in transition). The time frame in which the achievements have to be made is divided into different commitment periods. The first commitment period is starting in 2008 and will be lasting until 2012. The general aim is to reduce the overall carbon emissions by 5 per cent of the 1990 levels in the Appendix I countries, while there are different commitments for the different countries.
The compliance mechanism of the Kyoto Protocol can be considered as weak as it requires a double majority among Annex I and nonAnnex I countries to acknowledge noncompliance of a certain party.53 The outcome of a non compliance procedure may be the declaration of the noncompliance. Further, there is a duty to create an action plan to reduce emissions immediately.54 The ability of the party to trade emissions on the international market can be withdrawn.55
New Zealand’s commitment under the Protocol is to reduce the carbon emissions to the 1990 levels.56 This was negotiated when New Zealand joined the regime on 22 May 1998. Even though the commitment seems to be lower than those of many other countries, New Zealand is expected to experience problems in reducing the carbon emissions back to the 1990 levels. A recent greenhouse gas inventory shows an increase of carbon emissions of 37 per cent in 2003 compared to the 1990 levels.57 The cause of this massive increase is mainly the transport sector that makes up about 19 per cent of New Zealand’s current carbon emissions.58
The EU ratified the Kyoto Protocol on 25 April 2002 using the possibility
54 Ibid, 115.
according to fulfil the Kyoto Commitments as a community.59 The EU Burden Sharing Agreement divides the EU commitment which consists of a reduction by 8 per cent of 1990 levels among the member States.60 For each member State, individual targets are set which are legally binding within the EU.61 Germany is required to reduce greenhouse gases by 21 per cent compared to the 1990 levels during the first commitment period.62 Currently, it seems likely that Germany fulfils the Kyoto targets.63 So far, it has reduced its carbon emissions already by 18 per cent compared to the 1990 levels.64 Thus, a further reduction of about 3 per cent during the next commitment period seems to be possible.
4. THE GENERAL CHARACTER OF ECONOMIC INSTRUMENTS
The progress in international environmental policies concerning climate change is connected closely to the employment of economic instruments. This phenomenon is possibly due to the fact that it has become more popular to include economic aspects in environmental policies. The following part should give an overview of the relation between economic instruments and environmental policies and the role of economic instruments for climate change policies.
4.1 From “Command and Control” Regulations to Economic Instruments
The traditional way of regulations in environmental politics always has been commandandcontrol regulations.65 These tools usually function through direct regulations. The certain behaviour that is causing adverse effects to the environment is usually prohibited unless there has been a permit for this special behaviour.66 The adverse behaviour is therefore illegal until it gets legalised
Climate Change and Carbon Markets (Earthscan, London, 2005) 77.
through permission.67 During the last decade, environmental policies have experienced a noticeable move towards marketrelated instruments.68
On the other hand, there are also advantages of traditional command andcontrol regimes. As opposed to the use of economic instruments, the administration will often be more familiar with the use of regulatory instru ments.69 The main advantage is that there is a high level of certainty under absolute standards that the desired emission level is going to be reached.70 This achievement, however, will be paid by a high level of economic inefficiency, depending on the actual system in general and the total abatement costs in par ticular. Achieving a certain emission reduction level under absolute standards always means that there will be higher abatement cost in total.
However, both the report of the World Commission for Environment and Development Our Common Future, also known as the Brundtland Report, and the Report of the Rio Conference in 1992 recommended the implementation of economic instruments in environmental policies.71 Both commissions pointed out the cost efficiency and flexibility of these instruments compared to traditional regulations.
4.2 The Advantages of Economic Instruments
All of the economic instruments have in common, that they cause lower overall abatement cost compared to traditional commandandcontrol regulations by reaching the same level of carbon emission reduction.72 Another main feature of marketbased instruments especially appreciated by the EU was the internalisation of external environmental costs through economic incentives and civil liability.73 Furthermore, it is a practical way to adjust the prices for environmentally friendly products by lowering their production costs through financial incentives.74
To characterise the role of the different instruments, it has to be considered
that it has to be focused on the economical optimum in order to reach an economically efficient solution.75 This is the point where a polluter has to pay the lowest abatement costs in order to reach an emission level that is as low as possible. The situation where there is the lowest emission level constitutes the social optimum.76 Total abatement cost will be very high for the emitter, if an emission level of zero is aimed.77 Thus, a solution orientating on the social optimum would be very ineffective in economic terms because high expenses have to be paid in order to reach a certain level of emission reduction.78 To guarantee an economically efficient solution, the point has to be reached, where total abatement costs are equal compared to the environmental damage.79 This point represents the economic optimum because the emitter causes the least damage at the lowest possible marginal abatement costs.80 Thus, the question arises how to reach the economic optimum. The traditional regulatory instruments merely function by setting emission limits that are identical for every polluter. This can only lead to economic efficiency if the total abatement costs for all emitters are the same.81 If they are not the same, the emitter with the higher emission rate will have higher abatement costs.82
The introduction of a carbon tax can change this situation. If all emitters are subject to a uniform carbon tax, the total abatement costs for all emitters are now equal because no emitter is forced to reach a certain emission level.83 This will always lead to the economic optimal solution, because no emitter has to suffer extraordinary losses compared to the reached emission reduction.84 Therefore, there are lower overall abatement costs under a carbon tax in total.85 This optimal solution can only be reached if the tax takes all individual abatement costs into account so that it operates at an optimal tax rate.86 While this example shows the general advantage of economic instruments to be able to operate at the economical optimum, it also shows that there are practical difficulties. In reality it will be very complicated to collect the needed data to
identify the perfect tax rate, to guarantee an economic optimal solution under a carbon tax setting.
The second economic instrument to be considered is carbon emission trade. Under this system, a certain amount of permissions will be set, which represents the optimal emissions level representing the economic optimum.87 As there is a correlation between the amount of the emission units and the emission price, the permission price will be adjusted automatically to the economic optimum. The lowest abatement costs lead to the best outcome, if the amount represents the optimal emission level.88 Thus, the amount of tradable permits has to be set exactly to the amount that would constitute the economic optimum.89 Under these circumstances, when permits are traded under a certain market price, the abatement costs for every emitter will be the same, because the price for emission units operates at the economic optimum.90 This solution also leads to the economic optimum due to the fact that total abatement costs are the same for all emitting firms because there will be a certain market price for tradable permits.91 In contrast to the carbon tax, the tradable permit scheme has the advantage that emission ceilings can be set which is not possible in the case of using a single carbon tax. The tradable permit scheme is rather an instrument focused on a certain quantity of emissions compared to a tax system.92
As shown, economic instruments are more likely to operate at the economic optimal solution in general. While commandandcontrol regulations can only act on the economical optimum when the abatement costs of all emitters are the same, economic instruments always cause the same abatement costs for the emitters and therefore reach the economic optimum.
Economic instruments are influencing human behaviour indirectly. In contrast to the traditional commandandcontrol regulations, economic instruments do not penalise certain behaviour in a way that this behaviour is declared as illegal. While absolute set standards and permits have to be followed immediately, the addressee of economic instruments can act more flexibly. The addressee of the economic instrument will only feel an economic incentive not to act against the desired aim. He or she still remains free in his decision to act like he or she wants to. In general, people are said to change their behaviour faster because
(2005) 15 at: http://www.treasury.govt.nz/workingpapers/2005/twp0502.pdf.
of selfinterest rather than on external interests, so that financial incentives are more likely to be effective.93
4.3 Economic Instruments and Sustainability
Another feature of economic instruments is that they are more likely to have the capability to serve the principle of sustainability than traditional commandand control instruments. The World Commission on Environment and Development, commonly known as the Brundtland Commission, was the first commission to describe the principle of sustainability.94 The principle is defined in the Report of the Commission95 as:
[A] Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.
Considering the given definition, there is a consensus that the principle of sustainability includes the usage of environmental resources for economical needs.96 Economic instruments serve the principle of sustainability because of their optimal usage of natural resources under the given circumstances including the aspects of economical development and growth, as economic instruments guarantee environmental protection at the lowest costs. In theory there should be an optimal balance between economical and environmental components because the same level of environmental protection is possible at a lower rate of abatement cost. This effect of cost avoidance reflects the aim of the principle of sustainability as it leads to a certain level of environmental protection at the least possible abatement costs. Thus, environmental protection is forced as well as a sustainable development for the economy. The Brundtland Report stressed the link between sustainable development and economic instruments by demanding their usage in order to serve the principle of sustainable development.97
4.4 Economic Instruments and the Precautionary Principle
Economic instruments are further more likely to serve the precautionary principle than traditional commandandcontrol regulations. The principle has been adopted in environmental politics to ensure the environmental protec tion under a longterm perspective for the future in the form of preventative anticipation, rather than reacting on already existing pollutions.98 It stresses the aspect of future hazards and unknown danger for the environment.99 Because of the unexplored consequences of many agents, caution will be exercised when setting emission standards and emphasis will be placed on the prevention of pollution under the precautionary principle rather than so called “end of pipe treatments”.100 In contrast to the principle of sustainability, the precautionary principle is about protecting environmental resources as well as possible, especially in case of scientific uncertainty of the adverse effects of a certain agent.101 The principle requires therefore the least possible emission level, because of the uncertainty of many agents. For this regulatory aim, economic instruments fit better than commandandcontrol instruments, because they provide incentives for certain behaviour before the pollution is going to happen.102 This would lead to the same outcome in the end, but it would only be possible at higher administrative and enforcement costs. The use of economic instruments would guarantee to meet the same requirement at lower cost because of the avoidance of certain resources in advance. The cost aspect is very important for the precautionary principle as well, as costeffective use of the precautionary principle is commonly promoted. The Rio Declaration includes the statement in favour of a costeffective way to use the precautionary principle.103 It concludes with the recommendation for the employment of more economic instruments.104 This stresses that economic instruments are an appropriate tool to follow an approach in environmental policies that stresses the prevention of environmental hazards beforehand.
99 Ibid, 138.
5. USAGE AND IMPLEMENTATION OF ECONOMIC INSTRUMENTS TO REDUCE CARBON EMISSIONS
5.1 Carbon Taxes
Carbon taxes in general are taxes on specific activities that cause greenhouse gas emissions. One of the main issues related to carbon taxes is the location of the point of obligation, which is the point where the tax is going to be charged.105 There is either the possibility to charge the amount of emissions directly or to charge for the consumption of certain agents that cause climate emissions.106 As it is practically very complicated to measure the amount of emitted greenhouse gases directly, proxy solutions seem to be more effective.107 The most common way to tax carbon emissions is to tax fossil fuels as their emission level is easy to estimate.108 Because there is a strong correlation between the carbon content of fuels and their emissions, it is relatively uncomplicated to measure and monitor carbon emissions.109
According to the economic theory of economic instruments, one aim has to be to establish an economically efficient tax.110 This implies that the introduced tax always has to reflect the marginal abatement costs arising for the society.111 In case the tax is too high, there will be an overabatement because a greater carbon reduction will be achieved than would be economically efficient.112 The economy will be charged too heavily because a level of carbon emission reduction will be reached which is too high, compared to the economic optimum.113 If the tax is too low, the carbon emissions reduction will not be sufficient, so that underabatement occurs.114 Therefore, the carbon tax has to mirror accurately the marginal abatement costs.115 This is only possible if there is a high level of certainty about all abatement costs.116 Due to the practical
116 Sin and Kerr, supra note 92, at 15.
problems to collect and monitor all relevant data and the fact that abatement costs sometimes are going to stay unknown, a level of uncertainty about the abatement costs is more likely than a certainty about these costs.117
An advantage of the usage of carbon taxes compared to tradable permits is the possibility to promote an incentive for technological improvement.118 Technical innovation would have mainly the effect of lowering permit prices, because of lower carbon emissions.119 This will cause the effect that firms will obtain new carbon credits in order to keep production up at the same level of carbon emissions. This is more likely to happen than the effect of the reduc tion of emission levels.120 Therefore, there is no incentive for technological innovation under a permit regime, because it would be easier to obtain new carbon emission units rather than reducing carbon emissions.121 There is an incentive for technological improvement under a carbon tax system, because technological progress is more likely to reduce carbon emissions which means at the same time lower production cost for the firms that are subject to the tax.122
(a) German ecological tax
In 1998, the new elected German government announced a reform of taxes in order to reduce carbon emissions.123 The socalled “ecological tax” or “eco tax” was launched in different stages with a steady increase of taxes.124 The first stage was introduced in 1999, followed by four stages ending in 2003. The eco tax is codified in the Statute of Energy Taxes (Energiesteuergesetz)125 which has been recently amended to introduce tax regulations concerning coal and natural gas to fulfil the requirements of the EU Directive. Under the ecological tax, taxation applies to light fuel oil, natural gas, engine fuels and electricity.126 The taxes for the different categories have risen gradually during the several stages. Fuel taxes for diesel and petrol have increased by about 3 ct (Eurocent) each stage, starting
by 31.70 ct per litre of diesel in 1999 and rising to 47.04 ct in 2003.127 The fuel price per litre has risen from 50.11 ct to 65.45 ct during this period.128
There were two main aims of the introduction of the ecological tax. Firstly, that it should internalise the external environmental costs.129 Meaning, the relatively low prices for energy should be raised in order to mirror the actual cost, caused by damage to the environment. This way, the government issued a clear statement to reduce carbon emissions caused by energy consumption. The second aim was to reduce nonwage costs to guarantee better competitiveness for German firms compared to foreign competitors.130 This aim is mainly addressed by the usage of the additional income raised by the ecological tax, to reduce the pension contributions of employees and employers.
According to the carbon emission reduction of the ecological tax, a new study of the national Federal Environmental Agency has shown that the carbon emission reduction caused by the ecological tax has been significant.131 A study of the German Institute for Economic Research DIW (Deutsches Institut für Wirtschaftsforschung) estimates the effect of the ecological tax at about 2.4 per cent of carbon emission reduction in the year 2003.132 Due to increased fuel prices, studies estimate a reduction of 3 per cent of carbon emissions in the year 2010, which corresponds to a yearly reduction of about 24 million tonnes of carbon dioxide.133 According to the study, the outcomes for German firms were predominantly positive.134 It is said that firms mainly benefit from the lowered nonwages cost, which leads to greater competitiveness.135 This way, the higher energy prices could be equalised.
In the early stages of the ecological tax there has been a lot of criticism in terms of coverage. It was mainly focused on the different measures that are taken towards coal and gas. While natural gas was subject to the tax, coal — which emits far more carbon dioxide — was not taken into account in terms of taxation.136 These differences were mainly the result of coalfriendly politics which tried to support the old coalproducing industry in the Ruhr region. On the other hand, there was criticism that there was no tax on kerosene, whereas public transport such as rail and bus transport had been subject to taxation. These differences had to be adjusted when the EU Directive 2003/96/EG was
brought into force. Thus, from 2003 on, there has been taxation on coal and a prospective kerosene tax.137
Further, there is coexistence between two economic instruments, as there is the ecological tax and the EU emissions trading market. This kind of hybrid system is considered problematic, if the allocation of carbon emission units is to be charged to the consumers.138 If a tax applied to the emission can be at the same time traded over an emissions trading market, firms that are subject to both regimes will have to pay the tax for their emissions and will eventually have to buy emission credits for their emissions. But even though the carbon emissions are allocated free, the emission trading system will not be able to prove to be the most costeffective instrument.139 Firms that would be subject to both the carbon tax and the emissions market will try to reach compliance with a higher effort than those firms which are not. Thus, total abatement cost will not be the same for every emitter and the economic optimum will not be reached. However, there will be only very few firms to which this double taxation applies.140
(b) Directive 2003/96/EG
In 2003, EU Directive 2003/96/EG141 came into force after a negotiation time of around ten years.142 It includes the duty to implement energy taxes for every member State of the European Union. The directive requires taxation for motor fuels and heating fuels, minimum taxation rates for coal, gas and electricity. Further, the possibility exists to lower taxation rates for less energy intensive business or for renewable energy producing business.143 While Germany had already introduced the ecological tax and was therefore complying with most of the demanded taxation for most of the fuels, it had to introduce taxes for coal to fulfil the directive. The amendment of the German statute for energy taxation came into force on 16 August 2006. Now there is a comprehensive taxation on all kinds of fuel in Germany except for kerosene. A possible tax on kerosene
for domestic flights has been announced recently and might be introduced in the near future.144
New Zealand was supposed to introduce a carbon tax by 2007.145 The proposed tax was designed to cover only carbon emissions for which New Zealand is responsible under the Kyoto Protocol.146 Excluded from the tax were methane and nitrous oxide emissions produced by the agricultural sector.147 Furthermore, the tax was to apply to New Zealand’s fossil fuels at an approximate level of the world market price for carbon emission units and was to be measured in carbon emissions.148 Per tonne of emitted carbon dioxide, there was an initial rate of $15 per tonne for the first stage until 2012. The revenue raised by the tax was mainly planned to buffer the new business tax, so that there would be a tax shift in general. Further, the revenue was planned to be used for subsidising inventions in the area of renewable energies. However, the coverage of carbon emissions was relatively narrow. Only 30 to 35 per cent of New Zealand’s emissions would have been covered by the projected tax.149
An exception from the tax was planned for firms that were subject to Nego tiated Greenhouse Agreements (“NGAs”).150 These agreements were introduced in 2002. They were supposed to prevent New Zealand’s economy from suffering competitive disadvantages by providing benefits for firms that agreed to cut their greenhouse gas emissions to a certain level.151 Those firms being party to the agreements agreed to use the world’s best practice in terms of carbon emissions.
At the end of the 2005 year, the government announced that the tax was not going to come into force in 2007.152 The decision was made after the report of the review of the government’s climate change policy was published. It was stated that the suggested carbon tax would create unequal incentives due to too many exemptions throughout the whole economy and therefore would be
highly inefficient.153 The tax would only cover about one third of New Zealand’s carbon emissions. The sectors that were mainly subject to the carbon tax would be transport and electricity generation while all other emitting businesses were not covered comprehensively.154 The main issue in terms of electricity generation is that the main part of New Zealand’s energy is already generated through renewable, nonemitting sources. Electricity production only makes up around 8 per cent of New Zealand’s emissions. A huge amount of other emitters consuming electricity are subject to NGAs, so that private households and small and medium business would have been the main tax payers under the carbon tax.155 According to the report, these circumstances would lead to a highly unequal taxation which did not mirror the aims of the carbon tax sufficiently.156 The estimated impact of the carbon tax is only about 1.25 per cent by 2020. Thus, it will not bring about enough carbon emission reductions to be justified in general.157 The government announced it would now concentrate on other policies in order to meet the Kyoto commitments.
The German approach towards the introduction of a carbon tax seems to suc ceed in terms of reducing carbon emissions. This approach consists of tax on agents that are causing carbon emissions like fossil fuels. While Germany took the initiative in introducing taxes for fossil fuels, it was obliged by the EU Commission to introduce a tax for coal and gas. While the intended positive effect on nonwage costs is highly disputed, the eco tax has contributed to an effective reduction of carbon emissions.
On the other hand, New Zealand refused to introduce a carbon tax for the first commitment period of the Kyoto Protocol. Even though a tax was announced to start in 2007, it has been abandoned because of predicted inefficiencies. As the climate change policy of New Zealand is currently at a stage of general revision, it is not clear whether a carbon tax is going to be one of the instruments employed by the government’s new policy to reduce carbon emissions.
5.2 Carbon Emission Trade
(a) Economic theory of carbon emission trade
As with carbon taxes, carbon emission trade is a tool that avoids high abatement costs compared to commandandcontrol regulations.158 Carbon emission trade is generally based on the idea that market mechanisms can solve the issue of carbon emissions by trade. The particular functionality of carbon emission trading heavily depends on the actual design of the trading system. While there is the possibility to use it as a comprehensive approach to regulate carbon emissions, it is also possible to only use it as an additional incentive to reduce emissions. The most common approach is to use the first possibility, which is also known as the “capandtrade” approach. Under this regime, emitters can only emit carbon gases if they hold the required amount of carbon emission rights.159 The basic idea of emission trading is, that emission rights that are not used by the holder in order to cover their own emission rights can be traded on the emission market.160 This market could be an international as well as a domestic carbon market. This way, the holder of the permits benefits from not using all emission units but reducing their own carbon emissions in order to sell them on the emission market.161
According to the economic theory, carbon emission trade functions more efficiently in terms of economic efficiency than traditional commandand control regulations.162 This is particularly the case if the system is going to be designed properly so that the instrument can work at the economic optimum. Therefore, the amount of allocated emission rights has to correspond to the optimal emission level.163 This level is the amount of total carbon emissions, where the marginal abatement costs are least and on the other side are at the lowest possible rate of carbon emissions.164 A main difference between carbon taxes and carbon emission trade is that with carbon emission trade it is possible
164 Ibid, 121.
to set emission ceilings or at least targets which are dependent on the actual shape of the system.165
A main feature of the carbon emission trade is that environmental achieve ments are going to imply a direct economic benefit at the same time. A reduction of carbon emission leads at the same time to a surplus of units, because not all the allocated units are being used. This way, an environmentally friendly behaviour has a direct positive economic effect. If there is only a certain amount of units on the market, which occurs in a capandtrade scheme, the main idea is that the traded units are adjusted to the aimed reduction target.166 For several parties, it will be less costintensive to reduce their own carbon emissions than buying emission rights on the market.167 This is a desired effect, because it leads to the outcome that the party which has the capability to avoid emissions in an inexpensive way will proceed on this way if it gains money from the carbon reduction.168
(b) Carbon credits and carbon permissions
It is possible to differentiate between two main categories of carbon unit trade.169 The first is an absolute approach, also known as the “capandtrade” solution, and the other is a relative approach, which is also known as the “baselineand credit” approach.170 These two approaches imply significant differences for the design of a carbon trade system. The actual functionality and efficiency in the particular situation is related heavily to the choice of system.
In a capandtrade regime, initially a total amount of carbon credits is pre defined.171 The carbon units are allocated among the parties taking part in the emission trade process. The total amount of carbon units mirrors the reduction target of the specific country or system as it represents the amount of allowed carbon emissions applying to the system in total. Therefore, these units are also called carbon permissions as every party is only allowed to emit the amount of carbon dioxide corresponding to the amount of units held.172 If the amount of emitted carbon dioxide gases exceeds the amount of permits held, the emitter has to buy additional units either on a domestic or an international market. There are various possibilities to allocate units initially. One possibility is the auction
of units while another possibility is free allocation of carbon units among the firms that are subject to the trading system.173
According to the baselineandcredits approach, there are no allocated allowances in the first place.174 Usually, a baseline is set to which the emissions should be reduced.175 Tradable carbon units are given as a reward to emitters that are able to reduce their carbon emissions below those given baselines.176 According to the particular system or depending on to what extent this system is linked with other carbon markets, these units could be traded nationally and internationally. The possibility to trade the gained units constitutes a financial incentive to reduce carbon emissions in order to be able to trade additional carbon units.
In terms of the functionality of both systems, the main difference is the possibility to set carbon emission ceilings. In the event that there is no link to other carbon markets and there is no other way to raise carbon units, the total amount of carbon units in the capandtrade scheme stays constant. That means that it is possible for a government to set an absolute amount of tradable carbon units. Further, the total amount of emissions is easy to control and to monitor. The baselineandcredit system does not provide this possibility because units only function as tradable credits without the character of allowances.
(c) International carbon trade
In an international carbon market, trading basically takes place between coun tries as they are parties to the international agreements.177 The basic function of international carbon unit trade is that countries that reach overcompliance according to their reduction target sell the carbon units which they do not need to comply with the Protocol.178 Those countries who do not reach compliance have to buy emission units on the international trading market.179
Carbon emission trade has been introduced as an instrument of the Protocol.180 It provides every Annex B country, which are the countries with the binding reduction targets, the possibility to take part in an international carbon unit trade mechanism. Countries taking part in the carbon emission trade are allocated a certain amount of units corresponding to their individual
carbon reduction targets.181 The circumstances of trading and transferring of units is subject to the Marrakech agreement.182 Generally, all units created under the Kyoto regime are subject to international carbon trade.183 This generally implies also the usage of projectbased units coming from the Kyoto Flexible Mechanisms. However, it is possible for the countries to restrict the trade of certain units.184
(d) Domestic carbon trade
The counterpart of international carbon trade is the domestic carbon trade. This kind of carbon trade system is based on the same concept as international carbon trade. The main difference between the different trading systems is the size of the market and the parties taking part in the trade system. While in an international carbon trade system, countries and private persons can take part, a domestic trading system is based on private parties trading carbon units.
The shape of the carbon system is dependent on whether a capandtrade or a baselineandcredit scheme is chosen. In a capandtrade regime, carbon units are going to be traded among the parties because a certain emission limit has to be reached; whereas in a baselineandcredit scheme, carbon credits are mainly awarded as economic incentive to reduce carbon emissions.
(e) Link between international and domestic carbon trade
An important matter is whether and how international and domestic carbon trade should be linked. As mentioned before, there is a general advantage to establishing a link to an international carbon market which regulates the price level of carbon reduction units. The availability of inexpensive units from overseas guarantees that the price level is lower compared to an enclosed system.185 Furthermore, a bigger emission market guarantees liquidity.186 A better liquidity ensures that units are available when needed. Therefore it en sures a better accessibility of units. On the other hand, there is the risk that the amount of carbon units obtained from other countries is not going to be controllable.187 Therefore, a cap of emissions is hard to realise. Furthermore, the emission reduction would actually occur in another country, because the
overabatement can actually occur in any country.188 This, however, is due to the fact that the climate change regime is designed as a global concept.
Ultimately, there are two counterparts that have to be balanced against each other. On the one side there is the cut of carbon emission, on the other side there is the economic efficiency of the employed instrument. In general, it can be stated that the more regional the market the better the control of carbon units and therefore the better the control of carbon emissions. The more international the market is, the better is the control of abatement costs and the better is the control of the economic efficiency of the instrument. According to the fact that carbon emission trade is an economic instrument, it has to be measured by its economic impact and its efficiency. This leads to the outcome that if the needed amount of units is unclear, which will occur in most of the cases, a link to an international market should always be desirable. If the economic advantage of this instrument is of minor importance, an enclosed system will be the best solution to cut carbon emissions.
As the German system is tightly connected to the carbon emission trading system of the EU, the legal framework of the EU trading system always has to be taken into account when considering the German approach. The EU Commission has set up a number of directives concerning carbon emission trade which the member States have to implement in their domestic law. Therefore, the EU trading system will be considered first, before the implementation of this instrument in Germany will be explained.
(a) The EU Directive 2003/87/EC — introduction of a broad carbon trading system
The EU established a carbon trade system to reach compliance with the Kyoto Protocol by introducing the EU Directive 2003/87/EC. The EU trading system came into force on 1 January 2005. Generally, it can be seen as a domestic trading system within the EU.189 A common market for carbon emissions within the EU countries has been established. Although it came into force before the international carbon trade under the Kyoto regime will start in 2008, a link between those markets will exist.190
Technically, every member State has to establish their own domestic carbon market.191 These markets are going to be linked tightly so that practically there
191 Ibid, 102.
will be one common domestic carbon market within the EU.192 According to Article 9 of the Directive, the allocation is being processed by the governments of the member States. They have to create a national allocation plan which states the total amount of allowances and the allocation method. Article 9 rule 3 states that this plan can be rejected by the European Commission. According to Article 10 of the Directive, 96 per cent of the allowances have to be allocated free of charge for the period between 2005 and 2007, while for the time period between 2008 and 2012 at least 90 per cent of allowances have to be allocated freely.
The EU trading system is a classical capandtrade scheme, because every emitter has to hold permissions for its emissions.193 As the individual reduction targets are factually determined by the amount of emission permits available in a certain system, countries are able to determine their reduction targets by themselves. The amount of carbon emission units is only restricted by §1 of Annex II of the Directive which requires that the total quantity of allocated allowances should mirror the internal reduction target of each country under the Burden Sharing Agreement. However, there is no explicit cap for the allocated amount of emission units. This procedure implies the risk that the reduction targets for each member State, which are subject to the Burden Sharing Agreement, are not translated directly into the equal amount of carbon emission units needed to achieve the reduction target.194 This may lead to an underabatement of carbon emissions. Member States are given the possibility to allocate more units than needed to achieve abatement. Some might allocate even more units than would match to actual carbon emissions. Thus, firms from these member States could sell more carbon emissions in total which leads to hidden subsidisation of these firms. Firms from countries that receive their units free would have a major advantage compared to firms that would have to buy their allowances.195
(b) Linking Directive: the link between the EU and the international carbon market
The Directive 2004/101/EC, commonly known as the “Linking Directive”, has been introduced in 2004 as an amendment of the Directive 2003/87/EC.196 Its main purpose was to create a link between the EU domestic trading market and the international emission trading market established under the regime of
194 Ibid, 112.
the Kyoto Protocol.197 In particular, only the Kyoto Flexible Mechanisms are linked to the EU trading scheme.198 This means that it is possible to trade carbon reduction units allocated in the Kyoto flexible mechanisms on the EU dom estic carbon market. Article 25 of the Directive allows links to be established between the EU emissions trading system and Annex B countries that are not members of the EU.199 Therefore, it is possible, once an international market is established under the Kyoto regime, to transfer units between these two systems. However, this only applies to the projectbased Joint Implementation (“JI”) and Clean Development Mechanism (“CDM”) units.200 These units will be fully exchangeable between Kyoto and EU countries.201
According to the Kyoto Protocol, CDM and JI units are allocated by the local governments.202 This regime was established to guarantee flexible solutions for certain industrial sectors.203 Foreign firms to which the Kyoto Protocol does not apply could keep production costs at a lower level than firms from countries which have to fulfil the Kyoto reduction targets. To avoid these undesirable effects on the economy, the flexible mechanisms have been created.204 These mechanisms provide the possibility to receive carbon reduction units even if the parties do not take part in the carbon emission trade.205 They receive their emission reduction units by complying with certain commitments.206 This requires firms to comply with a best policy approach.207 Certified emission reduction units (“CERs”), on the other hand, are allocated to countries taking part in a project of the Clean Development Mechanism.208 Clean Development Mechanisms were established to award private climatefriendly projects with financial benefits.209
There has been a strong opposition against the link between the EU carbon trading market and the international trading market.210 The main point of criticism was that the total amount of emission allowances could not be
197 Ibid, 130.
198 Commission Directive (EC) No 87/2003 EC, Art 30. 199 Haites, supra note 186, at 330.
206 Ibid, 234.
controlled. This would jeopardise the entire emission trading system, which was primarily designed to reduce carbon emissions within the EU.211 Due to the availability of inexpensive allowances, European firms could rather buy these allowances than reducing their own carbon emissions. This would lead to a transfer of the carbon reductions from the EU countries to countries with a low cost abatement. A formal compliance would occur, while the actual emissions were not falling in the EU.212
(c) German carbon trading system
As the EU Directive is addressing the member States, Germany had to implement the EU Directive into national legislation. The essential part of the implementation of a carbon trading system is the allocation of tradable car bon units. This is done by a National Allocation Plan (“NAP”).213 The plan determines the amount of units and the parties that are going to receive units. There are about 2400 installations covered by the carbon trade scheme emitting approximately 501 million tonnes of carbon dioxide per year.214 This is about half of Germany’s total carbon emissions.215 The German government has allocated an amount which is too high compared to the EU internal reduction target, determined by the Burden Sharing Agreement.216 The national allocation plan provided a surplus for about two thirds of the installations in Germany, compared to their emission levels.217 As there are more emission units allocated than emissions predicted, there will be no reduction of carbon emissions.218 Emitters are entitled to emit the same amount of carbon dioxide as they were before the introduction of the carbon trading system. Thus, the carbonreducing effect of the trading system is at risk.
Criticism against the German allocation practice has mainly been articulated by NonGovernment Organisations (“NGOs”) like Greenpeace219 and WWF.220
212 Ibid, 129.
It mainly focuses on the fact that there are more units allocated than the German reduction target would allow.221 Thus, no cap of emissions is aimed.222 A carbon trading system without a cap of carbon units is less effective, as the main aim of the system should be reduction of carbon emissions. However, this is not going to be reached by the current setting.
New Zealand has released a number of statutes to implement the provisions of the Kyoto Protocol into domestic law and to create instruments which allow reaching compliance with the carbon reduction commitments. To implement the Kyoto Protocol, the Parliament has introduced the Climate Change Response Act 2002.223 In terms of emission trading, this Act creates the legal framework that enables the government to hold and trade emission units allocated under the Kyoto Protocol’s international market.224
With the Climate Change Response Amendment Bill 2005,225 another attempt to implement economic instruments into the New Zealand environmental policy has been made. The Bill has been introduced to extend the possibilities of private persons to trade permits and to provide possibilities to take part in trading of the units received through the Negotiated Greenhouse Agreements and by Kyoto Flexible Mechanisms JI and CDM. The trading aspect included in the Bill is rather negligible, because a broad system of carbon emission trade is not included. It was only designed to provide the possibility to transfer units as a reward for complying with the NGAs to the parties.
The NGAs were originally designed to mitigate possible disadvantages in terms of competitiveness caused by the carbon tax.226 Since the carbon tax is not going to be introduced, the NGAs are basically not needed to mitigate possible economic disadvantages caused by a carbon tax. Therefore, the government announced that no more NGAs are going to be negotiated after
http://www.wwf.de/presse/details/news/klimapolitischer_offenbarungseid/1796/cHash/ 5b684cfbff/.
2006.227 However, it is possible that these agreements are going to be used as an additional instrument in the future. As the major policy review is still in progress, the government has not yet announced how it will proceed in terms of NGAs.228 Therefore, the aspect of emission trade which is currently still included in the Bill will be reviewed and possibly terminated.
Apart from the NGAs, another projectbased mechanism that is introduced by the government is the Carbon Sink Initiative.229 Article 3 of the Kyoto Proto col provides the possibility to raise carbon credits because of the usage of carbon sinks. As these sinks are going to reduce the amount of carbon emissions taken into account in the commitments, the government forces the creation of carbon sinks. The announced initiative is designed as a contract between the government and the landowners, who receive projectbased carbon emission
2
units.230 For every reduction of CO sequestered by new forest, the governmentis going to provide emission units that are tradable on the international market. This initiative, however, cannot be considered as an approach towards emission trading. As with the former NGAs, the carbon sink initiative employs the use of carbon emissions only as an incentive without having the character of emission units. Carbon units are not required to comply with domestic reduction targets. Those units are only given as a reward to parties who comply with the carbon sink mechanisms.
A possible alternative to reach compliance with the Protocol without reducing the emissions to the required levels will be the usage of the Kyoto Flexible Mechanisms which allow the government to declare new planted forests as carbon sinks. Socalled sink credits will be awarded for these carbon storages. During the first commitment period, the government will manage these credits and will reduce New Zealand’s carbon emissions. Another possibility to reduce carbon emissions will be that the government has to buy carbon units from other countries using the international trading system established under the Kyoto Protocol and the UFCCC.231
While the EU introduced a comprehensive domestic carbon trade system which started in 2005, New Zealand has not yet implemented a comparable scheme. New Zealand has until now mainly relied on the introduction of the carbon tax and the NGAs. Besides this, a carbon trading system has not been considered
necessary. As the government is currently undertaking a review of their climate policy, no economic instrument is implemented at the moment. This situation is highly disadvantageous as New Zealand is losing time by addressing the climate change issue while the First Commitment Period is going to start in 2007. The main concern according to the German and the EU carbon trade system is that the allocation of the units is left to the governments of the member States. This implies problems with the compliance, because member States are going to try to subsidise their economy by overallocating carbon units as Germany currently does. This practice can be seen as an abuse of the carbon trading system.
6. COMPARISON OF THE POLICIES
Germany and New Zealand are following different approaches in the implemen tation of economic instruments to cut carbon emissions. While Germany implemented both of the most common economic instruments, New Zealand has not yet proceeded on its announced way towards a greater usage of these tools. This section compares and judges the approaches Germany and New Zealand have taken. As there are only very few mechanisms in the New Zealand climate policy so far that can be considered as economic instruments, the main focus in this section will be on the German approach, while a recommendation for change in New Zealand is going to be made in the next section.
6.1 Carbon Tax
Germany followed a comprehensive approach towards a carbon tax in the form of an energy tax. It covers the main sources of the energy and the transport sector. The government planned to reduce carbon emissions and to give the benefits to the economy in order to lower wage costs. In terms of carbon reduction, this effort succeeded. As the statistics demonstrate, there has been reduction of carbon emissions of about 2.4 per cent in the year 2003 after the introduction of the eco tax.232 As one of the main advantages of economic instruments, the aspect of costefficiency is seen; the current solution also has to be measured by the impacts for the economy.
One problem which can be seen in this approach is that the tax might not be operating in economically optimal circumstances. As there is a relatively drastic cap of carbon emissions, it has to be considered that abatement costs can be relatively high, depending on the particular case. It is unlikely that the current tax rate operates at the economic optimum. This decreases the advantages of economic instruments as costefficient instruments. On the other side, it has to
be considered that the revenue of the tax is going to be used to decrease wage costs. This way, the income is paid back to the firms subject to the carbon tax to some extent. This provides an economic advantage compared to a traditional commandandcontrol regulation because of the risen revenue that can be used to create benefits for the economy.
The New Zealand tax, on the other hand, was planned as a relatively broad tax on carbon emissions. It has been abandoned because of the predicted impact which was said to be relatively low and inefficient. Furthermore, the impact on the economy has been regarded as too adverse to introduce the tax. While Germany uses the carbon tax as one instrument among others to reduce carbon emissions, the New Zealand carbon tax would have been the main approach to tackle carbon emission.
6.2 Carbon Emission Trade
The second economic instrument integrated into the EU and the German environmental policy is the carbon emission trade. The market functions as a domestic carbon market and provides the infrastructure for a comprehensive trading market. The evident problem in this system is that the amount of allowances is allocated by the member States. This leads to the problem that governments are allocating too many units to subsidise their own firms. They will receive units in order to be able to sell them in the international market. This subsidising practice has to be avoided. Otherwise the emission trading system is going to be jeopardised. Effectively, there could be the problem that there are no efficient allocations of units so that the reduction target for the EU cannot be fulfilled in the end. New Zealand on the other hand has not made any effort to implement a domestic carbon emission trade system into their environmental policies so far.
6.3 Character of both Climate Change Policies in General
Germany relies on a hybrid system to cut carbon emissions, with a carbon tax and an emission trading system. While the carbon tax caused most of the achieved emission reductions, the carbon emission trade system proved to be ineffective in its current shape. This is because of the overallocation of carbon units which subsidises the economy and jeopardises the idea of carbon emission trade. As the eco tax proved to be very efficient, the carbon reduction commitments could be achieved only with the carbon tax. Thus, more efficient allocation of carbon units would mean that the reduction target could be achieved even earlier. On the other hand, a lower level of the eco tax could be possible. In general, the two economic instruments, that should function together, do not in the German climate change politics. While the carbon tax
operates at a level where the economic efficiency is not certain, the emission trading system does not contribute to carbon reductions at all.
New Zealand currently merely relies on the use of carbon sinks in order to achieve the Kyoto commitments. This will not be sufficient, if the figures of carbon emissions continue to rise. It is also questionable whether this approach is mitigating adverse effects for the environment in general. Those instruments are not contributing to a longterm reduction of carbon emissions as they can only be used as storage as long as the forest exists.233 Moreover, it seems to be unlikely that a massive reforestation is going to contribute to biodiversity as it is not driven by the idea of sustainable reforestation but by the urgent need to create carbon sinks. This situation is likely to end up in a massive reforestation in disregard of the ecological needs. Monocultures are likely to result from this approach. Beyond this, it is still uncertain how New Zealand is going to handle the current uncertainties and whether and how a new approach towards an implementation of a carbon tax or a carbon emission trade system is going to be made.
7. SUGGESTION FOR NEW ZEALAND
As seen above, New Zealand has not succeeded so far in implementing econ omic instruments into its environmental policies. After terminating the carbon tax, the government did not provide any alternative solutions to introduce economic instruments in order to cut carbon emissions. As there is an urgent need for New Zealand to reduce carbon emissions, this is a substantial flaw. In the previous sections it has been shown that economic instruments can be a powerful and effective way to reduce carbon emissions if they are designed properly. This section will show if, and to what extent, New Zealand can learn from the European and the German approach in implementing economic instru ments to reduce carbon emissions.
7.1 The Special Situation of New Zealand: to what Extent is the Analysis of the German Approach Applicable to New Zealand?
Before going into the detailed analysis, it has to be clarified to what extent the findings according to the German approach can be used for suggestions made for New Zealand’s environmental policies. The major difference between New Zealand and Germany is the profile of greenhouse gas emissions. While Germany’s greenhouse gases mainly arise from public transport and energy
production, New Zealand’s greenhouse gas emissions are caused to a substantial degree by agricultural use.234 This means that the agricultural sector has to be considered separately. Nevertheless, New Zealand and Germany have similar situations in regard to the transport sector. Both countries have to tackle the problem of a high amount of individual transportation. Thus, the analysis of the German approach generally can be taken as an example for a suggestion for New Zealand. Other problems may arise because of the different size of the potential carbon markets. This issue will be discussed in context with the possibilities to establish a carbon trade system for New Zealand.
7.2 Introduction of One Single Instrument or a Hybrid System?
Firstly, it should be discussed whether only one economic instrument should be introduced or whether a combination of both instruments could be favourable. As the German example shows, a combination of both economic instruments is possible in general. The benefit of a hybrid system is that the advantages of both systems can be taken. There are practical reasons for the usage of carbon taxes for some sectors. The private transport sector is not very easy to integrate into an emission trading scheme. It will be a huge administrative effort if private transport and private energy consumption would only be possible if consumers held the required amount of emission permits. In addition, a combination of both systems provides the feature that the carbon reduction has not only been achieved by one system. A combination of two systems provides a broader diversification of the carbon reduction target. For these reasons, New Zealand should take a hybrid approach with a carbon tax and a domestic carbon trading system. The most favourable solution would be if the carbon tax were to be introduced to the level of economic efficiency, which can be possible if there is an emission trading scheme present at the same time. This system could equalise a possible lack of performance the carbon tax is causing.
7.3 Suggestion for a Domestic Carbon Emission Trade System
Carbon unit trade is considered as a costeffective way to reduce carbon emis sions. Another main advantage for the introduction of a carbon trade system in New Zealand is that the administrative costs would be considerably low. New Zealand is about to establish some features that allow the introduction of a broadrange carbon emission trading system under the Climate Change
Response Amendment Bill 2005.235 In terms of a possible trading system in particular, it has to be pointed out that there are basic differences between the EU and New Zealand. While the EU trading scheme represents a big market, there will only be a relatively small domestic market in New Zealand. This may cause the difficulty that there may not be enough emission units available. Furthermore, the price of these units might not be as low as it would be if the system was linked to another lowprice system. However, it is possible to compensate the problem of the size of the market. This could happen through the possibility of linking the domestic carbon market with the international mar ket established under the Kyoto Protocol. The aim of the supply of inexpensive carbon units has to be balanced with the need to restrict the amount of units in order to guarantee an efficient reduction of emissions. As New Zealand has to cut carbon emissions immediately, it is favourable to keep the amount of emission rights at a constant level or to allow only a small amount of units to enter the domestic market.
Another important factor is the coverage of the carbon trade system. It will be necessary that there is a huge range of emitters taking part in the system, so that a broad coverage of carbon emission can be guaranteed. Moreover, a bigger domestic carbon market can guarantee a lower price level of carbon units. This is important to ensure a reduction of carbon emissions which is as high as possible. Thus, the trading system should cover all carbonemitting industries including energy generation. Another important question is whether the agricultural sector and the private transport sector should be included in the trading system. As mentioned above, it will be practically very complicated to integrate these sectors into such a trading system. Thus, these sectors should be rather subject to a carbon tax than to a carbon trading scheme. Considering the current climate policy, New Zealand should move away from the broad use of carbon sinks. As shown above, these sinks are not contributing to a longlasting reduction of carbon emissions. Therefore, the usage of forest sinks should be cut and a broad carbon emission trading system should be introduced instead.
Considering the design of a New Zealand trading system, it is an important question whether a baselineandcredit or a capandtrade scheme should be introduced. As seen above, there are substantial differences between
both systems. While the baselineandcredit system is promoting economic interests, the capandtrade scheme provides more certainty for environmental achievements.236 The report of the policy review concerning New Zealand’s climate change policy recommends against introducing a capandtrade scheme. The reasons given for this recommendation are that it will be nearly impossible to predict the correct amount of units that have to be allocated. If the amount of units would be too low, achieved reduction would be beyond the target. If the amount of allocated units would be too high, the reduction limit would not be met.
Once more, the question whether a capandtrade scheme should be intro duced depends on the balance between economic and ecological aspects. If the government wants to guarantee an effective cut of carbon emissions, then a capandtrade system is desirable as it guarantees an efficient cut of carbon emissions. On the other hand, the baselineandcredit approach is not capable of cutting emissions at a certain level. As there is a high availability of units, it depends on market power how many units are obtained. This, however, depends on the economic situation. If there is an economic growth, more units are affordable for the parties.237 That leads to higher emissions in general.
Further, the flaw of the EU emission trading system, not to determine the total amount of carbon emission units to the reduction target, has to be avoided. A capandtrade scheme can only cause the desired level of emission reduction if it is used as an instrument to reduce the overall amount of carbon emissions. The EU approach bears the risk that the allocation system is misused as a subsidising system. In order to make the system efficient, the New Zealand government has to decide to allocate the amount of carbon emission that will correspond to the reduction target of New Zealand. As the policy review points out, there will probably be uncertainty about the correct amount of carbon units. However, the government will have to take this risk if it wants to guarantee an efficient cap of carbon emissions.
Another important question concerning the implementation of a domestic carbon trade system is whether it should be linked to the international carbon trade system established under the Kyoto Protocol. A link always stresses the economic benefits of carbon emission trading, because the likelihood is higher that inexpensive units will be available from other countries. If there is no link, the cut of carbon emission is more likely because the amount of units is going to stay constant. Abatement, however, will be more expensive without a link,
because inexpensive units might not be available at an equally high amount as they would be with a link. Therefore, policy review pleads to have a link to the international trading system in case of a domestic carbon trading system being introduced.
On the other hand, it has to be considered that a link to the international emission trade system bears the risk that the amount of emission units is not going to stay constant. This means at the same time that the reduction target is at risk. As mentioned above, this suggestion pleads for prioritising the ecological aspect. This means that, with consideration of the big difference between New Zealand’s actual emissions and the emission target, a serious effort to reduce carbon emissions should be made. To create a third way between a link and an autonomic system, New Zealand could establish a filter which only lets particular units enter into the domestic trading market.238 Though it has to be guaranteed that only a small amount of foreign units are allowed to enter the domestic market. This is especially important if an effective reduction of carbon emissions is desired.
In relation to economic efficiency, carbon emission trading has proved to be the most efficient tool to reduce carbon emissions.239 Yet it has to be acknowl edged that the economic optimum is an aim which is hard to achieve under the given uncertainties. It is very likely that the accurate amount of carbon units needed for the trading system to operate at the economic optimum will remain unknown. Therefore, it has to be considered whether a carbon emission trade system is still preferable under the given uncertainty.
The argument of the government as to why a carbon trading system has not been introduced yet is that there is uncertainty about the fact that an international market will be established.240 According to the government, in the case that there will not be an international market, a carbon tax would be preferable.241 Firstly, it seems to be likely that an international market will emerge. As carbon emission trade has been established in the EU and is to be implemented in different other countries, it can nowadays be considered the main instrument employed to reduce carbon emissions and it will be used more and more in the future, as the Kyoto regime requires international emission trade.
This creates an argument in favour for the emission trade system, as it can
be important for New Zealand to stay abreast with scientific development in this sector. Furthermore, New Zealand has always considered itself a pioneer in environmental politics. Introducing the economic instrument of emission trade would underpin this aim. Taking a leading role in the invention of new environmental policies is always desirable, as the example of the EU shows. The emission trading system is considered as the first broad attempt to introduce carbon emission trade. Therefore, EU experts can speak with authority about practical aspects of emission trade systems. Moreover, the existence of an international carbon market is an argument for emission trade. Simultaneously to the international market, a domestic market could be created. This provides the possibility to link these markets to some extent to mitigate the adverse effects for the domestic economy.
Considering the uncertainty of the amount of units to allocate, it has to be pointed out that the introduction of such a system will include a learning process. As the EU system still bears the risk that the system is being abused as a subsidising system,242 it will need to develop the system during the next commitment periods. This, however, seems to be the way new systems are introduced in the beginning. A trialanderror phase is often needed in the beginning in order to get familiar with the mechanism.
The main focus of the suggested system will be the reduction of carbon emissions in order to provide a possibility for New Zealand to meet the Kyoto commitments. Therefore, by balancing the economic and the ecological benefits, the ecological aspects have to be stressed. This means that the introduced system might not work at the economic optimum. This, however, is practically almost impossible for every system. On the other hand, it will provide an effective tool to cut carbon emissions. Nevertheless, a carbon emission trade system provides a possibility to reduce carbon emissions at a lower level of abatement costs in general. After a first learning process about the right amount of carbon emissions, the economic benefits can be stressed. However, in the first stage of uncertainty, the priority should be on the ecological benefits.
7.4 Suggestion for a Carbon Tax System
As the transport sector and the agricultural sector prove to be large producers of carbon dioxide emissions, it would be preferable to integrate these sectors into a carbon emission trading system as well, to get a comprehensive carbon trade system with a broad coverage. There are, however, practical reasons that are against this possibility. Firstly, there will be practical difficulties to
242 3-Sat.de, supra note 205.
integrate the private transport into an emission trading scheme. It is not very likely that private households are going to trade emission units for emissions created by private transportation. Firstly, it will be complicated to introduce a carbon market for private transport. Every car owner would have to be provided with the tools to take part in this trading system. Secondly, it will be very com plicated to monitor the actual emissions of the private transport sector. Every single emitter would have to be monitored, which is likely to be very cost intensive. Furthermore, such a provision would not gain people’s acceptance. The instrument of carbon emission trade is still exotic to many people and its benefits are not commonly known. Ultimately, the system of carbon emission trade seems not to be suited for a high amount of private parties to take part in. This might be possible after a longer period of international and domestic emission trade. The private transport sector could be integrated later into a trading system or could take part in its own trading system. This would warrant a high degree of awareness of the functionality of the mechanisms of such a system in the society. As the mentioned problems exist, it seems more suitable to integrate the private transport sector into a carbon tax system.
Further, the question arises on what products the levy is going to be charged. Considering the German eco tax, taxes are charged on fossil fuels like petrol, gas and coal. At that point, the special situation of New Zealand has to be taken into account. New Zealand does not have a large coal and gas consuming industry.243 Therefore, the main focus will be on the private transport sector, which is mostly consuming petrol. As the German example shows, a tax on petrol can decrease the carbon emission for that sector to a significant amount.244 Therefore, a tax on petrol seems to be an efficient tool to cut down carbon emissions in the private transport sector.
A comprehensive approach in climate change policy would also require including the agricultural sector in the climate policy. With an emission level of about 30 per cent of New Zealand’s total greenhouse gas emissions, it is a substantial emitter.245 However, the agricultural sector would also be very complicated to integrate into a carbon emission trade system. Here is the main problem — the monitoring of the actual emissions. It is a substantial difference to the private transport sector, where the emissions can be estimated accurately by the fuel consumption. Apart from the monitoring issue, the coverage of the agricultural sector with an emission trading system would be facing the same obstacles as an emission trade system for the private transport sector. Farmers would be required to hold permits for the emissions of the farm, which would take a high effort in terms of monitoring and trading. The issue of monitoring
243 Review of Climate Change Policies, supra note 27, at 59. 244 German Federal Environmental Ministry, supra note 59. 245 Review of Climate Change Policies, supra note 27, at 59.
emissions would also lead to the problem that the amount of allocated units is hard to predict. The other main issue of agricultural emissions is that New Zealand’s economy is heavily dependent on agricultural exports. Therefore, it will be depending on political decisions whether a carbon tax will be applied to the agricultural sector. In fact, such a tax would have to be charged on other greenhouse gases as well, as methane and nitrous oxide contribute to a substantial part of the emissions from agricultural use. Effectively, an emission charge applying to this sector would imply that agricultural use would have to be reduced. This, however, does not seem to be very realistic at the moment. Therefore, it heavily depends on the will of New Zealand politicians to cut down greenhouse gas emissions in the agricultural sector. But even without the introduction of a charge for the agricultural sector, carbon emission can be cut effectively in the private transport sector.
The suggested carbon tax would be rather a supplement to the carbon emission trade system than a system of its own. The carbon tax would only apply to the sectors where the introduction of a carbon emission scheme would face obstacles. Nevertheless, a carbon tax can contribute to an effective solution for cutting down emissions of the private transport sector as the German eco tax shows. The possibility to include the transport sector is an argument why especially New Zealand should introduce a carbon tax on fuel. By intro ducing the suggested hybrid system, it also has to be taken into account that a double taxation has to be avoided.246 This means that parties that are a part of an emission trading system are not going to be charged for the same emissions under a tax regime. This would affect the emission price and would not contribute to efficient emission trade. Another important question to be answered will be how to deal with the revenue of the tax. The revenue could be used to promote renewable energies and for the invention of energyefficient technologies. This could initiate a move towards energy consumption which relies less on carbon dioxide than it currently does. This would also contribute to a comprehensive approach of climate change policy in New Zealand.
7.5 Conclusion
The proposed system stresses the ecological aspects in contrast to the economic aspects. The suggestion pleads for the introduction of a carbon emission trade system except for the agricultural and the private transport sector, where the introduction of a tax seems to be more convenient. The suggestion underlines
246 Sin and Kerr, supra note 92, at 46.
the importance for New Zealand to comply with the Kyoto Protocol in order to regain credibility for their efforts to promote effective environmental policies. Therefore, at the present stage, to achieve a reduction of carbon emissions by using economic instruments seems to be more favourable than concentrating on the economic benefits those instruments can provide. After a first stage of trial and error, the amount of allocated units may be varied in order to stress the economic benefits. This way, New Zealand will be able to take advantage of the economic benefits of these instruments at a later stage.
8. OUTLOOK
The success of the implementation of the economic instruments in Germany will be dependent on how the domestic trading market of the EU will develop. While the ecological tax has proved to succeed in terms of reduction of carbon emissions, the carbon emission trading system has still to prove its efficiency. This, however, will not be possible if Germany continues to abuse the system as a way to extend the competitiveness of domestic firms. The government will have to adjust to the carbon reduction targets and cut the amount of permissions to the level determined by the German reduction target.
New Zealand, on the other hand, will have to take action in climate policies immediately if it is willing to comply with the commitments of the Kyoto Protocol. As the government has announced the employment of economic instruments for its environmental policy, it should begin to introduce these elements into their policies as they provide an effective way to reduce carbon emission at lower abatement costs than commandandcontrol instruments. Currently, there is about one and a half years left until the first commitment period of the Kyoto Protocol starts. So far, New Zealand has proved to be not capable of introducing effective climate change policies as there has not been any comprehensive approach to tackle these problems. It will have to introduce effective mechanisms to achieve compliance with the Kyoto Protocol. As suggested, these mechanisms could include the combination of both economic instruments in the form of a hybrid system.
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URL: http://www.nzlii.org/nz/journals/NZJlEnvLaw/2006/5.html