Climate Change & The Emissions Trading Scheme - New Zealand.

ACT and the Green Party’s idea of putting a tax on carbon isn’t the best way to fix our emissions problem. Nor for that matter is a nitrogen tax the best way to solve our fresh water woes. Cap and trade systems are far better, and here’s why. 

Tax vs Cap & Trade – What is the Difference?

For all the fear of cap & trade systems, they work in pretty similar ways to taxes. But there are two important differences that set them apart. Firstly, they control different things, and secondly they need different amounts of bureaucracy. Finally we will look at the myth that cap and trade systems are more open to manipulation.

What are we trying to control?

Under a tax, the price of pollution is controlled. The amount of pollution isn’t controlled, as long as people are prepared to pay the tax they can pollute as much as they want. We can understand why ACT would be into that, but why are the Green Party?

Under a cap and trade scheme, the amount of pollution is capped. The price isn’t controlled, it can rise as high as required to ensure that the cap is met.

A carbon tax might have made sense back in 2004 when it wasn’t certain how quickly we needed to get emissions to zero, but we wanted to get a price on carbon. Given that we now know we need to get fossil fuel emissions to zero by 2050, a cap on emissions is a far more effective way of getting there.

We see the same problem with the Green Party proposal of a nitrogen tax. This will put the same price on nitrogen everywhere in the country – despite nitrogen not being a problem in Gisborne but a huge problem in Canterbury. The result will be raising a lot of money off the farmers in Gisborne and not fixing the problem in Canterbury.


Taxes put the government in control as the middle person. They have to set the rate of the tax, collect the tax, and decide how to dole out the money they raise as a result. That means you need to employ a bunch of bureaucrats to manage it all. So just why do ACT support a carbon tax? The Green Party nitrogen tax will be even more complicated, as they are going to use the money raised to tell farmers how to farm. That’ll go down well.

Proper cap and trade systems use all the same machinery of taxes, but don’t require as many bureaucrats to run it. The price is set by the market. The taxes and subsidies move between the people who are creating carbon emissions (or nitrogen) and the people that are reducing them. Bureaucrats don’t need to be involved much at all. The market provides the incentive for businesses to reduce pollution by making polluters pay, and rewarding the sustainable ones.


Of course the catch-cry of the Green Party is that the Emissions Trading Scheme (ETS) has been rorted by National. And on that count they are right. But that problem is easily solved – we don’t need to throw the baby out with the bathwater. Simply keep the ETS closed to international trade, phase out free credits, remove the price cap and ensure that emissions are capped at the 2030 target. In short, make it a proper cap and trade scheme as it was designed to be.

Do we really think a carbon tax would be any less susceptible to political manipulation than a cap and trade? It seems unlikely. Given that bureaucrats are even more involved than a cap and trade, there is even more room for Ministerial interference in how the price is set and the subsidies are doled out.

In short, switching from the ETS to a carbon tax would be an expensive waste of time. Far better to make the ETS work as it was initially envisaged. For the same reason TOP’s water policy is a better way to deal with the nitrogen leaching problem than the Green Party’s nitrogen tax.