Wednesday 16 March 2022

Gas tax holidays

A temporary petrol tax holiday is a stupid way of responding to cost-of-living pressures.

It's what hundreds of economists argued over a decade ago, when Hillary Clinton and John McCain pitched the idea in 2008.

It was dumb then and there; it's dumb here and now. 

My column in Newsroom this week, now ungated.

All up, adjusting petrol excise when global oil prices change makes little sense. It would have made no sense to hike excise in response to very low oil prices at the beginning of the pandemic, and it makes no economic sense to reduce them in response to high current oil prices.

But that does not mean that the Government should do nothing.

Carbon prices are not to blame for the current oil price shock. But we should expect carbon prices to rise as the Government moves toward Net Zero. Carbon charges will impose a larger burden on household budgets.

And, unlike petrol excise, Government will profit from rising carbon prices. The Government intends to auction 19.3 million tonnes of carbon credits over the coming year – with more credits held in reserve in case the price cap is hit.

If the Government can sell a tonne of carbon credits for $72, it will earn just under $1.4 billion through this year’s auctions.

Currently, government ETS revenues are earmarked for climate activities. But programmes targeting emissions that are already covered by the ETS cannot reduce net emissions unless the Government also reduces the number of credits that it auctions. And a strong majority of Kiwi economists agree it is less costly to just reduce the ETS cap without implementing policies targeting emissions that are covered by the ETS.

The Government could instead take the money it earns at ETS auction and return it to Kiwi households, to help them respond to rising energy costs. The payment to a family of four would be just over $1,000, at current carbon prices.

This kind of carbon dividend would be better than slush-fund expenditures like electric vehicle subsidies for helping mitigate any undesirable distributional effects of rising carbon prices.

It certainly would not solve all of the problems caused by high inflation and by a global oil shock. But it would help households start adjusting to higher longer-term energy costs. And it makes more sense than a temporary excise holiday.

Unfortunately, yesterday’s announcement also suggested that the Government has a few other things planned for the money it earns at ETS auction.

At the same time, low-income households very likely bear a disproportionate burden from current petrol excise. A 1995 Toyota Estima does not impose any greater wear and tear on the road than a 2022 hybrid Toyota Rav-4 but pays an awful lot more to use the roads. Shifting petrol vehicles to road user charges would help undo a substantial inequity in the current road funding system and ease the burden facing households that have not yet been able to afford an upgrade.

Nothing can really cushion New Zealand from global oil price shocks. There were sensible approaches the Government could have taken to ease some of the burdens. A temporary excise holiday is not one of them.

I'd also chatted with Kate Hawkesby at Newstalk early Tuesday morning and with RNZ's The Panel on Monday afternoon about it.  

If this is what the government does when spooked by one bad poll, the path to Net Zero's going to be messy. 

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