The following is a ‘pundit column’, which was never published because the 2017 election swept it aside.

Our carbon emissions regime is costing us a fortune; why are we not doing something about it?

Suppose an item of government spending blew out from virtually nothing a few years back to more than $400m a year in the future. If the blow-out was, say, on social welfare, there would be much wailing and measures to haul it in, no doubt imposing heavily on the wicked miscreants who are causing the additional spending. But when it is the fiscal cost of the emission trading scheme, the silence is almost deafening.

This spending arises from international commitments New Zealand made to reduce its carbon emissions. To be clear, we are a very small part of the world. Whatever we do will have little effect on global warming (but we need major measures to deal with the expected changes including rising sea levels). However, because we are small it is vital that we work with the rest of the world for common objectives; we are neither big enough to bully, nor are we as isolated as North Korea. (A particular need is to show solidarity with small Pacific states who will greatly suffer from sea-level rises and climate change.)

A part of the international deal is to meet emission targets, which would lower the amount of carbon we inject into the atmosphere. But we are not within cooee of those commitments; our injections are rising, whereas we agreed that they would decrease.

Our current commitments means the Treasury expects, that we shall be spending more than $2 billion in the next five years to purchase to fund forestry, emissions-intensive, trade exposed and other sectors. (Budget forecasts only go out so far; experts tell me that the cost after 2020 is expected to be even greater; one estimate I say was15 to 25 billion dollars over ten years from 2020 to 2030 – say five times as much annually.)

That is an awful lot of moolah which, if we were to meet our emissions commitment, could be used for more health spending, reducing inequality, lowering income taxes, having an even lower government debt path or whatever your (or the government’s) fancy takes you (or it).

How did we get into this expensive mess? Part of the issue is that when we made the commitment we did not understand enough about our methane emissions from belching cows. They have proved difficult to reduce per cow, while the number of cows have increased as the dairy industry has boomed. We also seem to have been over-optimistic in regard to our forests as a carbon sink; they have not been expanding enough. Lurking behind this is the fact that our electricity system is not so dependent on coal-fired stations; many countries are meeting their targets by closing theirs down, switching to less carbon-emitting power sources.

While the previous paragraph is true, you cannot help thinking that we have been too afraid of the producers of carbon emissions to tackle the problem. Instead we have timidly avoided taking effective measures.

From this perspective, the outlays on the outlays are subsidies to the producers of carbon emissions, spreading their costs across the entire economy by, in effect, higher taxes. Shades of Muldoonism! We pretend we do not subsidise farming and industry, but we do.

The producers can come back and point out that the issue is really the consumption of products which produce carbon emissions. The current regime is misleading, they might say, because we measure carbon emissions at the point of production and we take action (or not) at that point, rather than focus on consumers. (It’s a neat piece of first year economics; see here.)

It is true that in a closed economy, or the world as a whole, it does not matter much whether the problem is tackled from the production or consumption side, but it may matter a lot in an open economy like New Zealand.

For instance, suppose we were to tax dairy farmers to cover the costs of their contributions to emissions which generate the need for carbon credits. They could rightly point out that most of their product is sold overseas. The tax would make them less competitive in the international market and so the world might switch to other dairy producers whose cows belch just as much as ours do, or even more. The world would be no better off in terms of carbon emissions; probably, the New Zealand economy would be worse off (measured by GDP – the short-term measure of material output).

What we could do then, is rebate any taxes on carbon-emitting producers when their products were exported. The same logic says we should also tax imports for the carbon emissions they generated when they were in production.

Although it appears to involve export subsidies and import levies, the taxation regime it is, apparently, permitted under the international trading rules. Indeed were we to introduce such a regime successfully I am confident that many other countries would follow. However, I am told that such a tax is just too complicated (the introduction of a new tax is always complicated).

But the real point of this column is not to argue that we should introduce a tax regime penalising consumers of goods whose production generates carbon emissions, using the revenue to cover the cost of international carbon credit purchases. (For a more detailed proposal of what we should do see here and here.)

It is to say firmly that we should be doing something about the two billion dollar and more bill. Rather than, as we have been doing, farting (I suppose I mean ‘belching’) around and charging our failure to the taxpayer.