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OPINION: Blue sky thinking - the Tax Working Group on the environment

March 05, 2019


Partners Barney Cumberland
Special Advisors Stuart Hutchinson
Senior Associates Nick Bland, Paul Windeatt

Climate change (inc Zero Carbon Bill and Emissions Trading Scheme) Tax reform (Tax Working Group)

Most of NZ’s environmental tax revenue is not levied or used for environmental purposes. The Tax Working Group considers tax has a role to change behaviour which harms the environment. But what does it propose? And could an environment-related tax be a political trade-off for a watered-down CGT?

There is a striking statistic in the TWG’s discussion of the role that tax can play in protecting and improving our “natural capital”, aka the environment. The statistic we have in mind is not that NZ is one of the highest emitters of greenhouse gases per dollar of GDP in the OECD, nor is it that NZ ranked 30th out of 33 OECD countries for environmental tax revenue as a share of total tax revenue (as of 2013). It is not even that, in 2016, the NZ Government collected an estimated $5 billion of environmental taxes, being 6.2% of tax revenue.  

No, the really striking statistic is that over 80% of NZ’s “environmental” tax revenue comes from fuel taxes, road-user charges and vehicle registration fees - which pay for land transport infrastructure (itself a threat to our environment) and road-related injuries - and are neither levied or used for environmental purposes. In this respect, NZ does not lag behind most other OECD countries. 

So not only is NZ batting above its weight in greenhouse gas emissions, but there is almost a complete lack of any taxes intended to address water pollution, declining biodiversity, threats to NZ’s coastal zones and the impacts of climate change.

What can be done about that? Or more fundamentally, does the TWG think the tax system can help to address “negative environmental externalities”?

Its answer is ‘Yes, but’.

The TWG accepts that taxation is not always the best tool to change behaviour which harms the environment, but it considers tax has a role and suggests a framework for deciding when to reach for the tax tool kit. The case for taxing is considered stronger if the damaging activity is susceptible to pricing pressures (eg a tax on fertiliser) or large revenues could be raised. The raising of revenues is justified as “allowing for the reduction of more distortionary taxes and/or spending on other government priorities”, although how that meets the aim of enhancing natural capital is not spelt out. 

Tax is also said to be a suitable policy instrument if the damaging activity can be measured or the problem is sufficiently large-scale and persistent to justify taxing in comparison to regulating. This framework is pitched at a very high level and the TWG is right to admit that it provides only limited guidance on how or who or what to tax for environmental reasons.  

More concretely, greenhouse gas emissions, water pollution, water abstraction, solid waste and road transport are areas that the TWG recommends for “further attention” in the next 1-5 years. In brief, the TWG:

  • supports a reformed, more “tax-like” Emissions Trading Scheme as the focus of efforts to de-carbonise the NZ economy, with greater guidance on pricing and auctioning emission units to raise revenue (as recommended by the Productivity Commission);

  • describes the pollution of NZ’s waterways as a significant environmental problem. However, the TWG takes a cautious approach. It only recommends the introduction of “input-based tax instruments” such as taxes on fertiliser (described as a poor proxy for actual emissions and environmental impacts) if there is not significant progress in the near term in measuring/estimating emissions enabling better directed water pollutant taxes;

  • considers that, applying its framework, water abstraction is ripe for taxation. However, it cautions that Maori rights and interests, the need to be sensitive to local water allocation pressures and the breadth and impacts of such a tax make water abstraction a challenging policy area;

  • supports the Ministry for the Environment’s review of coverage and rate of the Waste Disposal Levy (currently raising a modest $30 million per year) which now applies only to 30% of waste (in the 11% of landfills that accept household waste) and may not be priced at a rate that factors in all environmental impacts; and

  • supports current work by Government and Auckland Council on whether to introduce congestion pricing in Auckland.

Turning to the next 5-10 years, the TWG says there is a strong case to recycle some or all of the revenue from environmental taxes into measures that support the transition to a more sustainable economy. The example given is helping a farm with high emissions and high resource use in an ecologically sensitive area transition to a lower-impact operation. Given the scarcity of short-term revenue offerings proposed by the TWG, this smacks of pulling the environment up by its bootstraps. 

And as for the longer term (next 10-30 years)? We are told that environmental taxes could play a significantly greater role in the tax system, and the TWG flags the possibility of an environmental land tax (or “natural capital enhancement tax”), levied according to the intensity of land use and environmental impact.  

A January poll found that the biggest concern of 82% of New Zealanders is the pollution of the country’s rivers and lakes, indicating that there may be widespread political support for some blue sky thinking in this area by the Government. Its response to all aspects of the TWG Report is due in April: environmental measures might provide Labour with a compromise it could sell to the Greens as a trade-off for possible concessions to NZ First on CGT.