Government slow to pursue carbon capture, utilisation, and storage
It is evident that as the country moves towards decarbonisation, there are going to be changes in our legal system and our tax system. Society will have to accept this and factor it into the way that we operate. A key Government focus is reducing and eliminating carbon emissions in New Zealand. It is unsurprising then that tax is part of the equation when talking about how decarbonisation could be achieved.
The tax system is often used as a lever to manipulate a behaviour that is seen as desirable, and that politicians/society want more of, such as charitable giving, or to discourage a behaviour that is seen as harmful or detrimental and that politicians/society want less of, such as smoking.
If the tax system is used as part of the answer to climate change, then we believe that the most appropriate way to do this is to engage the trifecta of tax levers - incentives, disincentives and tax neutrality - to stimulate or reduce behaviours as necessary.
Many Government departments have already been tasked with consulting on various options for decarbonisation. This includes the Ministry of Transport who released a consultation document Hīkina te Kohupara in May 2021 on options to accelerate the transport system towards decarbonisation. Part of the discussion is on potential changes that could be made to the tax system, including:
- A rise of tax on petrol - something that would make owing an internal combustion engine vehicle more expensive and therefore less attractive, while also being fairly cost effective to administer as the systems are already in place to collect such a tax
- A reduction in the level of GST on zero emission vehicles, which could increase demand for these vehicles
- A reduction in the cost of FBT on certain zero emission vehicles, which could make these vehicles more attractive to some businesses who provide vehicles to employees.
For businesses in the infrastructure industry, the tax system could also be utilised to both discourage carbon output and encourage a move towards decarbonisation of all products and processes used in infrastructure projects from creating roads to building and powering our homes, schools and hospitals.
Three levers
There are generally three ways that this could be done. The most talked about levers are incentives and disincentives. The third, lesser talked about, lever is tax neutrality - essentially ensuring that tax rules do not apply in an unexpected way to certain transactions and that would ultimately encourage the behaviour being discouraged or, that penalises the behaviour being encouraged.
Tax incentives
Tax incentives are designed to encourage more of a certain behaviour. In this case, the behaviour wanted is for businesses to stop emitting carbon and to move towards a zero-emission operating model. A tax incentive to encourage such behaviour could be more tax deductions for zero emission businesses, or a special tax rate on private investments in carbon neutral or carbon zero projects (this would encourage investment funding to be directed at climate friendly projects rather than ones that are not). While it is not strictly a tax being managed through the traditional tax system, the recently announced clean car discount operates in many respects like a tax rebate that is run through the central Government (while the clean car fee will operate like a tax disincentive). This discount makes it cheaper for New Zealanders to buy electric and low emission cars.
While tax incentives appear to be a good thing, there are always questions as to whether the tax system is the appropriate place to be spending Government funds.
Tax disincentives
The most well known tax disincentive relating to decarbonisation is a carbon tax. Such a tax is charged on the carbon output of a business and could significantly increase the cost of using products or processes with even a moderate level of carbon emissions. Such a disincentive is intended to make the use of non-zero emission products and processes unattractive and encourage business away from them in favour of zero emission options.
However, in many cases, the technology has not yet caught up with the products and processes needed to operate that industry. For example, there are not readily available carbon neutral or carbon zero replacements for heavy vehicles that are needed for many infrastructure projects.
Tax neutrality
In the current context, it may also be appropriate to review the tax system to ensure that tax is not a handbrake or impediment for the infrastructure industry to move towards decarbonisation. For example, a carbon tax could have an unintended consequence of making infrastructure projects more costly, while reducing the amount of money the industry has to move towards zero emission operations.
One way to ensure that there is tax neutrality could be to phase in carbon tax on industries, products or processes that cannot readily be decarbonised or replaced with a zero-emission alternative. This would allow the industry time to engage in more research and development to move towards decarbonisation instead of applying an immediate tax penalty, increasing operating costs and subsequently reducing the amount of funds available for decarbonisation efforts.
Constant adjustment needed
Whether changes to the tax system have the intended effect is not always clear in the short term - for example, the recent tax changes introduced to address the housing crisis do not yet appear to have immediately brought down house prices. In the longer term they might.
Even if new incentives, disincentives or special allowances for certain products or processes are introduced, as we move closer to achieving decarbonisation, the need for such changes will likely reduce. This means that as we move closer to being a zero-emission country, the levers are likely to be adjusted to meet the needs that exist at that future point in time.
