Help the old bomb owners this time
A 'feebate' scheme to incentivise low emissions vehicles would hurt poorer provincial workers and farmers who use old and heavy cars, utes and SUVs. They should be compensated, Bernard Hickey argues.
Comment: The Productivity Commission proposed a 'feebate' scheme to encourage the adoption of low emissions vehicles as part of a suite of changes that would be collectively as big as the wrenching economic and welfare reforms that thumped a generation of poorer workers from the mid 1980s to mid 1990s.
No Government should again make the mistake of launching economic reforms without a plan to compensate and help the losers. We are still living with the legacy of failing to help those who lost out in the last big reforms. Many face being punished all over again for owning (and needing) big, old cars, utes and SUVs to get to live their lives.
Rightly, the Productivity Commission has highlighted the urgency of addressing climate change and the need to act early to avoid the sort of brick wall New Zealand hit in the decade after 1984. Also rightly, it made clear the need to help the losers in this huge adjustment.
The last time we tried such a large engine and drive-train rebuild on the economy while in motion (from the mid 1980s to the mid 1990s) we suffered at least two severe recessions and sentenced a generation of lower-skilled workers in the industrial suburbs and provinces to multi-generational poverty. The pain for certain communities from the de-regulations of that period was not immediately offset by compensation or help. Part of the prescription actually involved cutting their incomes, stopping building their houses and increasing their cost of living with various consumption, tobacco and petrol taxes.
Last week the Productivity Commission released its draft report on how to make an economic transition to a low emissions economy, but did not specify exactly how that could be done, other than through the income tax system.
The pain for some would be considerable. The report's modeling suggests a 10-fold increase in the greenhouse gas price set through the emissions trading scheme would be needed to incentivise the necessary jamming on of the brakes.
In the simplest terms, this would involve an increase in the part of the fuel excise cost of petrol linked to the ETS rising from three cents a litre to 30 cents a litre. But this would be just the beginning.
Those parts of the economy that rely on using cheap cars and relatively cheap fuel to run their lives could face much bigger other costs. The commission proposed using a 'feebate' scheme whereby buyers of old, inefficient and large passenger vehicles would pay a fee that would subsidise the cost of low emissions and emissions free vehicles, preferable in a revenue-neutral way.
One consolation for the victims of the deregulation of the mid 1980s to mid 1990s was a collapse in the cost of vehicles because of the introduction of cheap used imports from Japan. The commission recommended imposing tough emissions standards so we don't simply become the dumping ground for other countries' unwanted, inefficient, unsafe and essentially dirty diesel and petrol vehicles.
It also suggested looking at an outright ban on imports of petrol or diesel powered light vehicles by a certain date. It said nearly all vehicles entering the fleet by 2030 (just 12 years away) would have to be plug-in electric for the light vehicle fleet to be all electric by 2050.
That implies that over the next decade the Government would have to force the drying up of cheap, large and dirty used imports from Japan with both regulation and price incentives. Cars like this one below would be outlawed under these changes.
The Government starts this challenge with a particular problem.
The number of very old, large and dirty diesel utes and SUV imports has surged since 2012. The average age of used imports has risen from seven years to 10 years since 2012, making the overall fleet more than 14 years old on average, which is almost twice that of Britain's car fleet. The average engine size and weight of used diesel imports has been rising since 2012, helping to stall a decades-long improvement in carbon emissions efficiency.
This chart here shows the rise in older used imports since 2012. New Zealand is now importing almost as many 10-15 year old diesel utes and SUVs as it is importing plug-in hybrids.
The 'feebate' scheme would essentially see buyers of 10-15 year old used diesel utes like the Toyota Hilux above pay to subsidise buyers of plug-in electric cars such as the Nissan Leaf. In theory, they will have options to buy cheap electric-powered utes and SUVs, but there are none on the market yet and the current consumer preference is for heavy seven-seat four wheel drive diesels that can operate for days on end in the provinces without refilling. The charging networks are not there, and won't be there in the 10 to 15 year time-frame envisaged by the commission.
The Labour-New Zealand First-Green Government has a classic 'sin tax' problem in this area. These changes to outlaw and tax the imports of these cheap, big and unbreakable utes and SUVs would hit poorer families hardest in the poorer suburbs of Auckland, and the provinces.
They would also face a double whammy of an extra 30 cents per litre of ETS costs and, no doubt, extra fuel excise costs to pay for public transport. At the current growth rate of 2.2 cents per litre per year for the 12 years to 2020, these poor families of SUV drivers face another 26 cents a litre over the next 12 years.
If the Government follows through on the commission's policy suggestions, it faces trying to win the votes of provincial and poorer suburban family voters who are having to pay 56 cents a litre extra in fuel taxes to fill much newer and more expensive SUVs. That money will also be transferred to electric car buyers and public transport users in other suburbs or cities.
The Government will have to think up innovative ways to compensate 'Te Atatu Man' after his Toyota Hilux transport costs double or treble in a short space of time and he sees that money going to young (often immigrant) bus users and wealthy electric car drivers in the leafy suburbs.
The risk is a repeat of the benefit cuts of the early 1990s that compounded the damage for a part of the community hit hardest by the deregulations of the Lange-Douglas and Bolger-Richardson governments.
And then there's the poorer farmers
This scale of the changes needed in farming and forestry are also daunting, as outlined in the report.
It shows New Zealand faces a particular problem with almost half of its emissions coming from farming and a large part of the short term (20-30 years) solution being on the shoulders of foresters.
The speed and potential makeup of the inclusion of farmers in the emissions trading scheme will be crucial, along with how farmers are compensated or offset.
The report also shows how the growth of forestry-to-dairy conversions in particular have delivered an awful double-whammy to our greenhouse gas emissions (not to mention nitrate leakage into water tables) over the last 30 years. It both increased emissions of methane and nitrous oxide, along with removing carbon sinks that could have soaked up extra emissions.
Along with faster population growth than most in the OECD, the forestry conversions helped make New Zealand's gross emissions grow at the fourth fastest rate in the OECD behind Iceland, Australia and Turkey.
This means farmers will have to bear a large amount of the load, and foresters will have to rediscover their love of planting new trees or keeping their young ones. The current ETS does not incentivise either to change their behaviour and currently record-high log prices have triggered a mass harvest, often without replanting.
The commission said there would have to be massive conversions of marginal sheep and beef farms back to forestry of a similar scale to the forestry-to-dairy conversions of the last 30 years. Among other things, it suggested Fonterra be allowed to refuse to collect milk from remote farms and conversions that make emissions reductions difficult.
Again, the current Government faces a political problem in the provinces. It must compensate and help farmers and foresters adjust, or have to win the provincial votes of a second generation of farmers who effectively had subsidies kicked out from under them without assistance.
This is the big risk of the next 30 years: that the same two communities (poor Māori workers and small farmers) bear the heaviest burden again of a massive economic shift without compensation.
The grand hope is that new technology will solve everyone's problems in a painless way, particularly in agriculture. But in the meantime, we have to move on with the assumption there is no hail Mary pass delivered on solar batteries, carbon storage underground or magic pill to stop all the cows and sheep burping and farting.
Let's plan to compensate the losers, rather than hope a magic pill arrives to ease the pain.