The Treasury

Global Navigation

Personal tools

5 Conclusions

This paper has analysed the potential effects on consumer prices in New Zealand arising from the imposition of three carbon tax rates, namely $7, $15 and $25 per tonne of carbon dioxide. The resulting effects of those price changes on the welfare of a range of household types and total expenditure levels were examined. Finally, the effects on a summary measure of inequality, within each demographic group and over all groups combined, were reported. The price changes were computed using information about inter-industry transactions and the welfare effects were examined using data from pooled Household Economic Surveys. The linear expenditure system was used to model the demand responses of consumers, from which the welfare and inequality effects were calculated.

Households with relatively low total expenditure were found to spend a proportionately greater amount of their income on carbon intensive commodities such as petrol and domestic fuel and power. Despite this, the distributional effect of the carbon tax was not unambiguous, in view of the substantial price increases for several commodity groups on which households with relatively higher total expenditure spend proportionately more.

The ambiguity of the distributional effect of the carbon tax was confirmed by the welfare measures which show that for the majority of households types, the relative burden of the carbon tax (the equivalent variation divided by total expenditure) does not vary monotonically with total expenditure; over some ranges it is regressive while for other ranges of total expenditure it was progressive.

The marginal excess burdens arising from the carbon tax were generally small. However, for three groups, the burdens rose relatively more quickly with expenditure, beyond total expenditure levels of approximately $600 per week. These groups were households with one child relative to households with no children, single adult households relative to multi-adult households and households where the head of a couple was aged over 65 relative to couples where both were aged under 65.

Inequality measures were obtained for a range of degrees of aversion to inequality. Even for very high aversion, the top carbon tax rate of $25 was found to give rise to a very small redistributive effect.

The marginal welfare cost of the carbon tax was found to lie between 18 and 25 cents per dollar of additional tax revenue for all three carbon tax rates.

Page top