Analytical note

Household cost-of-living impacts from the Emissions Trading Scheme and using transfers to mitigate regressive outcomes (AN 24/02)

Staff and teams are writing in their individual capacity and the views in this paper are not necessarily a “Treasury” view. Please read Disclaimer for research and commentary publications.

Extract from paper#

The New Zealand ETS is the Government’s main tool for reducing greenhouse gas emissions. As emissions budgets tighten towards the achievement of longer-term targets , so will the supply of carbon credits. This will exert upward pressure on the price of carbon, which will flow through to the price of carbon intensive goods and services. While this price signal is the key mechanism of the ETS, it will have regressive impacts on household cost of living, particularly in the short-term; cost increases may be unavoidable for lower income households, and will consume a larger fraction of their disposable income. In this paper we use Treasury’s TAWA microsimulation model to show how hypothetical increased carbon prices could flow through to household expenditures, and how the impacts could vary across the household equivalized disposable income (HEDI) distribution. The expenditure impacts are regressive. Different household types have different energy use and income characteristics and are covered by different income support payments. With an eye to potential mitigations of regressive cost-of-living impacts, we investigate expenditure impacts for various household types and for households receiving different income support payments. We then model the net household impact of increased carbon prices and hypothetical offsetting transfers, which include universal payments and increases to existing transfers. We compare the fiscal costs and poverty impacts of these transfers. This paper focuses solely on the hypothetical modelling exercise and does not comment on the relative merits of the different transfers modelled or more broadly on the use of ETS revenue.

IDI disclaimer#

These results are not official statistics. They have been created for research purposes from the Integrated Data Infrastructure (IDI) which is carefully managed by Stats NZ. For more information about the IDI please visit https://www.stats.govt.nz/integrated-data/. The results are based in part on tax data supplied by Inland Revenue to Stats NZ under the Tax Administration Act 1994 for statistical purposes. Any discussion of data limitations or weaknesses is in the context of using the IDI for statistical purposes, and is not related to the data’s ability to support Inland Revenue’s core operational requirements.