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Climate Change General Equilibrium Analysis of Options for Meeting New Zealand's International Emissions Obligations Online version
Scenario 3
As in Scenario 2 with the carbon price doubled to $50/tonne. This also doubles the value of free allocations.
The results confirm one’s prior expectation that the higher the carbon price, the greater the welfare cost of meeting a given emissions obligation. Private consumption declines by 0.3% compared to 0.2% in Scenario 2. One might have expected a larger fall, but the negative effects of the higher carbon charge are cushioned by greater domestic abatement. Emissions of CO2 fall by 10.1% compared to 5.9% in Scenario 2. Hence the cost of emission permits from offshore does not double, rising from $170m to $255m.
Note that a doubling of the carbon price delivers less than a doubling (70%) of the reduction in emissions, indicating a rising marginal cost of abatement.
The free allocations to selected industries are insufficient to offset the effects of the carbon price on other exporting industries, resulting in lower exports than in the BAU. Hence the adjustment on the external account is via lower imports and a small gain on the terms of trade. Imports fall by 0.4% relative to BAU, or double the fall in Scenario 2. Most of the fall is accounted for by lower imports of consumer goods and services.
While the drop in private consumption represents an unambiguous economic loss for New Zealand households, caused primarily by the real resource cost of purchasing emission permits from offshore, the rebalancing of government income improves the allocative efficiency of the economy – enough to prevent GDP measured in world prices from falling, but not enough to prevent private consumption from falling.
