The Government’s effort to soothe the pain of inflation by preventing the cost of carbon from rising is coming at a cost.
By the end of March, the Crown accounts were $804 million deeper in the red than forecast by the Treasury in December, due to the carbon price plummeting.
The carbon price fell after Cabinet late last year rejected the Climate Change Commission’s advice to change the settings of the Emissions Trading Scheme (ETS), to enable the carbon price to rise more than it had in the past.
Cabinet feared that allowing the price to rise to a level that gave businesses a greater incentive to reduce their emissions would make the cost of living crisis even worse.
The pinch, however, is that a lower carbon price reduces the revenue the Crown receives when emitters surrender units under the ETS to account for their emissions in the previous year.
In the nine months to March, the Crown received $1.2b (or 42 per cent) less revenue than the Treasury forecast, as the carbon price was $30.50 per unit lower than expected at $54.50. Under the ETS, possession of one unit gives a polluter permission to release a tonne of carbon dioxide.
Because the Crown incurs an expense when it allocates units to industries such as forestry, the lower carbon price meant it also spent $393m (or 24 per cent) less than expected.
The net effect was that the fall in the carbon price resulted in the Crown’s budget deficit ending up $804m wider than forecast in December.
This is a notable sum that accounted for a third of the difference between what the Treasury expected the deficit to narrow to ($913m), and where it actually landed, at $3.4b.
Tax revenue, nearly 3 per cent lower than expected, was the other factor that contributed to the deficit being wider than forecast.
Finance Minister Grant Robertson said it was inevitable the books would be affected by the cooling economy.
“The upcoming Budget has required tough choices as we respond to the deteriorating economic conditions,” he said.
“We will take a balanced approach that is responsible and looks after those who are the most affected by changing economic conditions and recent weather events.”
Coming back to the ETS, the Climate Change Commission last month advised the Government to take more drastic action in the future to make up for its deviation from the agency’s plan for a higher carbon price to help lower emissions in line with what is required by law.
“Without such action, Aotearoa New Zealand risks failing to meet its climate goals or potentially facing higher emissions-related costs in the future,” the commission warned.
Speaking to the Herald, Robertson said Cabinet had not yet looked at the matter. Indeed, the Government has until September to respond to the commission’s recommendations.
Robertson recognised the impact the lower carbon price was having on the Crown accounts. He said the May 18 Budget would provide carbon market traders with more certainty on the Government’s work programme on climate issues.
Despite ignoring the Climate Change Commission’s advice last year, and avoiding endorsing its latest recommendations, Robertson would not go so far as to say its advice was unreasonable.
He said the commission was “simply stating facts about what needs to happen”.
“We have to do that in a way that actually works for people and allows people to transition in a way that is fair,” Robertson said.
Treasury last year advised Cabinet that a carbon price of $120 per unit would increase residential electricity prices by up to 5 per cent and commercial and industrial electricity prices by as much as 7.5 per cent.
Asked whether National would change ETS settings to allow the carbon price to rise in line with the Climate Change Commission’s recommendations, leader Christopher Luxon said he would have more to say on the matter in coming weeks.