When is fair fair in the ETS?

Yesterday’s select committee hearings on the Emissions Trading Scheme (ETS) were a lesson on how to do it. We had invited all the iwi submitters to present in the early afternoon, just as we have grouped other like-minded submitters. But instead of each taking their individual 15 minutes for presentation and questions, they organised themselves into a forum, presided over by Dr Apirana Mahuika and MC’d by Willie Te Aho, with all the questions dealt with together in a forum at the end. It was an impressive show of organisation and solidarity and allowed a better debate on the issues.

The key issue for Maori is fairness in the impacts of the ETS. This is easy to say, but fairness can have many meanings to different people.

Is it enough that Maori and pakeha foresters pay the same deforestation penalties and live under the same rules? Well, no – it’s not that simple.

Some iwi used Treaty settlement money to buy land under Crown Forest Leases with the express intention of deforesting and farming the land when the final rotation was harvested by the lessees. The question here is, did the value assigned to that forest when they bought it reflect the fact that there would be a large financial penalty for doing that? The penalty is charged to the owner of the land, not the owner of the forest.

For recent Treaty settlements, that fact is obviously taken into account in valuing the land. For Ngai Tahu a decade ago, and probably some others since, that is unlikely to be the case.

Some sectors in New Zealand will be affected more than others, because of their greenhouse gas intensity. For example, IT and computer software are hardly affected, while livestock farming, forestry, fishing and energy intensive industry are greatly affected. So another take on “fairness” might be, are Maori disproportionately involved in those industries? I think we need to know how much of the pre-1990 forest estate (the forests that incur a deforestation liability without earning credits because they were planted before the base year for the Kyoto protocol) are held by iwi, and I have asked for that information.

Then there are households. Every household will face the same rise in the price of a kWh of electricity and a litre of petrol, so that’s fair, right?

Maybe not – power and fuel are a much higher proportion of family income for those on low incomes than for high earners. Maori are disproportionally on lower incomes and more likely, statistically, to live in cold damp houses on the edge of cities where the only way to get to work is my car and the only affordable car is a gas guzzler. Maori don’t have this on their own of course, they share it with all low income people. But that is why I negotiated so hard with Labour for the return of the electricity SOEs profits to the people, in the form of home insulation and energy efficiency upgrades. We are working with the Government right now to make sure people don’t lose that.

It’s also a reason why we go on and on about improving public transport and cycle and walking facilities. We want to give as many people as possible the choice to leave their old gas guzzler at home and take a train or a bus that runs frequently, on time and affordably.

A new point to me was driven home forcefully, and I’m glad to have learned it. Most farmers are content to get much of their return on their investment and hard work via an increase in the value of their farm. Then when they retire they get a large capital sum to pay for a house in town and an overseas trip. But Maori land acquired through customary title or through Treaty settlements is not for sale – it must stay with the iwi for future generations. So capital gains are of little value to them. They need a good annual income to provide for the whänau. Policies that restrict their income but capitalise their wealth in land values disadvantage them relative to most other New Zealanders.

No-one will escape the impacts of climate change and no-one can be exempt from the costs of the ETS. In the end I put it to Maori submitters yesterday that “fairness” does not mean that Maori are not impacted but the ETS, but that Maori as a group will not be impacted more than society as a whole. That seemed pretty well supported.

14 thoughts on “When is fair fair in the ETS?

  1. A1kmm,
    You mean internalising that which was previously externalised? 😛
    But, yes, I agree with you here.

  2. Why would you tax capital gains.
    One thing that NZ doesn’t have enough of is capital.

    The government should reward NZ’r who save and invest their capital not punish them via taxation. Right now NZ’rs do not save enough and spend far too much.

    Why don’t we stop taxing savings (capital gains) and start taxing consumption.

    The only way NZ can maintain its standard of living is if we produce goods to export to the rest of the world. We do this by saving our capital and investing it producing goods not by buying goods from overseas with money we borrowed from overseas.

    It makes no sense to me to tax something you want and at the same time not tax something you don’t want.

  3. Why, oh why do we not have a capital gains tax?

    Because they are extremely easy to bypass through the use of trusts, company assets, etc.

  4. The inherent unfairness here is not that the ETS would impose charges for the carbon released by cutting down forests – which should be reclaimable for if the land is reforested and the carbon is resequestered. Instead, the unfairness is that not all carbon releasing activities are equally penalised. Land use changes are actually reasonably reversible in the scheme of things, while burning fossils fuels at the rate we burn them is much less so.

    It is acceptable for us, as a society, to put an end to harmful activities, and people or groups who had anticipated on being able to do those harmful activities will lose out. For example, let’s say I lived in a fictitious country where there was no law against murder, and I bought shares in a company which carries out hits for money. Then the government passes a law against murder, and the value of my shares plummet. Am I really being unfairly treated by the government here? No, because the government is creating a more fair society, and I was the one complicit in the previous harmful activity.

    When the government acts to ‘externalise an internality’, i.e. make someone pay for a previously common resource (like the limited capability of our ecosystem to deal with greenhouse gases), people who have the capital to exploit that common resource will face a loss because the value of their capital drops. However, ownership of the capital does not give them an inalienable moral right to exploit the common resource for free.

    As another parallel example, let’s say that I lived in a village where there were public parks with lots of apple trees, with apples high up on them (the apple trees grew on public land and were public property), and anyone who could get the apples was allowed to take them. However, only some of the villagers could afford to / were interested in buying ladders, needed to pick the fruit. So the villagers with ladders would go in and pick the fruit. Now lets say that one day the government decides to start charging a fee to pick apples off the tree (it is on public land after all). The value of the ladders plummet, and the ladder owners are angry. But the ladder owners have no right to be angry, because the apple trees were on common land and were the common property of everyone in the village, so they were just unfairly getting (or expecting to unfairly get) more apples from common land which everyone owns than the rest of the people.

    Similarly with Greenhouse gases. We all have to share the environment; it is common property, and we all suffer when it is damaged. But only those in a position to damage the environment benefit from this damage. Owners of forested lands are in the position to damage the environment by cutting down the trees and releasing the carbon dioxide sequestered in the trees. However, just because they own the land (i.e. the means to exploit the common resource, like the ladder in the previous example) doesn’t mean they have any inherent right to do so.

  5. Good example. Jumping on the bandwagon is the worst investment strategy of all and lot of dairy and vineyard conversions are going to go the wall this year. Many parts of the country have already seen farm prices fall by up to 25%. The reckless lending by banks that fueled the farm price bubble has distorted things just as badly as SMPs did 30 years ago.

    However, it’s different story for traditional farmers who have treated their farm as the longterm investment that it really is. Borrowing to fund productivity increases based on sound market analysis had become the norm in farming during the 1990s. If, at the end of a lifetime living the farm lifestyle, a farmer can cashup the the accrued increased production value of the property for a retirement nestegg then that it simply the icing on the cake. The danger with that strategy is that ill health or an accident removes the option of picking the right time to retire. But as with all investing, farmers can reduce that risk by diversifying if their farm has different soil types or microclimates. The old hands seem to have become quite good at that.

    How stupid it is ulyimately depends on just how much they are depending on the capital gain for their retirement. No different from putting all your money into one retirement fund or the ‘family firm’.

  6. A farm depreciates its assets in exactly the same way as a factory, their is no difference. The return on investing for say owning a factory, rental property or farm is exactly the same.

    If a rental property today is giving a negative ROI based on the captial you invested today, then why will it give a positive ROI in the future. If you buy the asset today in the hope that it will gain in value in the future, what you are really hoping for is that sometime in the future their will exist an idiot that will buy this asset off you at a higher price than what you paid for it, that’s a suckers model of investing. Unless you have added value to the asset then it really isn’t worth anything more.

    I’ll give you an example my old landlord when i was living in brookyln ny, I paid 2000 dollars in rent per month, he paid a mortage of about 3000 a month. He was losing 1000 dollars a month. If he then sells the property for more than he paid in the future then that persons mortgage would be higher, they would be losing more money. No you can’t raise the rent since the market rent is 2000 dollars in fact it has fallen since the people who are now renting it are paying 1800, Rents in NY city are falling very very fast.

    The gain in value of the land is an inflationary adjustment it isn’t a real gain and it shouldn’t be since you haven’t added any value to the land which is the same case for the factory and the farm and the rental property. This means that basing you ROI strategy on a significant gain in land value is an unwise investment strategy. Of course it worked well during the largest property bubble in the history of humanity but don’t think for one second that land prices are going to return gains anytime soon, land prices are going to remain flat for a very very long time and when you factor in inflation they will actually be declining in value.

    The only worth to holding land as an asset is in fact a hedge against inflation but their are much easier ways to hedge inflation like say holding silver or gold for example. An investment must return a value, in fact it is the ROI which gives the asset its value, their is no other way to logically price an asset today than its future projection of ROI. If a million dollar farm has an ROI of say 1% its not worth 1 million dollars so don’t buy it and instead wait for the owner to go bankrupt and buy it then.

    A lot of farmers are about to find out that their farms are not worth what they paid for them. I expect to see a lot of dairy farms go bankrupt in the next couple of years because people paid too much money for the asset based on bad investing strategies.

  7. There seems to be some part of “much” that you have misunderstand or overlooked to have come to that conclusion.

    IMHO, generally, factories are significantly different from most other land improvements. Their added value is tax depreciated during the period of ownership instead of being capitalised at the end.

  8. So by your argument if i own a factory then the return on my investment will come from selling the factory not the profit generated by selling goods.

  9. I’m lost for words. This is one of the stupidest things I have read, and I’ve got Internet access.

    So capital gains are of little value to them. They need a good annual income to provide for the whänau.

    Unlike the rest of us. I mean, have I got a farm that slipped down the back of the sofa and been forgotten about? If I don’t, can I get extra state assistance? Perhaps we can get Bono and Geldorf to hold a concert for the west’s farmless people.

  10. In what way? Most land owners do much the same things whether they improve the land by replacing 1/4 acre sprawl with high density town houses or repace low rise office buildings with high rise. They expect to get much of their return on their investment and hard work via an increase in the value of their land rather than from rental income.

    Wcich raises another fairness issue. Should farmers who convert part of their farm into native forest or plantation forest be rewarded with carbon credits while property developers who help improve urban densities and thereby reduce transport emissions miss out?

  11. “A new point to me was driven home forcefully, and I’m glad to have learned it. Most farmers are content to get much of their return on their investment and hard work via an increase in the value of their farm”

    I see by the above quote that we have a lot of stupid farmers in NZ.

  12. Fairness is a terribly subjective concept.

    The schemme should make emitters of carbon pay for such emmision through the purchase of carbon credits from producers of such credits.
    An individual should not be charged for cutting down a forest any more than the cost of the carbon credits the consumption of that forest generates.
    Where a forest existed pre-legislation only the post-legislation growth earns credits for which the growers may be refinanced and therefore the owners should only have to account for the portion of carbon emitted through use that falls after the implimentation of the legislation since presumibly the forest was producing credits prior to the legislation which were not sold or traded and from which no profit was made; credits greater than the amount of carbon emmitted should the entire forest be burnt prior to legislation.
    If the Iwi are leesing the land to the government and the government are claiming credits from the use of that land then it should be the government paying for the costs of the generation of those credits; the cost of clearing the forest. And since it was the governmetn that changed the rules and seeks to benefit from such change there would likely be legal reason to take it before the courst shoudl the government not recognise this.

    maori are over-represented in unemployment figures and underepresented in employment, Where they are represented they are over represented in low wage jobs and under represented in high wage jobs. So, if a change of legislation impacts on the poor more than the rich then maori will be disproportionatly penalised.
    however, consider this, maori are over represented in the poor and under represented in the rich, the poor are by far over represented in state spending and underrepresented in tax income while the inverse is true for the rich. So, maori, being over represented in the poor, are extremly over represented in state spending and under represented in tax income. Which suggests that maori are at present significantly positivly discriminated against relative to europeans. Now, taking into account that as food, transport, and electricity prices rise so likely will unemployment benefits and income subsidisation and that this requires more tax, implimenting a carbon trading schemme actually has minimal effect on the standard of living of the poor but maori become even more disproportionatly over represented in state spending and more under represented in tax income.
    So no, this does not disriminate negativly against maori when you talk about their over representation among poor, if anything it discrimiantes positivly. It is meaningless to talk about maori being victimised due to being over represented in the poor, if you want to raise the standards fo maori you dont hand the money to maori only or talk about the effects on maori due to that representation; that only creates strife. You attempt to rais ethe standard of all and since maori are over-represented they will be over-represented in benefit from such actions and no strife will result from this agaisnt maori which means a far more equitable society with less racism.

    As to maori over representation in poluting industries; this is irrelivant, these industries ahve been externalising costs for their entire existance, asking them to internalise them would decrease their productivity but so what? maori are nto one homogenous group, if they as individuals or collectives choose to go into industry which externalises costs then it is their own problem, especially when there has been a blatently obvious trend towards internalisation of costs for the last hundred years or so.

  13. Some forest owners used their personal savings to buy land with the express intention of deforesting and farming the land when the final rotation was harvested by the lessees.

    The question here is, did the value assigned to that forest when they bought it reflect the fact that there would be a large financial penalty for doing that? The penalty is charged to the owner of the land, not the owner of the forest.

    So this applies to whitey forest owner, too?

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