Fallow on Deforestation policy
Brian Fallow looks at the dilemmas facing the Government over their retrospective deforestation tax, and concludes that the best solution for NZ would be to scrap it. And this comes from a columnist who generally has been supportive of the Government’s initiatives in the greenhouse gas area. He writes:
Well here’s a suggestion: Forget the whole thing.
Not just the free allocation of 55 million tradable credits but the policy for which it is a partial offset, the retrospective deforestation tax.
The fundamental question to ask is what the object of the policy is. Is it to reduce New Zealand’s net greenhouse gas emissions, or to limit the financial risk to the taxpayer?
If it is the former – as it should be – there is a real danger that the policy of penalising deforestation will prove counterproductive.
And if so it will also be an own goal from a narrow fiscal point of view in the long run.
The policy is intended to discourage a switch in land use from trees, which store lots of carbon as they grow, to grass whose carbon is quickly returned to the atmosphere.
Increasing the proportion of New Zealand that is covered by plantation forest from 7 per cent would buy time, decades, in which the economy could adjust to a low-carbon future.
But if the policy effectively locks some forested land into a second-best use there is an opportunity cost. Export receipts, incomes, jobs, profits and taxes will all be lower than they might otherwise be.
The importance of land-based industries to the economy argues powerfully against reducing flexibility of land use.
And even from an environmental point of view there is a risk that erecting a barrier to exit from forestry will deter people from getting into it in the first place.
If the decision to change a block of land from grass to trees is seen as effectively irreversible, people may think twice about doing it.
Policy makers are liable to think a bird in the hand is worth two in the bush.
They can see how much land is deforested but they cannot measure how much afforestation that might have taken place does not because landowners fear lock-in.
And they cannot measure the broader chilling effects on investment that might flow from imposing what amounts to a retrospective tax.
The Government might see devolving a deforestation liability as incentivising future behaviour (replanting) but those affected by it are likely to see it as penalising past behaviour (planting the forests in the first place) which cannot be changed and which indeed was actively encouraged at the time.
Retrospective tax changes are generally regarded as odious. They are also a bad look for a country which needs to attract investment capital…
Fallow suggests as an alternative:
In the meantime, while we wait and see what international rules emerge, it would seem to make sense for the Government to shelve plans to devolve the deforestation liability, and avoid the complications around the associated allocation of free units.
It should focus more on what will encourage the afforestation of a millon hectares of bare, erosion-prone land and less on locking in what may be a sub-optimal use of country already forested.
The Government rarely gets the balance of stick and carrot right, and it seems this area is no difference.