The economic costs of stabilising emissions of carbon dioxide in New Zealand∗

Abstract

Action to reduce carbon dioxide emissions has wide ranging implications for national economies. This paper uses a multi‐country, multi‐sector model to estimate the costs for New Zealand, in conjunction with other OECD nations, of stabilising carbon dioxide emissions at 1990 levels by the year 2000. To bring about New Zealand's abatement, a tax on each tonne of carbon dioxide of $42 (1988 US dollars) is required in the year 2000. This rises to $125 by the year 2010. The $US42 tax is equivalent to an increase in the price of coal of some 67 percent and generates annual losses in private consumption expenditure of 0.73 percent by about the year 2005. The losses rise in subsequent years. Most of the emissions reduction is achieved by substituting hydro‐based electricity for coal as a source of industrial energy. Output in the coal industry declines by 25 percent. These results are sensitive to assumptions about the flexibility of the New Zealand economy, how the carbon tax revenue is spent and the amount of fuel efficiency improving technological change.