By Timothy Welch* of
Opinion – The government’s announcement that the Trade Commission will soon have the power to regulate wholesale prices for petrol and diesel may be good news for cash-strapped drivers, but it’s arguably a step backwards in the fight against climate change.
While there is some skepticism about whether the Commission will ever act to enforce fuel price caps, any move to make CO2-emitting vehicles more affordable must come at the expense of efforts to encourage people to stop and drive switch to more sustainable modes of transport.
To make matters worse, the political announcement came amid the critical COP27 climate meeting in Egypt and a draft UN report warning of soon-to-be-missed global warming targets. The move suggests, at best, conflicting government priorities.
Aside from running counter to other plans to mitigate climate change, there is ample evidence that price caps can often produce results contrary to those intended. Sometimes leaving it to the market can be a better option.
Fuel should be less affordable
Since last year, the focus worldwide has been on switching to electric vehicles. While this is not without its own problems, New Zealand has fully embraced the approach, setting a target of zero net emissions by 2050.
This would require 100 percent of imported cars to be electric by 2030 – an ambitious leap from the estimated 4.8 percent of total vehicle imports they accounted for in 2021. Fuel price suppression just doesn’t fit the narrative of massive EV adoption (including subsidies). up to NZ$8625 per vehicle to boost sales).
Relatively low gasoline and diesel prices and the still high cost of new electric vehicles (and the electricity at home to charge them) remain significant barriers to the decarbonization of private transport.
But there are alternatives to price caps that don’t compromise our climate goals. An alternative is an unexpected tax on the oil industry. Such a system would entail an additional levy on oil company profits, perhaps around 25 per cent, as introduced in Britain.
For example, BP recently announced a $230 million gain in New Zealand. An unexpected tax on this one company would generate an additional $57.5 million in revenue for the government.
That could then be used to boost programs and other modes of transportation that help people avoid the gas pump. The money could also be used to fund the “Loss and Damage” pledges made at COP27 to help developing countries already suffering from climate change.
The problem with price caps
There are other, broader questions about the effectiveness of price caps and their potential to achieve the opposite of what is intended.
Price caps are designed to make goods more affordable for the consumer, which increases demand. But it also makes selling the goods less attractive for the producer, potentially reducing supply. Over time, this can affect supply chains and make cap removal more difficult in the future.
Price caps are novel in New Zealand but have been used elsewhere to regulate various markets. Several countries have had price controls in the past or are considering introducing them now to control the prices of food, oil, housing and other consumer goods in the face of rapid inflation.
As is well known, New York City has long introduced rent controls to make living in the expensive city more affordable. However, decades of research from New York and other U.S. cities where rent controls have been used highlights the risk of setting off-market rates.
The evidence shows some near-term gains in affordable housing. But over the long term, rent-controlled areas saw housing affordability fall and gentrification rise—both unintended consequences of a price cap.
But even if regulating the price of fuel could save consumers money, it actually only affects a small part of household spending. At about $50 a week, the average household fuel bill is less than 4 percent of their total weekly spending. That’s likely to fall further as fuel prices stabilise, while inflation continues to put pressure on mortgage rates and food costs.
Short-term relief instead of long-term goals
Finally, we should ask why the Commerce Commission’s new powers to set “fair prices” in the face of perceived anti-competitive behavior do not apply elsewhere. Fuel is just one of many potentially anti-competitive sectors in New Zealand, with the food industry perhaps being the most visible.
Although the Commission has taken steps to encourage competition in the industry, price controls are not part of the plan. Still, groceries account for about 17 percent of household spending each week, much more than fuel.
At the same time, banks and energy suppliers have recently reported massive profits. Together, they account for about 25 percent of average weekly household expenses.
Given these and other factors, there should at least be a serious debate on whether the Trade Commission’s new powers are necessary. These include whether fossil fuel affordability runs counter to our climate goals and whether we are trading the health of the planet for short-term economic relief.
* Timothy Welch is Lecturer in Urban Planning at the University of Auckland