Wellington, Nov 20 : A carbon tax is the most effective way for New Zealand to cut emissions while supporting a stable economy, a study published on Wednesday showed.

While all policies caused some short-term welfare losses, a carbon tax was gentler on New Zealanders' welfare and wallets overall, said researchers from the University of Auckland after comparing the effects of three environmental policies -- carbon taxes, emissions trading schemes (ETS), and emission intensity targets -- on New Zealand's economy, Xinhua news agency reported.

Although carbon taxation may increase the cost of living, particularly by increasing food, transportation and energy prices, the revenue raised can be used to mitigate some of the subsequent burdens faced by households through income tax rebates or direct transfers to struggling families, said Emilson Silva, director of the University of Auckland's Energy Centre.

A carbon tax could work well alongside the current ETS under which agriculture is exempt, the researchers said.

Associate Professor Stephen Poletti of the University of Auckland said the study reinforces the view of many economists that the best way to reduce emissions is to impose a carbon tax, as it gives certainty to businesses as to the carbon price compared to the price set by an emissions trading scheme which is volatile.

The study's lead author, doctoral candidate Simon Tao said relying on the ETS for emissions reduction is ineffective in terms of meeting New Zealand's environmental goals, and agricultural emissions pose a considerable challenge.

The government could consider dynamic carbon pricing, with a flexible carbon price that increases during economic growth and decreases in recessions to help stabilise emissions and would counteract emissions spikes in agriculture where production tends to rise during expansions, by setting higher carbon prices in growth periods, Tao said.

/IANS