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After hearing the sheer number of opposing submissions made to the Finance and Expenditure Select Committee on the Climate Change (Emissions Trading and Renewable Preference), it will be a brave (or foolish) government that presses ahead with the proposed emissions trading scheme, writes Catherine Beard, the executive director of the Greenhouse Policy Coalition. The Greenhouse Policy Coalition has long been critical about the lack of good economic analysis behind the introduction of the scheme. As more analysis emerges these concerns are proving to be well founded. Recent economic modelling by New Zealand Institute of Economic Research* shows that the imposition of such an ambitious emissions trading scheme ahead of our trading competitors will put New Zealand at a significant disadvantage. As it stands, the emissions trading scheme will increase the cost of energy to the productive and export sectors, and leakage of industry with industries packing up and moving to a country that does not impose the same costs on carbon. The proposed emissions trading scheme and the ban on new thermal generation are in fact quite radical proposals – with a level of ambition that no other country in the world looks like emulating any time soon. We don’t think this has been acknowledged politically in New Zealand, or the public been given fair appraisal of the costs and economic risks of the scheme. Senator Wong, Australian Minister responsible for emissions trading says, “emissions trading will be one of the most far-reaching and complex reforms in Australian history”. She is right – and the same is true in New Zealand, but the debate so far has failed to gain any traction apart from in the business pages – when it really needs to be frontpage news. We should be trying to avoid a situation where New Zealand has to spend the next 20 years travelling to international meetings begging other countries to cap their emissions growth (from all sectors and all gases), in the same way we have been unsuccessfully pleading for a reduction in international agricultural tariffs and subsidies for the two decades. Out of step with the rest of the worldNo other emissions scheme includes all sectors and all gases and neither are they likely to in the foreseeable future. The largest mandatory emissions trading scheme is the European Union Emissions Trading Scheme (EU ETS). It only covers around 50 percent of CO2 emissions, and while it will get broader from 2013, and still falls far short of what is being proposed here. Its impact on business has also been much more benign due to an over allocation of allowances to emitters. In addition, the European Commission is coming under increasing pressure from the largest economies (France and Germany) to soften the impact of scheme on energy intensive industries to avoid those industries becoming uncompetitive against countries that do not price carbon. They are talking about 100 percent free allocation to those industries, total exemption from the scheme, or border adjustment taxes. The US States is moving slowly and cautiously with domestic cap and trade schemes. Those that exist are narrow in focus (electricity generation), voluntary (low targets and low prices) or in gestation (a Californian cap and trade is not starting until 2012). Canada has abandoned its Kyoto Protocol target and is pursing an ET scheme that uses energy intensity Worlds Best Practice (WBP) benchmarking – to allow for growth, but at a lower rate than ‘business as usual’. At the very least we need to slow down the introduction of the ET scheme in New Zealand until we see the details of what Australia is proposing to do later this year (July), or it will cost us dearly. For instance, by jumping ahead of Australia with a ET scheme we will pay close to $600 million more on liquid fuels in 2009. What will the scheme really cost?A price of $30/tonne of carbon will have significant economic impact on New Zealand’s wealth creating sectors, and analysis shows we could suffer price shocks in the transition of a similar magnitude to those experienced after economic reforms in the 1980’s. Nearly three quarters of our two-way trade is tied up with Asia Pacific countries, which also provide 68 percent of our tourists. It is highly unlikely that increased costs as a result of ET will be able to be passed on in that sort of competitive environment. A Greenhouse Policy Coalition survey of 41 firms across a range of sectors indicates an increase in costs of $257 million in direct energy costs, putting at risk 3000 existing jobs and 700 new jobs had planned investment gone ahead. In that small sample, $1.6 billion of planned investment would not go ahead due to every new tonne of carbon having to face the full international price of carbon. No free allocation was factored into the survey – but on the basis of the ‘straw man’ proposal only 14 of the 41 companies would be allocated partial protection via free allowances. New Zealand has only around 160 companies with annual revenues greater than $25 million. These 160 companies generate almost 70 percent of all our export earnings and they tend to be energy intensive – using energy to add economic value through processing resources. The SolutionWe need to be very much better informed about the transitional costs to the economy. How many jobs are at risk, from which industries and in which regions? NZIER has done some excellent work in this area and the government needs to be listening and adjusting the Bill accordingly or putting it on hold. To avoid leakage of our trade exposed energy intensive companies we need to take the lead from the EU. Options include 100 percent free allocation of units (or exclusion from the scheme) with the free allocation of units not being phased out until our trading competitors are facing the same costs of carbon. Free allocation of units should not be restricted to existing industry, or there will be no new investment in New Zealand. We need industry and agriculture to be judged against WBP on emissions intensity (emissions per unit of output). If we are the most efficient in the world at producing energy intensive goods and agricultural products – then we should be doing it and displacing dirtier production else where in the world. Much of this benchmarking work has already been undertaken for the large companies under the previous NGA policy and it should be revived. We believe there should be price safety valve in the scheme, so that if the price of carbon becomes too high or volatile in this emerging market, it can be capped. Once there is a global price of carbon – and all countries face it – New Zealand would be competing on its merits. In the meantime, you would have to ask whether an emission trading scheme is the ‘least cost’ way for New Zealand to meet its international obligations in the near term and if it is not why would you do it? The recent economic modelling by NZIER indicates that it will be eight times more expensive to meet our obligation via emissions trading (with no additional emission reduction benefits) than if the government just paid for the extra carbon units we are short of out of the consolidated fund. Critics would say that if the polluter does not pay, then the taxpayer is just subsidising them. However, the NZIER analysis shows that the taxpayer is still better off due to better employment opportunities and higher wages than would be the case with an emissions trading scheme. Another argument in favour of emissions trading is that it incentivises investment in new cleaner technology but, as already mentioned, this will not happen unless there is a global price of carbon. Until that comes about, investment will simply go to the countries that provide the best economic return.
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