Erasing subsidy for greenhouse gas heavyweights would impose small cost

Climate Change Minister Paula Bennett.

Removing the current subsidy for heavy emitters of greenhouse gases from the emissions trading scheme would impose "a small cost on the economy as a whole" and would be more heavily borne by the agricultural and extractive sectors, and lower income households, according to analysis by the New Zealand Institute of Economic Research.

Released yesterday as an input to the ETS review by Climate Change Minister Paula Bennett, the NZIER paper says if carbon was trading at $50 a tonne -- in a so-called "high price" scenario -- it would reduce total economic growth by around 0.2 per cent a year for a 1.1 per cent reduction in gross greenhouse gas (GHG) emissions.

If contributions from plantation forests locking up carbon dioxide in their wood are included, net emissions would fall by 1.5 per cent under the $50 a tonne scenario. The independent economic consultancy warns its scenarios are "snapshots of before and after removing the transitional measures".

They do not project "adjustment paths" that might be agreed to phase in the removal of the current measures to make heavy GHG emitters cover the full cost of their emissions.

The ETS currently requires heavy emitting industries, including transport and industrial fossil fuels, to cover the cost of one in every two tonnes of carbon emitted, with a cap on the price of carbon at $25 a tonne. The cap has been meaningless to date as the price of carbon has been well below that since the scheme's inception and was well below $1 a tonne when the scheme still allowed polluters to buy carbon credits from the international carbon market, which was flooded for a time with credits of often doubtful credibility.

The ETS now only allows trade in New Zealand Units and the price has been edging towards $10 a tonne since announcement of the ETS review late last year, as it is expected to recommend the removal of the one-for-two transitional subsidy. New Zealand emitters are expected eventually to regain access to foreign carbon markets.

"Gross Domestic Product ... fall(s) by 0.1 per cent or around $267 million under the medium market price of $25 a tonne," NZIER says. "This equates to about eight hours' worth of GDP in 2020."