KEY POINTS:
Power companies will face the full cost of the carbon emissions arising from the fossil fuel they use from the start of 2010, under the emissions trading regime the Government unveiled yesterday.
They will be able to buy units from the forestry sector and on the international market for credits created under the Kyoto Protocol's clean development mechanism.
The Government might also auction units but that is not expected to be a significant source of supply in the early years of the regime.
The design of the scheme draws a fundamental distinction, among firms with large carbon footprints, between those like oil and power companies which can pass on their carbon costs to their customers, and those whose international competitiveness would be at risk if they faced the full cost of their emissions.
Only the latter get an allocation of free units. But Climate Change Minister David Parker stressed it had to be for less than they currently needed, so they had an incentive to reduce their emissions and a disincentive to increase them. "It's all about the effect at the margin."
Large industrial emitters and energy-intensive firms which are exposed to international competition will be given a free allocation of units sufficient to cover 90 per cent of their emissions in 2005 and a similar proportion of the carbon price impact on their electricity bills.
But that only applies to firms emitting more than 50,000 tonnes a year. Smaller companies, like residential consumers, will face an increase in their power bills, and with it an incentive to be more frugal in their use of electricity.
Where carbon prices will settle is anyone's guess, but Contact Energy has said that at an indicative carbon price of $20 a tonne, wholesale electricity prices would rise about 10 per cent and a residential consumer's power bill by about 4 per cent.
Tom Campbell, chief executive of Rio Tinto Aluminium (former Comalco), the largest electricity user, was philosophical both about the level of grandfathering and the 2005 base year, even though it means companies like his get no benefit from past action to reduce emissions or how close they already are to world's best practice.
"If this was a perfect world we would be squealing like a stuck pig," he said.
"But nobody has data going back to 1990 and although a world's best-practice benchmark would be desirable, how do you adjudicate it? You would need another Beehive-full of people."
The 90 per cent target was tough but probably achievable, he said. The company would implement a technology strategy to get there, as it did not want to have to buy emissions units.
"If had been 80 per cent it would have been impossible. If it had been 95 per cent we would hardly have to do anything."
The Government has said 90 per cent of generation must be from renewable sources by 2025. It is about 70 per cent now. Such a target was ambitious but achievable, Contact Energy chief executive David Baldwin said.
It would need clear direction and support from the Government on the consenting of renewable projects, and sufficient investment in the national grid.
Meridian chief executive Keith Turner described the overall policy package as balanced and principled and the 90 per cent renewables target as absolutely within reach.
As all of Meridian's generation is from hydro and wind Meridian will not face a carbon bill but will benefit from higher electricity prices. There is no plan to claw back that windfall and Meridian is, in any case, state-owned.
"It would be punishment of the good to artificially tax a company which over the past nine years has specifically positioned itself in the market where Meridian has," Turner said.
Mighty River Power chief executive Doug Heffernan said that a trajectory aimed at 90 per cent renewables by 2025 would be straightforward for the next decade without any major impact on power prices, because of the wind and geothermal resources available.
Beyond the next 10 years it would be more challenging as it would require permanently displacing existing thermal generation capacity, not only the coal-fired plant at Huntly, but some gas-fired capacity as well.
"But then it's supposed to be tough."
Carbon dating
* The emissions trading scheme is to be phased in by sectors. The stationary energy sector - electricity generators and large industrial plants - has obligations from January 2010.
* Large trade-exposed companies, especially in the aluminium, steel, cement and glass industries, will get a free allocation of most of the units they need, but still face a carbon price at the margin.
* The generators get no such break because they can pass on their carbon costs to consumers.
* By 2025, 90 per cent of electricity generation will be from renewable sources.
* By 2040, per capita transport greenhouse gas emissions will be reduced by half of those in 2007.
* New Zealand will be one of the first countries in the world to widely deploy electric vehicles.
* New Zealand will remain a world leader in agricultural emissions-reduction research, and in the early adoption and application of new technologies and processes that reduce agricultural greenhouse gas emissions.
* By 2020, New Zealand will achieve a net increase in forest area of 250,000ha of that in 2007.
* The electricity sector will be carbon neutral by 2025.
* The stationary energy sector will be carbon neutral by 2030.
* The transport sector will be carbon neutral by 2040.
* The total energy sector will be carbon neutral by 2040.
