KEY POINTS:
New Zealand's emissions trading scheme is better than nothing - but not much.
That's the conclusion of a Greenpeace-commissioned report on the scheme, which is now before Parliament's finance and expenditure select committee.
The lack of any medium-term target for reducing domestic emissions, the delayed entry of the
main emitting sector, agriculture, and the free allocation of permits to large industrial emitters mean the scheme is fatally flawed, it says; a costly way of delivering next to no reduction in greenhouse gas emissions.
Cement-maker Holcim also has issues with the scheme, though unsurprisingly, different ones.
In some respects, the New Zealand scheme is more rigorous than the European model.
It will - eventually - cover all sectors and all greenhouse gases, whereas the European ETS covers about half of Europe's emissions, and it has avoided the mistake of grandfathering thermal power stations, which was a massive windfall gain to them.
But in another respect it is less stringent, in that it places no restriction on the ability of firms with compliance obligations under the scheme (as opposed to the vast majority for whom it just means higher energy bills) to buy permits on the international market.
One of the Greenpeace report's authors, economist Richard Denniss of the Australian National University, sees this as a soft option, a missed opportunity and an economic risk.
It makes no difference to the atmosphere and the climate where in the world emissions reductions occur or who pays for them. The point of trading is to achieve reductions at least cost.
But clearly if everybody relies on importing certified emissions reductions the system is not going to work.
"This is a huge bet on the part of the New Zealand Government that other countries much bigger than New Zealand aren't going to adopt a similar strategy," Denniss said.
"If some big countries make the same sort of soft political compromise and say 'let's see how it goes and import them all', then New Zealand will be a price-taker and the price is going to be way above $25 a tonne."
However if that is what happens, and the cost of carbon in the New Zealand market goes sky high, then it would obviate another of his criticisms of the lack of a binding domestic cap.
"The biggest missed opportunity is not even attempting to put pressure on emitters by putting a cap on what they can import," Denniss said.
"Everyone underestimates the capacity of industries and firms to make significant changes when there is pressure on them to do so."
Why is it thought emissions trading will do little to reduce emissions, at least over the next five years?
First of all about three-quarters of the cost of meeting the country's Kyoto obligation will fall on the taxpayer, not on consumers and other emitters, because of the phasing in of the scheme and particularly the decision to exempt agriculture until 2013 (and grandfather it heavily even then).
Secondly, the main areas where a price signal will be transmitted - petrol, diesel and electricity - are famously not very elastic. Consumers in the short term are more likely to respond to higher energy prices by cutting down their consumption of other things than energy.
The hope is that, in the longer term, higher energy costs will influence big-ticket decisions about what cars and houses to buy. But some evidence suggests people respond to greater fuel economy and energy efficiency by buying bigger cars and houses.
Meanwhile, the Greenpeace report is critical of exempting agriculture for the time being.
"Imagine if Australia said 'We are particularly dependent on coal so we are going to leave that out'. We would be a laughing stock," Denniss said.
He is also critical of the proposal to grandfather the smokestack sector - large trade-exposed industrial emitters - by giving them a free allocation of permits sufficient to cover 90 per cent of their 2005 emissions.
Policymakers hope the remaining 10 per cent will bite hard enough to drive them to find ways of reducing emissions without putting them out of business.
It is all well and good, Denniss says, to say that it is the effect at the margin which matters for investment decisions.
But the object of the exercise is also to change the relative prices of the goods people consume. When you grandfather 90 per cent, you have done nothing much to reduce the average cost of emissions-intensive goods.
If the intention is to compensate firms for a reduction in value of their existing assets, this is a crude way of doing it.
It would be better, he argues, to auction the permits and dole out the proceeds on more discriminating criteria, like how many jobs are at stake or how long the remaining life of the plant is, rather than on the basis of their 2005 emission totals.
Holcim is a concrete example (forgive the pun) of the crudeness of the proposed rules for allocating free permits to large emitters.
It plans to replace its existing 50-year-old plant on the West Coast with a new one in north Otago.
Roughly half of the emissions from a cement works are the unavoidable result of the chemical reactions involved, but the other half arise from their use of fuel.
Holcim's new plant would produce only half the fuel-related emissions per tonne of cement as the old plant.
But it will also be some 75 per cent bigger, allowing the company to avoid importing cement as it now does because production from Westport falls well short of demand, its energy and climate change manager, Michael Rynne, said.
Assuming the emissions embedded in the imported cement are at the global average level, the new plant would enable Holcim to reduce emissions per tonne of cement it sells by 18 or 19 per cent - a good outcome for the planet.
But an allocation of free permits set at 90 per cent of the Westport plant's 2005 emissions would clearly be a lot lower than if the new plant had already been commissioned (the result of basing allocations on an arbitrary date).
It would also, Rynne argues, put Holcim at a disadvantage relative to its only New Zealand competitor, which would get an allocation based on production from existing plants.
It would increase its costs compared with imports from non-Kyoto countries and send a perverse signal that it was better to keep a less efficient plant operating than invest in a new more efficient one.
And global emissions would be about 150,000 tonnes a year higher, Rynne said.
All this makes a bleak contrast with the now-abandoned negotiated greenhouse agreements process which was being pursued when the policy was to have a carbon tax.
Instead of a one-size-fits-all approach, it allowed individual industrial emitters - there aren't all that many of them after all - to negotiate a programme for reducing emissions based on how far they are from world's best practice for comparable plant and a reasonable timeframe for converging with it.
That still makes sense, unless the policy is simply to reduce national - but not global - emissions by driving energy intensive industries overseas.
