Mounting energy costs likely

By BRIAN FALLOW


Businesses are almost certain to face higher energy costs arising from the Kyoto climate change treaty, now that the Russian Government has decided to approve it.

Uncertainty about whether the Kyoto Protocol would come into force, and therefore whether there would be a carbon tax, has overhung business planning and especially investment in electricity generation for a couple of years.

Ratification by Russia is necessary for the protocol to come into force. Although it still has to be passed by the Russian Parliament, that body is not expected to defy President Vladimir Putin on this question.

Climate Change Minister Pete Hodgson said yesterday that he expected to introduce legislation for a carbon tax before the next election, due late next year.

The tax, levied on the carbon content of fossil fuels, would not come into effect before April 1, 2007.

The National Party has pledged to scrap any such tax. The tax is the key measure designed to make the Kyoto Protocol bite.

The Government estimates that at an indicative level of $15 a tonne of carbon dioxide it would push up the price of electricity to industrial users by 9 per cent. At the maximum possible level of $25 a tonne, the increase would be 15 per cent.

For industrial gas users, the increase would be 6 per cent (at $15 a tonne) or 10 per cent (at $25).

For coal, the impact would be 26 per cent and 43 per cent, respectively.

The Government has said the carbon tax revenue would be recycled, either through the tax system or in subsidies to emissions-reducing projects. Large swathes of the economy will escape the tax.

Large industrial emitters whose international competitiveness would be at risk if they were subject to a one-size-fits-all tax are able to negotiate greenhouse agreements with the Government.

So far, 12 firms representing 55 per cent of industrial power use have applied to enter into negotiations with the Climate Change Office. Only one agreement, with the New Zealand Refining Company, has been completed.

Kyoto was a weak agreement in terms of its coverage (a bare majority of developed country emissions) and in its initial targets for emission reductions, Hodgson said.

But it was strong in its design.

Kyoto is designed to put a price, initially a modest one, on something which is now free: the right to emit greenhouse gases. And it sets up trading mechanisms designed to ensure that the cheapest options to reduce emissions are taken first and that technology is transferred to developing countries.

Hodgson is confident, as is his National counterpart Nick Smith, that New Zealand will be a net seller of carbon credits during Kyoto's first (and so far only) commitment period, 2008 to 2012.

That is because Kyoto's rules allow countries to claim credits for the carbon dioxide taken out of the atmosphere by "Kyoto" forests, those established since 1990 on land not already forested.

It is a sore point with the owners of those forests that the Government retains ownership of the credits they give rise to.