Brian Fallow: Battle lines drawn over emissions review

The review panel will examine how effective the ETS has been in persuading companies to lower their carbon emissions. Photo / Dean Purcell

The Government inherited an emissions trading scheme enacted in the last few days of Labour's ninth year in power.

Rather than scrap it and blame the recession, the Government opted to keep it, but soften it to the point that people would hardly feel a thing.

It also inherited a statutory requirement to review the scheme this year, even though it has only been in operation since the middle of last year.

The plumbing, you might say, is installed. Some money is flowing from energy consumers to the forestry sector.

Now the review panel chaired by David Caygill has to decide whether the pressure in the pipes should be increased.

Put another way, it has to consider whether the line, where doing our fair share to combat climate change ends and futile self-sacrifice begins, has moved.

That is all about what is happening in the rest of the world which, not to put too fine a point on it, is five-eighths of not very much at all.

Submissions to the review line up largely as you would expect.

Trade-exposed emitters, which are heavily protected, want the protection to be maintained intact and for longer.

Farmers don't want a bar of it.

On the other side, the Parliamentary Commissioner for the Environment and the Sustainability Council remind us what the objective of the whole scheme is supposed to be.

As far as business is concerned, a survey commissioned by the Ministry of Economic Development and conducted around the time the ETS kicked in is instructive.

Covering around 1500 firms it is intended to provide a baseline from which future changes in attitude and behaviour can be measured.

At that point only 11 per cent of firms had estimated their emission costs or were in the process of doing so.

"The ETS is not a significant issue for most businesses," the survey report said.

Only 5 per cent of firms at that stage intended to reduce their emissions, while 65 per cent expected to just pay the additional cost and either pass it on or absorb it in their margins. The rest had yet to give the matter any consideration.

"We can conclude with confidence the ETS has had a muted financial impact on the majority of New Zealand businesses," the survey report, released last month, said.

It also bears remembering that in the case of trade-exposed firms - those which have to compete in foreign markets or the home market with competitors facing no price on carbon - the threshold for protection is low and the extent of the protection is high.

A firm whose carbon costs would equate to more than 1 per cent of its revenue can expect the taxpayer to pick up 60 per cent of the bill. If costs would equate to more than 2 per cent of revenue, the subsidy rises to 90 per cent.

Hardly a crippling impost.

That is based on two of the transitional measures currently due to expire at the end of next year.

One is a price cap of $25 a tonne, which has yet to be threatened in the market.

The other is a half-obligation under which firms which are points of obligation in the scheme only have to surrender to the Government one credit, called a New Zealand unit, for every two tonnes emitted. Buy one, get one free.

The Greenhouse Policy Coalition which represents the large emitters wants those arrangements extended by three years until the end of 2015, and reviewed again in 2014.

It argues that the recessionary conditions that lay in part behind the watering down of the ETS in 2009 still persist.

"We would also like to suggest that when the ETS was moderated in 2009 there was an assumption that the Kyoto Protocol would continue [beyond 2012], our major trading partners and competitors [Australia, Japan, the United States and China] would have ETS regimes and there would be a liquid international carbon market. These conditions are highly unlikely to exist in 2013."

A key question for the review panel is whether agricultural emissions, arising from the bodily functions of livestock and responsible for nearly half of New Zealand's emissions, should be brought into the scheme in 2015 as the legislation currently requires.

Federated Farmers is ferociously opposed. New Zealand should never have ratified Kyoto, it says, and should not have an ETS.

It is hard enough for unsubsidised Kiwi farmers to make a decent living in a wicked protectionist world without this additional impost.

To the review's question about the conditions under which the sector should enter the scheme, the Feds reply: "Only when competitors face a similar price of carbon, where there are economically sustainable mitigation technologies and where uptake of such technologies can be recognised under international rules."

The Business Roundtable, however, argues that the agriculture sector should be brought into the scheme in 2015 as scheduled.

It is inefficient and distorting for the burden of nearly half the country's emissions to be borne by other industries or taxpayers, it says.

Others can also plead that they have limited opportunities to abate or reduce emissions. The whole point of a market mechanism is to identify abatement opportunities in an efficient manner rather than have the Government pick winners.

The Australian Productivity Commission is due to deliver a report by the end of next month on the effective carbon prices different countries' policies impose.

New Zealand should not seek to match the average carbon price of developed countries, the Roundtable says, because we are poorer than most of them.

The Parliamentary Commissioner for the Environment, Jan Wright, says protecting trade-exposed emitters through the allocation of free units is a costly subsidy which lessens the incentive for them to invest in low carbon technologies.

It transfers cost from emitters to taxpayers, when it is not taxpayers' behaviour that needs to change, and it retards the economy's adjustment to a low-carbon future.

The same applies to agriculture, Wright argues. Moreover, he says, "backtracking on bringing agriculture into the ETS would also send a negative signal to the international community".

"It would bring into question our commitment to carbon reductions and be likely to affect our clean, green image."

The Sustainability Council this week highlighted a United Nations report which points to the wide gap between what New Zealand is offering in emissions cuts by 2020 in the context of international climate negotiations and what the Government itself claims the ETS will deliver.

The latter would get us only a third of the way there.

Whatever the ETS review recommends, the Government will face the question: What's the plan to deliver the remaining two thirds?



This article has been changed from an earlier version.

In that, the Greenhouse Policy Coalition was quoted as saying conditions around trading partners emissions trading schemes and a liquid international carbon market were lilkely to exist in 2013.

This should have read highly unlikely to exist in 2013.