KEY POINTS:
The emissions trading scheme will take a toll on economic growth, incomes and jobs, but the cost will be less if the taxpayer keeps picking up the bill for the trade-exposed sectors' emissions, the New Zealand Institute of Economic Research says.
A day after the Sustainability Council released research concluding that in the short term households and small businesses will bear the brunt of the scheme's cost, the institute concludes that in the longer term it is the export sector which will bear the largest cost.
In principle the institute favours people facing the costs of what they do and it likes markets.
But it says the scheme as designed is not the least-cost way for New Zealand to take responsibility for its emissions.
That is because emission reduction opportunities in New Zealand are generally more expensive than elsewhere in the world.
The scheme allows those companies with obligations under the scheme to import credits generated by certified emission reductions overseas.
But the institute argues it would be less costly for the Government to import the credits, because the cost would be spread across the whole tax base and not hit the productive sectors so hard.
After putting the scheme's design parameters and a $40 carbon price into its mathematical model of the economy and cranking the handle, the report has found that by 2012 gross domestic product would be $900 million or 0.5 per cent lower than under business-as-usual. If instead the Kyoto obligations were entirely met by the taxpayer the hit to GDP would be much smaller, around $100 million.
Households would have an average $600 less to spend that year. If taxpayers foot the bill they would have $300 less.
And there would be 22,000 fewer jobs, compared with 1500 fewer if the taxpayer pays.
Asked why households are affected so much, one of the report's authors, John Stephenson, said it was because businesses and farms have employees and owners.
"You can't draw a stark line between household and business impacts."
By 2025, when as the scheme stands the initial grandfathering of emissions from the smokestack and agriculture sectors will have been entirely phased out, the impacts are significantly higher.
By then the economy would be $5.9 billion or 2.1 per cent smaller than it would otherwise be.
Agriculture would be hardest hit - enough to cause dairy land prices to fall 40 per cent and sheep and beef properties 23 per cent.
But if the trade-exposed sectors continue to be covered to 90 per cent of the 2005 emissions by a free allocation of emission units, the GDP forgone would be cut from 2.1 to 1.2 per cent.
The decline in New Zealand's emissions would be more modest - 4.2 per cent if grandfathering continues, compared with 10.4 per cent if it is phased out.
But the institute says a quarter of that 10.4 per cent would be offset by an increase in emission elsewhere in the world as increased dairy and meat production displaced production rendered uncompetitive here.
That effect - called "leakage" in the jargon - would also affect aluminium and steel production, where investment and jobs would decline.
"Free allocation is hugely useful in helping to eliminate leakage and lessen the impact on wages," Stephenson said.
It made no sense to penalise New Zealand farmers, recognised as among the world's most efficient, while their competitors faced no similar impost.
The scheme's grandfathering and phase-out provisions are among its most controversial features.
The Climate Change Leadership Forum is advising the Government to look at some form of best-practice intensity-based system for dividing up the initial allocation of free units within each sector, rather than allocating them on the basis of whatever firms or farms happened to emit in 2005. And it recommends more than one review to reassess the phase-out track in light of the emerging international competitive environment.
Climate Change Minister David Parker flatly contradicted the institute's conclusion.
He said the scheme was a better way of managing international commitments than having no domestic carbon price and having the Government buy the emissions units needed overseas, paid for by higher taxes.
"What the modelling doesn't look at is the risks of not honouring our commitments, for example the economic impact of countries in the European emissions trading scheme imposing duties on our exports."
EXPORT BLOW
The New Zealand Institute of Economic Research says:
* The biggest costs of the emissions trading scheme come from a loss of competitiveness in export sectors, including agriculture.
* That will also hit households through fewer jobs and lower wages.
* In the absence of a level playing field internationally it would be cheaper for the taxpayer, not emitters, to bear the cost.
