KEY POINTS:
Of the two concessions to greenhouse gas emitters that the Government has just doled out, one is modest and defensible and the other is large and highly debatable.
The decision to defer the inclusion of transport fuels in the scheme until 2011 is understandable.
Car and truck owners have already been getting a loud and clear price signal from the international oil markets to go easy on petrol and diesel use. Adding a few more decibels to that signal with a further impost over the next two years would not accomplish much.
And it takes a little bit of pressure off inflation and inflation expectations in the short term (while deferring it to the medium term).
Fair enough.
But the concession to large industrial emitters and, crucially, to the farm sector which was slipstreamed in behind that announcement is a different matter.
The decision to push back by five years both the start date and the end date of the process of winding back the grandfathering of the trade-exposed sectors, to 2018 and 2030 respectively, will have a much bigger fiscal cost.
Or to put the same point more bluntly, it represents a much bigger subsidy.
New Zealand, like the rest of the developed world, is bound to face a much tougher emissions reduction target under whatever regime replaces Kyoto, which ends in 2012.
The gap between the volume of emissions which farmers and smokestack emitters are answerable for and their share of what the country as a whole is answerable for (and it will be the lion's share) will be all the greater as a result of this concession.
And world carbon prices are liable to be a lot higher too.
There are no grandfathering provisions for power companies in the scheme from 2010, or oil companies from 2011. It is assumed they will have no trouble passing on their carbon costs to their captive customers.
But the trade-exposed sectors will get a free allocation equivalent to 90 per cent of their emissions in 2005.
Winding back that shield will not now start until 2018 and won't be completed until 2030. Why the special treatment?
One reason is compensation for stranded capital, the money invested in physical plant or land before there was any thought of a price on carbon.
But that argument has got a finite shelf life. After all it is already 11 years since the Kyoto conference and six years since New Zealand ratified the Kyoto Protocol. By 2018 it will be 21 and 16 years respectively.
This is not an out-of-the-blue change like the tsunami of economic reform which hit in the 1980s.
The other reason to grandfather is to provide a degree of shelter for firms whose competitiveness is at risk. These are enterprises which have to compete in international or domestic markets with competitors which will not face a cost of a carbon.
Without that shelter, the argument goes, all you get is "carbon leakage" where emissions-intensive activity merely migrates from a country where it faces a cost of carbon to one where it does not. The first country loses jobs and income but the planet is no better off.
The prospect of leakage is the main factor underpinning the Institute of Economic Research (NZIER) conclusion about the economic costs of the emissions trading scheme and its conclusion that it would be less costly to spread them over the entire tax base rather than sheeting them home to the emissions-intensive export sectors.
It is one thing to envisage scenarios where New Zealand Steel's Glenbrook mill closes or Holcim does not build its new cement works in Canterbury - as both companies have threatened.
But how plausible is talk of leakage in the agriculture sector?
Look at the big picture. The debate is occurring against the backdrop of a world food crisis. The demographers tell us to expect a 50 per cent rise in the global population by mid-century - another 3 billion mouths to feed.
That underlying growth in demand for food will be amplified by the shift of large numbers of people out of poverty and into the income brackets where they can afford a diet richer in meat and dairy products, which take a lot more land and water to produce than staple cereals and vegetables.
Such at process is already under way and is why New Zealand now enjoys the most favourable terms of trade since the mid-1970s, even with sky-high oil prices on the import side.
On the supply side much of the farming done to meet existing world demand is unsustainable, especially in its use of water. Add to that the incalculable effects of climate change itself in shifting the distribution of rainfall and the geographic ranges of pests and diseases.
Longer-term, then, it looks like an outlook where being an efficient producer of the foods of affluence is a good position to be in.
Not one which requires a lot of taxpayer support.
Economists would argue that what matters is always whether the most likely supplier of the next increment of supply to the market - in this case the international markets for dairy products, lamb and beef - will face the cost of carbon.
If so the world price for those commodities will include the cost of carbon; if not a New Zealand farmer who does face that cost will suffer a loss of profitability. It is about marginal costs, in other words.
But there is another big influence on their profitability: the price of land.
Farmers in the 1980s suffered the triple whammy of the overnight loss of subsidies, the floating the dollar and soaring interest rates as the Reserve Bank began its struggle to get inflation under control. The big adjustment was a drop in land values.
For individual farmers who had just borrowed heavily to buy land at subsidy-inflated prices, that was calamitous. But the system adjusted.
It was not the death of pastoral farming in New Zealand, but rather the beginning of a productivity revolution on the land.
NZIER modelling concluded that if farmers were exposed to the cost of carbon by 2025 on every tonne emitted dairy land prices would be 40 per cent lower and sheep properties 23 per cent lower. Not lower than they are now but lower than they would otherwise be. Like any modelling these figures are only as good as the assumptions made (one of which the Government has just changed) and the mathematical innards of the model.
The Reserve Bank says around 80 per cent of farm debt is concentrated in 20 per cent of farms, especially dairy farms acquired or developed within the past 10 years.
Whether that represents a bubble depends on how well dairy prices hold up, it says.
The rest of us are entitled to ask whether keeping that bubble inflated is a good use of billions of dollars of taxpayers' money.
