Brian Fallow: Emitters on bludger's end of deal

The Government seems to have it in for taxpayers.

Not today's taxpayers so much as those who will be footing the bill in, say, the 2020s.

First there was superannuation.

Let's accept for the sake of argument that it no longer makes sense for the Government to borrow with one hand and make contributions to the Cullen Fund with the other.

But that still leaves the problem which the fund was set up to mitigate.

The cost of superannuation payments will rise from, in round numbers, 4 per cent of gross domestic product now to 8 per cent when the babyboomers have all retired.

By siphoning off and investing around another 1 per cent of GDP while the babyboomers are still in their peak earning and taxpaying years the intention of the fund was to reduce the burden on future taxpayers by around 1 per cent of GDP.

A 40 per cent increase from 5 to 7 per cent of GDP would be easier to handle than a 100 per cent increase from 4 to 8 per cent.

If that is no longer possible, it is clearly craven and irresponsible for the Government to refuse to even discuss a reduction in the entitlement parameters of the scheme, such as pushing xeback the age of eligibility. Instead it plans to just pass on the now much larger bill to future taxpayers.

It is the same story with the costs of the Emissions Trading Scheme (ETS), the cornerstone of the official response to the challenge of climate change: a multibillion-dollar post-dated cheque on future taxpayers.

The Sustainability Council's executive director Simon Terry and economist Geoff Bertram have analysed the Government's planned changes to the scheme which was enacted late last year in the dying days of the previous Government's ninth year in office.

The questions they ask are basic: Who pays the charges the ETS imposes? How big are the subsidies to the trade-exposed sectors? And who pays the ultimate bill, New Zealand's Kyoto liability?

The answers they come up with make it clear today's emitters are on the bludger's end of a transfer from future taxpayers.

They calculate that over the next three years the emission units which emitters have to go out and buy will cover only 16 per cent of the country's Kyoto liability, compared with 47 per cent under Labour's version of the scheme.

New Zealand's gross emissions in the first commitment period, which runs until the end of 2012, are forecast to be around 22 per cent over target, leaving an overshoot of 76 million tonnes the country (taxpayer) is liable for.

The Government's accounts, however, estimate New Zealand will be some 10 million tonnes in credit when the time comes to square accounts with other Kyoto countries, because of the carbon sequestered in "Kyoto" forests, those planted since 1990 on land not previously forested.

But if those forest sink credits are used to cover the overshoot of gross emissions in the interim they will not be available to cover the liability which accrues when the trees are harvested in the 2020s and their carbon is deemed to be emitted. Fresh emission units will need to be bought then to coverthe liability when forests flip from being a net sink to a net source of emissions.

As the council points out the accounts treat forest credits as if they were income out of which the Kyoto bill can be paid. But they are more like a loan. They buy time, but on tick.

Using them to cover the liability current emitters give rise to merely pushes the cost on to future taxpayers.

The Treasury, at least, has acknowledged in its advice to the Government that "in the long term forestry is essentially a zero sum game".

It said the Government should recognise a contingent liability on its books associated with forest credits used to meet the country's international commitments between 2012 and 2020. At a carbon price of $100 a tonne, that could be as much as $18 billion, it said.

The analysis by Terry and Bertram, to be submitted to the select committee considering the ETS amendment legislation today, also offers a breakdown of how much different sectors of the economy will pay over the next three years, relative to their respective contributions to how much the country's emissions have exceeded the Kyoto target.

Households, including their vehicles, are estimated to be responsible for 19 per cent of the excess emissions and will pay for only slightly more than that under the ETS. (Their costs will jump, however, in 2013 when transitional measures to soften the impact on domestic energy prices come off). It is a similar story for small to medium enterprises and the transport sector. They pay only slightly over the odds for the next three years but face a hefty price shock thereafter.

But agriculture's exclusion from the scheme (until 2015) means farmers will be subsidised for almost all of their 37.5 per cent share of the increase in national emissions since 1990. At a carbon price of $30 a tonne, Terry and Bertram put the cost of that at $1.1 billion.

For large industrial emitters the picture is more complex. Most, if not all, are either exporters or exposed to competition from imports and so get substantial protection under both the original and amended versions of the ETS (though more so under the latter, as time goes by).

Terry and Bertram estimate their subsidy (at $30 carbon) to be just under $500 million over the next three years, much of it compensation for higher electricity prices.

That sum does not drop intact to their bottom lines; they will face higher power bills.

So will the rest of us, but we do not contribute significantly to the export income of a country up to its eyeballs in debt to the rest of the world and struggling to earn a First World living.

The question is not the binary one of whether to afford some protection to the trade-exposed emitters responsible for around two-thirds of the country's emissions or not.

Rather the questions are how much support, for how long and at whose expense?

In illuminating those questions the Sustainability Council's report fills a gap that should not exist.

The Government may quibble with its numbers, but has provided few of its own.

As the report says, the few official documents released that do look at fiscal costs provide only a partial analysis of the total cost of the subsidy regime to the country , because they do not examine the Kyoto liability that sits above it.

Nor has there been any attempt to quantify the benefits, the harm to the trade-exposed emitters which is avoided by the subsidies they stand to get.

Conspicuously, and for the first time anyone can remember, the Treasury has refused to endorse a regulatory impact statement for the legislation.

The quality of the analysis, it says in the bill's explanatory note,"is not commensurate with the significance of the proposals".