Brian Fallow: Kyoto window dressing for Copenhagen

Power plants such as this one at Otahuhu complicate the carbon equation. Photo / Greg Bowker

Legislate in haste, repent at leisure.

There is a bitter irony in having to lament the indecent haste with which the legislation to "moderate" the emissions trading scheme is being trundled through Parliament.

It is, after all, 12 years since the developed world agreed in Kyoto to limit, and in effect to price, carbon emissions.

Since then all that has happened in New Zealand is untrammelled growth in emissions, a collapse in forest planting to offset it and we still have no carbon price in the economy.

What we do have right now is the unedifying spectacle of a select committee where oral submitters on a bill of consequence to the economy get 10 minutes each to make their point to MPs who have generally not yet had time to read their written submissions.

This is driven by the Government's determination that its rewrite of the emissions trading legislation passed in the dying days of the previous government and in limbo since the election has to be "settled" before December when the world gathers at Copenhagen to try to agree on the framework for a regime to succeed the Kyoto Protocol.

But why? No doubt it would be nice for New Zealand's representatives at Copenhagen to be able to say: "Apart from the Europeans we are the only ones to have an emissions trading scheme on the statute books."

In fact they could say that now.

But anyone at Copenhagen listening to that claim is likely either not to care, or to see through it.

It invites the response, "Yes, but isn't it a cap and trade scheme without a cap?"

CTU secretary Peter Conway has summed it up as the emissions trading scheme you have when you really don't want to have one.

In the scathing judgment of Victoria University's policy studies and climate change research institute it is fiscally unsustainable, environmentally counter-productive, administratively cumbersome and economically indefensible.

Climate Change Minister Nick Smith rejects the charge of fiscal unsustainability (and no doubt the rest of the institute's verdict as well).

He objects to the presumption that if emitters have to pay less, then taxpayers will have to pay more. It is not true, he contends, that there is taxpayer "subsidy" to trade-exposed emitters.

But his reasoning amounts to this: under Labour's version of the ETS the Government would (eventually) make out like bandits, raking in far more from domestic energy consumers than it would be paying out in free emissions units to the energy-intensive, trade-exposed sectors.

Under the modified scheme the Crown will still make money (at least after the next three years, when we have what amounts to a low-level carbon tax) but not as much.

In other words it is as consumers rather than as taxpayers that the rest of us are picking up the bill for trade-exposed emitters' emissions. The Government acts as an intermediary for that wealth transfer, but it will clip the ticket less under the new scheme that under the existing one.

It works like this. New Zealand is only internationally accountable for any increase in emissions above a certain level.

Right now it is 1990 levels. The Government has indicated it is willing to see that drop to 10 to 20 per cent below 1990 levels by 2020 and 50 per cent below by 2050.

But the ETS requires oil companies and power companies to buy, and surrender to the Government, enough units to cover every last tonne of the emissions from the fossil fuels they sell or use (at least from 2013 - until then there is a buy one, get one free discount).

Their obligation, in other words, is 1990 minus 100 per cent. It is assumed they will pass that cost on to consumers.

So the scheme is designed so that the Government will over-recover from domestic energy consumers, while doling out free units to trade-exposed emitters, including farmers, to protect their international competitiveness. That is a feature of the existing and the amended scheme.

But Labour's scheme would cap the allocation of free units at 90 per cent of 2005 levels, and claw it back to zero by 2030.

In effect it says to emitters: if you increase your production you will face the full cost of carbon for those additional emissions. Bear that in mind before making the investment. The world has changed.

National's scheme, by contrast, is uncapped. It tells emitters: by all means produce more methanol or cement or urea or milk. The country needs the money. Don't worry about the extra emissions. We will pick up the bill - or almost all of it.

It will claw back the free allocation much more slowly, just 1.3 per cent a year. That means, of course, that if emissions from the trade-exposed sectors grow faster than 1.3 per cent a year the number of free units the Government doles out will go up, not down.

The Parliamentary Commissioner for the Environment, Jan Wright, told the select committee these changes essentially removed the price signal from the emissions-intensive smokestack sector, where a price signal was needed the most.

The fainter the price signal, the less effectual the scheme is likely to be in reducing emissions. That in turn means we will have to buy more carbon in the international market to meet our obligations.

That is likely to get a lot more costly if or when the Americans join the Europeans and Japanese on the demand side of the market. Can the global supply of environmentally credible offset credits keep pace with that increase in demand, and if not what might be the impact on carbon prices?

These are the sorts of questions the select committee should be hearing expert views on. It is not.

Official projections of what all this might mean for the Government's increasingly debt-burdened accounts are scanty, at least in the public domain.

Some released by the minister a couple of weeks ago show little difference between the two schemes over the next 10 years. In 2020 the government would make $1.8 billion under the current scheme and $1.7 billion under the new one.

But by 2030 the government would have been making about $4 billion a year out of it (assuming, rather conservatively, a carbon price of $50 a tonne). Under the amended scheme it will be half that.

These projections assume industrial emissions grow at barely more than 1 per cent a year. A couple of projects already under consideration - a new Holcim cement works in Canterbury and a Solid Energy urea plant in Southland - could blow that assumption.

They also assume New Zealand will be able to get away with a national emissions target of 50 per cent below 1900 levels by 2050, with a corresponding allocation of free units to the Government, when the United Nations' Intergovernmental Panel on Climate Change says developed countries need to cut by at least 80 per cent by then.