Brian Fallow: Staying in tune on climate won't be easy

Australia and New Zealand are to explore the harmonisation of their respective emissions trading schemes.

Two views are possible about the New Zealand Government's motives in this. The generous view is that it wants to improve the local scheme and further the cause of a Single Economic Market with Australia.

The cynical view is that it wants to dilute and delay the scheme.

At this early stage there is no way to choose between these views, save on the basis of prejudice.

But what is clear is that something which sounds sensible in the airy generalities of a prime ministerial sound bite is seriously difficult when you get down to the nitty gritty.

A first-order question is whether the elastic term "harmonisation" would extend to each country recognising the other's internal emission units/permits so that they could be traded transtasman.

As they stand the two schemes take very different approaches towards international trading.

The Australian scheme allows emitters to import some kinds of emission units from the broader Kyoto markets but not others. And it forbids the export of Australian permits.

New Zealand is going to fall well short of meeting its Kyoto target and will have to import a lot of carbon (emission permits) to cover the difference.

The ETS is about transmitting, rather slowly, the cost of doing that from taxpayers to emitters. The more places we can buy carbon from the lower the cost is liable to be.

Australia, by contrast, is on track to meet its rather lenient Kyoto target and will not need to import a lot of carbon. It can afford to have a scheme which is largely about transferring money from one subset of Australians to another.

So a key potential stumbling block for harmonisation talks is on the issue of whether the Australians are prepared to relax, at least in New Zealand's case, the ban on exporting permits. If not there is not much point from our point of view.

We should be wary, though, if the price of a single carbon market is to erect the same barriers to trade with the rest of the Kyoto world that Australia currently contemplates.

There is an emerging archipelago of carbon markets - Europe has had an ETS for four years and the Obama Administration favours one for the United States. The ability to trade with the nearest neighbouring island must not pre-empt trading with larger ones.

It is akin to the arguments about adopting the Australian dollar. It might facilitate the 20 per cent of our trade which is transtasman but if it makes life much more difficult for those involved in the other 80 per cent it is not worth it.

Climate Change Minister Nick Smith says no one really knows whether lower cost emission reductions would come from planting trees in New Zealand or from technological improvement in Australian coal-fired power stations. "What we do know is that if there are more options the market will find the least-cost ones among them."

Apart from facilitating trading the other main objective for the New Zealand side, and perhaps for the Australians, would be to reduce the risk of "leakage" - the loss of emission-intensive production to the other side of the Tasman because of some impact on relative competitiveness arising from the design of the two schemes.

Both schemes involve the allocation of free units to cover 90 per cent of emissions from the most emissions-intensive trade-exposed firms.

The New Zealand scheme phases out that free allocation at 8.3 per cent per annum starting in 2019. The Australian scheme has much gentler phase-out, initially 1.3 per cent a year.

Naturally from an emitter's point of view the longer the taxpayer picks up the tab the better.

Some argue that defeats the entire purpose of such a scheme, which is to change emitters' behaviour, not taxpayers'.

But others argue that what matters in that respect is the price at the margin and that both schemes bite enough there to make a difference.

The two schemes differ in sectoral coverage. New Zealand's is all sectors, all gases; Australia's excludes deforestation and it will not even decide about whether to include agriculture until 2013.

One feature of the Australian scheme which has some admirers here is a price cap, for the first five years of the scheme, starting at A$40 ($49.75) a tonne and rising in real terms by 5 per cent a year. That is about twice what secondary CERs are trading for right now.

"If one country has a price cap and the other doesn't [trading between them] becomes unworkable," Smith said. He is open to the idea of a cap here.

The more business-friendly elements of the Australian scheme are the flipside of an emissions target which has been roundly condemned by environmentalists - a 5 per cent reduction from 2000 levels by 2020, or 15 per cent if the commitment from other developed countries is sufficiently ambitious.

Simon Terry of the Sustainability Council says such targets, which equate to 13 or 1 per cent respectively above 1990 levels, are indefensible on the basis of the latest science.

The United Nations Intergovernmental Panel on Climate Change considers developed countries need to cut their emissions by 25 to 40 per cent from 1990 levels by 2020.

Forget the 25 per cent, it needs to be 40 per cent, Greenpeace said yesterday.

New Zealand's long-term target, 50 per cent below 1990 by 2050, is essentially the same as Australia's, but is meaningless as there are any number of possible emission curves between where we are now and that end-point.

An intermediate target is needed. The Government is likely to come under increasing international pressure to commit to an intermediate target before the Copenhagen conference in December.

But first it needs a firmer handle on the starting point, current emissions, estimates of which have whipped around a lot.

Clearly there is much for the transtasman officials working group announced by Smith and his Australian counterpart Penny Wong last week to discuss.

The whole issue could be moot, however.

The Australian Government has yet to get its scheme through the Senate and the New Zealand scheme is being reviewed by a select committee when the ink in the statute book is barely dry. In the meantime uncertainty continues.

At the very least there is a risk of slippage in the timetables which would see smokestack emitters including power stations in a scheme from January 1 next year in New Zealand and July 1 in Australia.

There is a trade-off, Smith says, between giving people certainty and getting policy right.

"My view is that there are substantive benefits for New Zealand [in] harmonising with Australia and if there is some uncertainty in the short term, the long-term benefits warrant it."