KEY POINTS:
Business lobby groups are indignant about one change in particular made to the emissions trading legislation in the course of mustering the parliamentary numbers to get it passed.
It is a new provision to restrict the ability of emitters, when meeting their obligations under the New Zealand scheme, to use a particular kind of Kyoto carbon credit called assigned amount units (AAUs) unless they have been, in the jargon, "greened".
Critics of the change say it will deprive New Zealand emitters of a cheap source of carbon and so drive up costs through the economy. But this misunderstands the purpose of the emissions trading scheme and rests on a highly debatable assumption.
The object of the ETS is not to ensure that New Zealand meets its obligations under the Kyoto Protocol as cheaply as possible.
Its aim is to ensure that New Zealand emitters reduce their future emissions as cheaply as possible. The key word is "future".
And the idea that a behind-closed-doors deal between the Government and the Greens has deprived emitters of a bountiful supply of cheap carbon assumes, implausibly, that eastern European governments with "hot air" to sell will say to a New Zealand corporate emitter: "We can see the sort of prices you would have to pay on the deep and transparent CDM market. But don't worry, we will sell you a substitute form of carbon at a fraction of that price because, what the hell, we've got plenty and we used to be communists and haven't quite figured out how markets work yet."
AAUs are the allocation of units Kyoto countries have received based on their 1990 emissions (more or less depending on their national targets under the treaty). Countries like New Zealand which will emit more than that (in our case about 25 per cent more) will have to top them up with units from other sources, notably those arising from the establishment of new forests, certified emissions reductions (CERs) arising from UN-approved climate-friendly projects in developing countries or excess AAUs held by other governments.
The latter are most likely to be eastern European since 1990, Kyoto's baseline year, was just before the collapse of the Soviet empire. A lot of eastern bloc chimneys went cold after that, leaving those countries with an excess of emission units.
On the demand side of the market the largest emitter of all, the United States, alone among developed countries, has refused to ratify Kyoto and so undertake a binding emission reduction target. This leaves the market for Kyoto units potentially very long indeed.
The World Bank in its 2008 report on the state of the carbon market estimates that over Kyoto's first commitment period (2008-12) demand for Kyoto units will be around 2.4 billion tonnes of CO2 equivalent. The potential supply of surplus AAUs would be close to 7.3 billion tonnes.
But before that overhang of carbon could flood the market and collapse the carbon price, there would need to be both willing sellers and willing buyers.
Why would the Ukrainian government, say, sell AAUs cheaply when it has the option of banking them for future commitment periods when it is likely to need more itself and when more stringent targets will boost international demand?
And on the demand side concerns about the environmental value of Eastern European AAUs has led to the emergence of "green investment schemes" - mechanisms established by selling countries to assure buyers that the proceeds from AAU trades will finance investments to reduce emissions. This is called "greening".
In some ways it is akin to what New Zealand did when it ran the now defunct Projects to Reduce Emissions scheme. The Government peeled off 10 million from its wad of AAUs, not to sell, but to dole out as subsidies to projects like wind farms which could demonstrate that they would reduce emissions and would only be commercially viable with the additional cash from selling the units.
Setting up green investment schemes, deciding what projects and programmes should count and how to monitor their ongoing operation with acceptable transaction costs, and negotiating bilateral international agreements to recognise them, is not easy or cheap for the governments concerned. And the potential market for greened AAUs is limited by the fact that AAUs are not accepted within the most liquid carbon market, the internal European emissions trading scheme.
AAU trading, in contrast to the market in CERs, is still in its infancy and the market is illiquid, which suggests that dogmatic assertions about how much cheaper this sort of carbon would be rest on empirically rickety foundations.
The New Zealand scheme as initially designed set no restrictions on emitters' ability to surrender AAUs to the Government when meeting their obligations under the scheme.
The argument was that all Kyoto units are created equal and it is invidious to discriminate against some countries' just because the economic calamity which makes them surplus to their requirements occurred in the early 1990s. Either 1990 is Kyoto's year zero or it isn't.
But the green movement has long been opposed to the use of what it regards as a kind of windfall legacy of units, in place of units generated by measures adopted now to reduce future emissions. The Green Party in its negotiations with the Government initially sought to exclude AAUs altogether as an option for corporate emitters, co-leader Jeanette Fitzsimons says, but was persuaded to accept them if they were greened.
The legislation does not specify what environmental standards or inter-governmental process will be required. That is left to regulations yet to be drawn up and adopted.
"This is really piggybacking on what Japan and Canada have already done and there appear to be quite well-advanced bilateral agreements with the Czech Republic, Latvia and Hungary," Fitzsimons said.
At this stage the Australian Government does not intend to allow its emitters to use AAUs for compliance purposes over the next few years "given the potential impacts on the stability and credibility of the scheme".
This raises issues about whether the unrestricted use of AAUs within the New Zealand scheme would pose a barrier to linking with Australian and/or European schemes in the future. The legislation does not foreclose the option of the Government buying un-greened AAUs for the purpose of squaring accounts with other Kyoto governments after the first commitment period is over.
Given that most of the country's emissions over the next five years will have to be paid for by the taxpayer, that is just as well.
