Brian Fallow: We can't just be carbon copies

Waiting for the Australians to sort themselves out has serious risks. Photo / Supplied

The Australian Senate voted on Tuesday to defer consideration of the Rudd Government's emissions trading scheme until August.

Watered down last month in an evidently vain attempt to ease its passage into law, the carbon pollution reduction scheme has passed the House of Representatives. But the Government does not have the numbers to get it through the Senate.

The Opposition Coalition, though led by a former Environment Minister and advocate of emissions trading, is divided and will not support the bill.

The Greens oppose it as too unambitious and of the two other senators on the cross benches one is an avowed climate change sceptic.

In principle such an impasse can be resolved by a double dissolution and election.

But that is high-stakes poker for all concerned and even if the parties want to play it would now be touch-and-go to have such an election before the world gathers in Copenhagen in December to try to negotiate a successor agreement to the Kyoto Protocol.

On this side of the Tasman it is also a picture of slithering and slippage, but rather further up the mountainside.

At least New Zealand has an emissions trading scheme on its statute books, even if there is now no show of the smokestack sector coming into the scheme by the appointed date of January 1 next year. The select committee reviewing it is expected to report back late next month or early August. Assuming, as seems likely, it will recommend keeping the scheme but amending it in various emitter-friendly ways, legislation to that effect will need to be drafted and go through the normal process, including another round of select committee hearings.

But it ought to be possible, just, to have legislation passed before Copenhagen.

Our equivalent to the checks and balances Australia's upper house provides is MMP. The Government would need the votes of at least one of the following parties: Labour, the Greens, the Maori Party or Act.

It has recently taken up Labour's offer of talks about a mutually acceptable emissions trading regime. From the standpoint of offering business some certainty about a politically durable scheme that would be the best option. It is a more responsible stance on Labour's part than that being taken by the Opposition in Canberra.

But a grand coalition on this issue will be easier said than done.

There are features of New Zealand's emissions profile which make an ETS even harder to design here than in Europe, Australia or the United States.

All such schemes have to deal with the problem of "leakage" - the risk that imposing a carbon price on their domestic industries will undermine their international competitiveness, perhaps fatally, and merely result in world demand for whatever they produce being met by producers in countries where emissions are unfettered, leaving the global climate no better off.

A recent report from the New Zealand Institute of Economic Research and Infometrics says that most developed countries considering carbon pricing do not face such critical leakage issues because their emissions are concentrated in non-tradeable sectors like energy and transport.

In New Zealand's case, not only are half of all emissions generated by agriculture, 90 per cent of farm production is exported.

Overall New Zealand exports about 55 per cent of domestically produced emissions but imports an amount equal to just 25 per cent of domestic emissions.

NZIER and Infometrics conclude that climate change policy here needs to be particularly sensitive to what the rest of the world does.

They recommend excluding agriculture from the scheme so long as the compliance costs of measuring emissions on farm are prohibitive. As the law stands agriculture will be included, albeit heavily grandfathered, from 2013. The Australians do not propose to even decide about including agriculture until 2013.

Climate Change Minister Nick Smith said that although no decisions had been made, given the make-up of New Zealand's emissions, climate change policy would have to include agriculture "at some point".

The price signal had to vary farm by farm, as that was where the relevant decisions to reduce emissions were taken, but the issue of measurement and compliance costs was challenging, he said.

Meanwhile, US lawmakers and lobbyists are wrestling with an emissions trading scheme in the Waxman-Markey bill before Congress.

It would start by capping US emissions to 3 per cent below 2005 levels in 2012 and progressively reduce that to 83 per cent below by 2050.

The Congressional Budget Office estimates that by 2020, eight years into the scheme, the net cost economy-wide would be US$22 billion ($34.4 billion) or about US$175 per household, 0.2 per cent of households' after-tax income. The cost to consumers of a carbon price, assumed to be US$28 a tonne, being passed through to them would be partially offset by various provisions to recycle back to them revenue the US Government would get from auctioning emission permits.

The Waxman-Markey bill has been reported back from the House of Representatives select committee, but clearly a lot of politics will have to take place before it is on President Barack Obama's desk awaiting signature.

Waxman-Markey allows for US emitters to import up to 1 billion tonnes a year of offsets - emission permits generated by climate-friendly projects in other countries - and it does not share the Europeans' fastidiousness about offsets arising from forestry.

The final shape of the US rules will make a big difference to liquidity and prices in international carbon markets, and therefore on the cost to New Zealand of taking responsibility for its emissions. But it remains an area where the questions outnumber the answers by a wide margin.

In the light of all the uncertainty about what will eventually emerge from Canberra and Washington, to say nothing of the multilateral pre-Copenhagen negotiations, it will be tempting for the Government to adopt a wait-and-see approach.

But the proposition that it is dangerous to get too far out of sync with what our trading partners are doing cuts both ways: there is a cost to getting too far ahead of them and to getting too far behind. As the NZIER/Infometrics report puts it: "New Zealand needs to be at the table when post-2012 negotiations take place to ensure our voice is heard and the outcome is equitable. We cannot realistically do so if we do not have a commitment to a domestic carbon price."

In other words waiting for the Australians to sort themselves out before we finalise an ETS risks being - to borrow a phrase from the Cold War - naked at the negotiating table.