Emissions tax will hurt competitiveness

By CHRIS BAKER*

The Government ratified the Kyoto Protocol in December 2002. Climate change policy is now developing rapidly and alarm bells are ringing.

Policy outlined to date applies up to the end of the first commitment period - 2012. No progress has been made in international forums on the US and Australia joining the protocol and how developing countries will take on obligations for the second commitment period.

So New Zealand's longer-term obligations are not at all clear.

Some of the technologies needed to reduce emissions to a meaningful extent will take 20-plus years to develop. Climate change policy should recognise this and not rely on such a blunt instrument as an emissions tax.

The Government will introduce an emissions tax in 2007. Some of our trading partners have climate change policies similar to New Zealand's, but not one of our partners in the Asia, Pacific or Southern Hemisphere region has, or is planning, an explicit emissions tax.

New Zealand's economy is energy intensive, second only to Canada in the OECD. Simple logic, supported by economic analysis, confirms that imposing an emissions tax in the absence of a similar impost by our trading partners will harm the economy.

Many NZ firms, particularly those competing internationally, will be unable to pass on the tax. Such firms will tend to shift production overseas; investment will be discouraged, output will fall, closures occur and jobs be lost for no benefit to the environment.

The Government has recognised this threat by providing for Negotiated Greenhouse Agreements (NGAs). These will provide relief from some or all of the tax in exchange for a binding commitment to achieve energy efficiency and emissions management targets based on a measure of world best practice.

NGAs are not a cheap option - negotiating one will be a major commitment in itself, perhaps beyond the resources of all but the larger companies.

Most energy-intensive firms have long-lasting assets. An NGA provides these firms with the certainty to invest, build assets and shift the business to a lower carbon economy over a time frame that reflects the technology options available to the firm.

So, if NZ has to have an emissions tax, equally it has to have a meansto shelter firms from the loss of inter-national competitiveness. NGAsalso encourage firms to investin energy efficiency and emissions management, an outcome that bothGovernment and industry support.

Unfortunately, the Government has imposed significant hurdles to NGAs. These mean that a large number of medium to smaller firms will find it difficult to gain access to an NGA.

It is hoped that some of these firms may be able to form bubbles that can negotiate an NGA as a single entity on behalf of the participants. Also, industry is encouraging the Government to develop second-tier policy mechanisms that may give smaller firms some relief, and encouragement to manage emissions.

The Government is under pressure to maintain flexible policies for these firms so agreements are accessible, investment is encouraged and the economy can grow. The Government is also under pressure to ensure that adequate resources are available to negotiate the NGAs industry requires.

The simple message here is: more agreements will result in better emissions management and less damage to the economy.

* Chris Baker is chairman of the Greenhouse Policy Coalition