Brian Fallow: Germany's Kyoto ruling to be felt in NZ

COMMENT

As Europe's biggest economy steps up its efforts to reduce emissions of greenhouse gases, the ripples will be felt in New Zealand.

Germany has recently completed its national allocation plan, something each European Union country has to do ahead of the start of Europe's emissions trading system (ETS) in January 2005.

Why should we care?

Because the biggest plank in the New Zealand Government's climate change policy is to introduce a tax on the carbon content of fossil fuels before 2008.

The level of that tax will be determined - exactly how has not yet been decided - by the international price of "carbon", which is jargon for tradeable rights to emit carbon dioxide and other greenhouse gases.

The ETS will be the most liquid carbon market and prices prevailing there are therefore likely to be heavily influential in setting the level of the carbon tax here.

National allocation plans involve European Governments peeling off some of their national allotment of carbon credits under the Kyoto Protocol and passing them on to industrial emitters and power companies.

Those firms will have to ensure they have enough credits to cover their emissions, either by reducing their emissions or by buying credits from those who have them to sell. The ETS, in short, mimics at the level of enterprises the same cap and trade system Kyoto sets up among Governments.

So how lenient or strict the initial allocations to firms are will have a major bearing on how short the market is, and therefore how high the price is likely to go.

New Zealand energy consumers' upside risk is limited, however. The Government has put a cap of $25 a tonne of carbon dioxide on the tax, which would put up the price of petrol by 6c a litre and diesel by 7c. Electricity prices would rise an estimated 9 per cent for residential consumers and 16 per cent for industrial ones.

And whereas the Europeans will proceed with emissions trading even if the Kyoto Protocol does not come into force, New Zealand's carbon tax is contingent on Kyoto.

The prospects of Kyoto coming into force brightened last month with the conclusion of a deal between the European Union and Russia over Russia's accession to the World Trade Organisation.

Russian President Vladimir Putin said the agreement could only have a positive effect on the Russian process of ratifying Kyoto and that that process would be accelerated. The protocol will come into force and be legally binding if, but only if, Russia ratifies it.

The European Union's Kyoto target is to reduce emissions (on average between 2008 and 2012) to 8 per cent below what they were in 1990, the protocol's baseline year.

But Germany's target is to reduce emissions by 21 per cent from the 1990 level. The deeper cut reflects the economic implosion of the former communist states of eastern and central Europe, including East Germany. As those smokestacks have gone cold, emissions from that part of the world have been slashed.

German emissions are 19 per cent below 1990 levels now. But there are another eight years to go before the end of Kyoto's first commitment period and assuming a resumption of normal rates of economic growth over that interval, Germany will have to take further measures to reduce emissions if it is to meet its target.

The Environment Ministry estimates Germany will need to find another 17 million tonnes of CO2 equivalent per annum to meet its target.

The national allocation plan would find 10 million tonnes of that from industry and electricity generation. The household and transport sectors will have to find the rest, most likely through higher eco-taxes.

The amount of carbon credits allocated to industry and generators was greater than the Environment Ministry had wanted, reflecting intervention by the Economic Ministry, but it was still condemned as too high by industry representatives.

It is also higher, the Environment Ministry points out, than industry had agreed to under an earlier voluntary agreement.

The national allocation plans have to be approved by the European Commission. Environment commissioner Margot Wallstrom has described the plans which member states have sent to Brussels so far as disappointing. "My first impression is that many of the notified plans go for a rather high quantity of allowances."

There is some scepticism, however, about how much Brussels would be able to amend the national allocation plans in the face of serious resistance from member Governments, especially as it intends to have the market under way by January 1 and several Governments have yet to submit plans.

But allocation plans which gave a firm or an industry more credits than it would need would probably count as a subsidy and be a breach of one of the European Union's fundamental rules which forbid state aid favouring national firms at the expense of their European competitors.

Global competitive pressures also have a bearing on the allocation process, because of the need to avoid what in Kyoto jargon is called "leakage".

If a German iron and steel works, for example, had to close because the price of emission rights was too high or it had not been allocated enough of them, that would reduce German emissions. But if Germany's demand for steel remained the same and the shortfall was met by imports from a non-Kyoto country, say the United States or Brazil, global emissions would be just as high. German jobs would have been lost to no environmental purpose.

The other horn of the Government's dilemma, however, is that the better the deal industry and power companies get, the heavier the burden will have to be on the non-trading sectors, essentially households and transport.

Eco-taxes introduced in 1999 have put an increasing impost on final electricity consumers in five annual steps, and pushed up the price of gasoline and diesel by 3€c (6c) a litre each year.

The household sector's emissions are back at 1990 levels. Tougher insulation and heating standards for new dwellings have been adopted and there are grants for efficiency-enhancing retrofits to existing homes.

The transport sector, which had been 15 per cent ahead of 1990 levels, is now only 7 or 8 per cent higher following reductions for four years in a row. Further gains are expected from increased use of compressed natural gas (CNG) as a transport fuel.

The Government requires power companies to buy electricity from renewable sources at a price set to make them economic. When combined with the impact of emissions trading this creates what might charitably be described as a belt-and-braces policy for renewables, or uncharitably as double dipping and windfall gains.

About half of Germany's electricity generation is coal-fired, 30 per cent nuclear, 11 per cent gas-fired and 9 per cent from renewables of which half is wind power.

Reflecting the anti-nuclear origins of the German Greens, now in coalition with Gerhard Schroeder's Social Democrats, the first priority is to phase out nuclear power.

Coal meanwhile continues to be subsidised, to the tune of about €5 billion ($9.7 billion) a year - testament to powerful political protection and the difficulty of doing without it even in a country as environmentally minded as Germany.

* Brian Fallow visited Germany as a guest of the German Government.