KEY POINTS:
Whatever the merits of the emissions trading scheme unveiled by the Government last month, saving the taxpayer money over the next five years really isn't one of them.
Tucked discreetly away in the Crown's accounts for the year ended June 2007, which were released yesterday, is a revised estimate of the bill coming the taxpayer's way because of our collective inability to get anywhere near meeting our target under the Kyoto climate change treaty.
It is $704 million for the 2008 to 2012 period Kyoto covers, up from $656 million a year ago.
Doesn't look like much of an increase.
But that is only because a 10 per cent increase in the projected volume of emissions to be covered and a 23 per cent increase in carbon price are masked by the steep rise in the dollar over the past year.
The latest estimate assumes an exchange rate of US76.9c, compared with US60.6c in last year's accounts.
For the sake of the tradeables sector we had better hope that the latter is closer to the average exchange rate applying over the period during which the Government will have to buy carbon credits on the international market.
But if it is, the liability will be closer to $1 billion.
The planned emissions trading scheme is not reflected in these numbers.
But don't expect it to make much difference to the taxpayer's liability.
Because of carve-outs and the progressive phasing in of the scheme taxpayers, not emitters, will still have to pick up the bill for three-quarters of the country's emissions over the next five years.
Agriculture, responsible for half the country's emissions, will not be brought into the scheme until 2013. Oil companies in effect get next year's emissions from transport fuels free, and electricity generators get the next two years' emissions from power stations free.
Most of the other quarter of the national liability, which will be devolved to emitters, will be offset by the devolution to forest owners of the credits for carbon sequestered by post-1990 forests. That needed to happen, but it comes at a stiff cost.
Climate Change Minister David Parker reckons the scheme will shave about 20 million tonnes off national emissions over the next five years, which would almost halve the liability.
But that is not a number you can take to the bank.
Estimates of the volume of emissions New Zealand will be responsible for under Kyoto have swung around wildly over the years, and are in any case surrounded by very wide margins of uncertainty.
The latest estimate is 45 million tonnes of carbon dioxide equivalent, up 10 per cent on last year's figure.
But that is a relatively modest revision. The estimates have gone from 32 million tonnes in the black (at the time we ratified Kyoto) to 36 million in the red two years ago, then 64 million in the red in late 2005 when the Government scrapped the proposed carbon tax, subsequently clawed back to 41 million tonnes in June last year.
The latest 45 million tonnes estimate heroically assumes only 21 million tonnes of emissions from deforestation in the next five years.
But a survey last year of forest owners' intentions found actual deforestation could be twice that.
The policy announced last month will not materially change that. It still makes the owners of pre-1990 forests liable for the emissions deemed to occur when forests are harvested but not replanted.
True, 21 million tonnes worth of tradeable units will be allocated free to pre-1990 forest owners, but the Government was always going to come to the party to that extent anyway; the only question was how.
The latest estimate reckons post-1990 forest sinks will reduce the national liability by about 80 million tonnes - give or take 40 million.
But remember today's forest credits are tomorrow's liabilities. There is a corresponding spike in obligations about 2020 as the 1990s planting surge reaches harvest.
Agriculture is expected to emit around 200 million tonnes, give or take 25 million tonnes.
The uncertainty ranges around energy and transport emissions are smaller, but still run to millions of tonnes either way.
Similar uncertainties bedevil any attempt to estimate the likely balance of supply and demand in the New Zealand carbon market.
Some Kyoto foresters, having secured the right to have what they regard as their carbon credits devolved to them, may look at the transaction costs involved in carbon trading and the fact that with the credits comes associated liabilities upon harvest, and opt not to exercise that right.
Others may take the credits and put them in the bottom drawer.
On the demand side will be the oil companies (from 2009) and the power companies from 2010, together with companies which opt to manage their own carbon price risk, rather than relying on their upstream suppliers of fuel or electricity to do it for them.
Large industrial emitters exposed to international competition now look like being short to a greater extent than the headline announcements last month suggested.
They will get a free allocation, not of 90 per cent of their 2005 emissions but of 90 per cent of the 2005 emissions above 50,000 tonnes.
So if a firm emitted 200,000 tonnes in 2005, and even if it has not increased emissions since then, it will have to either reduce its emissions by 65,000 tonnes or buy units to cover the difference.
To the extent the domestic market is short - that is, to the extent there are not enough New Zealand units (NZUs) to go around - market participants will have to import units from the international Kyoto markets so they have enough to surrender to the Government at their annual due dates. In the jargon these would be certified emission reductions (CERs), emission reduction units (ERUs) or assigned amount units (AAUs).
In practice they will drive the local carbon price.
So what does the balance of supply and demand on the international market look like?
The World Bank, which takes a keen interest in such things, estimates global demand in the international market between 2008 and 2012 at about 2 billion tonnes.
More than three-quarters of that demand comes from Europe and most of the rest from Japan.
On the supply side the World Bank sees about 1.7 billion tonnes arising from United Nations-approved projects, mainly in developing countries, which reduce emissions and which would not occur without the revenue from selling the credits they give rise to.
The dominance of European companies and to a lesser extent Governments in the buying side of that market explains the gravitational pull which prices on the internal European emissions market exerts on the broader international Kyoto market - particularly at the high-quality, low-risk secondary CERs end of the market, which New Zealand emitters facing stiff penalties for non-compliance are likely to favour.
Prices at that end of the market have been running closer to $30 a tonne than the indicative $15 price the Government has tended to use as it "sells" the scheme.
In calculating the taxpayer's liability, however, the carbon price assumed is $15.50. That may be achievable assuming the Crown is willing to buy cheaper credits with more risk of non-delivery and if the exchange rate sticks at nearly US77c. But not otherwise.
