KEY POINTS:
A key feature of the Government's planned emissions trading scheme risks hobbling economic growth for negligible environmental gain and no better cause than administrative convenience.
It is the decision in principle - although there doesn't seem much that is principled about it - to use a static or snapshot approach to the free allocation of emissions units to large trade-exposed industrial emitters.
But why should these emitters get a free allocation at all, which at present carbon prices amounts to a transfer of about $1.3 billion from the taxpayer?
The reason is that if they faced the full cost of their emissions - when they have to compete internationally with firms which do not - they could go out of business.
That would cost jobs and tax revenue here.
But it would not reduce global demand for their products, which would just be met by producers in other countries whose carbon footprints might be larger.
In the jargon, it is called leakage or carbon flight.
It is an instance of the more general proposition that where doing our bit on climate change ends and futile self-sacrifice begins depends utterly on what the rest of the world does, something which we cannot control and over which we have precious little influence.
The problem is that the way the Government plans to deal with the issue is based on crude grandfathering.
Eligible firms - those whose emissions are greater than 50,000 tonnes a year - will receive a gratis allocation equivalent to 90 per cent of their emissions in 2005 above the 50,000 threshold.
It is a kind of compensation for the sudden drop in the value of their businesses which the introduction of carbon pricing will impose.
But because it shields a share of historic emissions rather than a share of future emissions it is liable to deter new entry into those sectors.
And the sectors we are talking about are those we largely rely on to earn the country's living as a trading nation in a wicked protectionist world.
At best the planned policy is anti-competitive and therefore inefficient. At worst it will lock us into a future of exporting bulk commodities with little value added.
Climate change consultant Murray Ward puts the argument trenchantly: New Zealand's equable climate and efficient practices give it a comparative advantage at pastoral farming and plantation forestry.
"Our products can be delivered to markets worldwide with lower carbon footprints than the same products from other countries," Ward says. "But here's the rub - most of these farm or forest products require significant amounts of thermal and electrical energy to process them. And most of these industries exist in a highly competitive world where many of their competitors will not face the full cost of emissions, or even a partial cost, for years to come."
If potential new entrants face the full cost of their emissions, unlike their incumbent or overseas competitors, that may well kill off plans to invest here.
This amounts to a cap on the New Zealand economy, Ward says.
Forestry is a poignant example. A disappointingly large proportion of the harvest goes overseas as raw logs.
Plans to invest in more downstream processing to add value to that burgeoning resource - the fabled wall of wood - have been few and far between.
Years of uncertainty about climate change and energy policy is part of the explanation. But certainty may not be much better if the bottom-line conclusion investors draw is that it makes more sense to build the energy and emissions-intensive processing plant close to the market rather than close to the source of fibre.
As it is, the forestry sector contains a ticking timebomb in terms of the country's carbon liability.
As Cabinet papers made public this week explain, the underlying projected path of New Zealand's emissions, on a business-as-usual basis, is for them to increase by about 1 per cent a year until the middle of the century.
But superimposed on that trend is a spike in emissions as the surge in tree planting in the early 1990s comes up for harvest.
Officials project net emissions from 2023 to 2027 to be 60 per cent higher than now, on a business-as-usual basis.
It would be a shame if we get limited economic nourishment from that harvest just because it is administratively simpler to grandfather part of historic emissions rather than have an output-based or intensity system which offsets a share of future emissions, regardless of whether the emitting firms were here in 2005.
It is particularly unfortunate as a couple of potentially important clean technologies are byproducts of forest processing.
One is ethanol from hemicellulose. About a quarter of a pulp log is hemicellulose, which is no use as a fibre in paper and little use as a source of process heat. But it can be broken down into fermentable sugars.
So as a feedstock for ethanol product it has a negligible opportunity cost compared with the wicked waste of food involved in making ethanol from corn.
Another potentially important product is bio-char, essentially charcoal made from wood waste. Worked into agricultural soil it does all sorts of useful things over and above sequestering carbon that trees have taken out of the atmosphere.
Officials contend that the playing field will be more or less level, that both firms considering entry and existing firms considering expansion will have to take account of the full costs of their action, including the cost of their emissions.
But Ward argues that, done right, dynamic or per-unit allocations are just as effective as fixed allocations in facing businesses with the opportunity cost of their emissions.
It is hard to quarrel with his conclusion that "an issue with such serious potential economic outcomes deserves a much more carefully thought through approach".
For those for whom environmental considerations are paramount, intensity targets are an anathema. And in the context of global or national targets they are right.
Apec's Sydney Declaration set the aspirational target of reducing the Asia-Pacific region's emissions intensity - or emissions a unit of GDP - by 25 per cent by 2030.
But that is a recipe for a 50 per cent increase in emissions if the region's GDP doubles by then.
In the context of New Zealand's emissions trading scheme and its provisions for a small number of trade-exposed emitters, the issue is how to divide up the burden of meeting an absolute national cap between taxpayers, consumers and exporters.
It is not a soft option as far as the country's overall emissions are concerned.
When our trade accounts and our per capita GDP tell us we are struggling to earn a First World living, this policy will not help.
