KEY POINTS:
A market in carbon credits was not the Government's first choice of instruments to reduce greenhouse gas emissions. Simple taxes were much closer to its instincts. But it may be glad now that it was forced to drop a carbon tax and the earlier "fart" tax on methane emissions from animals. For the worldwide trend is now towards an emissions trading system to ensure reductions occur with the least cost to living standards.
The decision announced this week to phase in a domestic emissions market from next year gives industry the direction it needs and expected. The stock market is already gearing up to handle the trade and some branches of business sound as if they are ahead of the play in factoring carbon costs into their future.
Some businesses will expect to benefit from an allocation of credits that they might sell by reducing their carbon dioxide emissions. This still seems to worry the Government unduly. Climate Change Minister David Parker says it has learned from the European trading system where excessive allocations awarded in 2005 created windfall profits for little reduction in emissions.
But if there is now a more accurate method of making allocations, Mr Parker says nothing about it. Many of the elements of a market have yet to be decided. The Government intends to set a cap on a sector's emissions and somehow decide how much of it each plant is permitted. It is going to decide which will get their allocations free and which will have to buy the rights.
Those decisions are going to be arbitrary. Certain industries - Comalco springs to mind - are likely to receive generous allocations for fear that added costs could make their products non-competitive overseas. But the country at large will face a bill under the Kyoto agreement if it does not meet its agreed reduction target, so any generosity to a few big offenders will probably be offset by harsher limits on industries that are "less sensitive", meaning more competitive. This will be a strange market.
Nevertheless, it will find a price that reflects the value of industries that could be contributing to the warming of the atmosphere to a damaging degree. As the minister explains the system, those who can reduce emissions for less than the market price of them will do so and sell their unused quota.
Conversely, those whose increased production is worth more than the added cost of carbon dioxide emissions will be able to buy extra quota.
The minister envisages fewer than 100 New Zealand companies being interested in emissions trading, but surely he neglects the potential for small-scale foresters and the like to enter the market as sellers of credits. The Government has been strangely reluctant to allow forest owners a "windfall" from climate change remedies. It is not clear why.
If the growth of trees removes carbon dioxide from the atmosphere, the owners of young groves deserve their windfall. At the same time they should have to buy credits if they want to harvest the tree, thereby releasing the carbon dioxide stored in it. The system creates a double incentive to leave forests in the ground, which should be good for the global temperature.
It could be good, too, for the replanting of native forests in parts of the country where milling is too costly and the soil too poor for farming. New Zealand has many such places and it should be planting forests furiously in expectation of an international carbon trade. Instead the country is being deforested with a vengeance because the Government wants nobody to gain a windfall from public policy. Yet everyone gains from anyone's reduction in greenhouse emissions. Trading is merely the way to make it happen.
