Little impact on growth seen from carbon charge

New Zealand's largest single CO2 emitter, Genesis Energy's Huntly Power Station. Photo/Amos Chapple

Introducing a carbon price into the economy, while not costless, will not significantly affect its potential growth rate, according to results of independent economic modelling.

A joint study by the New Zealand Institute of Economic Research and Infometrics for the Ministry for the Environment into climate change policy options supports a broad emissions trading scheme - with free allocation of units to sectors whose competitiveness is at risk, and agriculture excluded as long as measurement of its emissions is too expensive.

Their modelling indicated that income per capita, as measured by real gross national disposable income, would rise to $54,000 by 2025 from $38,500 now, even with a carbon price of $100 a tonne, four times the current price. In the absence of any policy response to climate change, it would be $56,000. Such numbers, they caution, should be regarded as indicative only.

In the short run, up to 2012, there is relatively little difference economy-wide between the Government funding the country's liability under the Kyoto Protocol by buying carbon credits on the international market out of general taxation, or an ETS with free allocation to trade-exposed sectors, or a narrow carbon pricing scheme which covers just energy and transport sectors.

But they said the global trend was clearly towards the gradual introduction of carbon pricing.

In the short run, a narrow carbon pricing scheme - whether through an ETS or a tax - at a low domestic price could provide the necessary signal to business investment at a slightly lower cost than an all-industries, all-gases ETS with free allocation (currently on the statute books), they say.

In the longer run, the modelling shows a broad-based, full price signal with no free allocation or exemptions would be the least-cost way to meet the country's post-2012 obligations.

But the economists put key caveats around that. It depends on what action the rest of the world takes, and what technological improvements emerge.

Until that becomes clear they recommend allocation of free units, based on output rather than as compensation for potentially stranded assets, for sectors whose competitiveness would otherwise be at risk.

That would still give them an incentive to invest in emission reducing technology so long as the cost was less than the market value of the units.

They see a case for excluding agriculture so long as the compliance costs of measuring emissions on farm are prohibitively high.

Climate Change Minister Nick Smith welcomed the report as a further step towards consensus on the way forward in an area which had seen policy "ping-ponging around" since the 1990s.

The Government was now awaiting the select committee report reviewing the emissions trading scheme passed late last year.

Labour's climate change spokesman Charles Chauvel said: "Agriculture accounts for more than half our emissions, and the sector cannot continue to avoid the cost of these."