Not long ago a review panel chaired by David Caygill recommended the next steps for New Zealand's emissions trading scheme.
The next steps could bring big costs to everyone. To choose the best path forward we need to review what has happened so far. The ETS began under the last Labour Government. If Labour had won the last election, its scheme would have been operating by now, with a fairly stiff cost problem for the economy – possibly one of the reasons for Labour's electoral loss.
National contested the last election with a scheme that was less daunting. National said we should do our bit for emissions reduction, but not ahead of everyone else, and we should strike a balance between environmental and economic considerations. Like Labour, National accepted the scheme should cover all sectors of the economy. Both parties agreed agriculture should be included. This was an ambitious move as agriculture is not in any existing or proposed scheme anywhere else in the world.
National softened the move by delaying the date at which agriculture would enter the scheme, along with some other moderating features. Among those were a cap on the price of carbon, at $25 per tonne, and a discount on the purchase of emission units – protections that were to be removed in 2013. The plan was that an expert panel would in 2011 make recommendations on the future of those protections.
The Caygill panel duly reported back, with a raft of recommendations, including that the discount on emissions units should end in 2015 rather than 2013, and that the cap on the price of carbon should rise to $50 in 2017. These recommendations to push those obligations further out in time were seen in media and general commentary as a further softening of the scheme and judged generally helpful and reasonable. However, this was not a particularly well-informed view.
In fact these actions would not go nearly far enough to protect New Zealand consumers and businesses from the looming costs of the scheme, which might cause internationally trade exposed businesses to lose competitiveness. First, 2015 is still too soon to end the discount scheme. Second, a price on carbon materially higher than the current price of $14 a tonne is unaffordable for many businesses.
These recommendations might work if there were other countries taking part in emissions trading – but there aren't many countries actually doing anything. There is still no Australian scheme – and even if there was, it may not survive the next election. Our other major trading partners China and the US haven't even made it out of the starting blocks which makes prospects for post-Kyoto arrangements look bleak. This all leaves New Zealand well ahead of the rest of the world in our actions towards an ETS to achieve emissions reduction.
Our Government's position has been that removing protections for business and consumers should happen once progress is being made in other countries, particularly our major trading partners. So, given there has been hardly any progress elsewhere, we should not be boxing ourselves into costly obligations, regardless of whether they happen in 2013, 2015 or 2017. A maximum carbon price of $50 a tonne would put many New Zealand companies out of business.
In all, rather than softening the impact of the ETS, the panel's recommendations would bring substantially increased costs. The other thing the panel had to consider was whether access to UN-approved units should continue. On this, it refrained from deciding and passed the buck back to Government – unsurprisingly, as this is a thorny issue.
UN-approved units are like currency for carbon trading – countries can buy them to offset their emissions. The units are generated in parts of the world where emissions are reduced at lowest cost; China, for example, where the manufacture of refrigeration and air conditioning units captures greenhouse gases – New Zealand businesses can buy the Chinese units, while the UN certifies that the units are valid and keeps the tally of countries' emissions records.
But the EU has recently said it will no longer use some UN-approved, Chinese-originated units in its emissions trading scheme. Large amounts of Chinese units on the market have contributed to a carbon price of $14 a tonne and green-influenced governments in Europe have questioned the integrity of the units and say $14 is too low a price to prompt emissions reduction. Banning the UN-approved units would cause the price of carbon to rise, and would therefore be a stiffer prod for companies to reduce their emissions. It might also have the effect of forcing China to take part in the Kyoto process – a political gambit by the EU.
In the absence of recommendations by the Caygill panel, the Government will now have to decide whether we should follow Europe's lead and also ban UN-approved units. BusinessNZ strongly believes we should not. It is not in our interests to be involved in any geopolitical power plays against China or any other country. We recommend the Government continue to support UN-approved units, while working through the UN multi-lateral process to remove any doubts about unit integrity.
Yet there are some sectors of the economy that would benefit from a higher price – clean-tech entrepreneurs and foresters, for example; the current price is not acceptable to foresters, with many withholding their units from sale.
And a higher carbon price might make agriculture's inclusion in our ETS more acceptable. A higher carbon price could make it more worthwhile for farmers to convert grazing operations to forestry – better returns from selling carbon credits from trees could help offset paying for emissions from animals. These are some of the complex considerations the Government must weigh up as it charts the next steps for the ETS. The Government must strike a fair balance between taxpayers, consumers and businesses.
I believe its decisions should be based on robust data. On a conservative estimate, the panel's proposals could see businesses face $1 billion in costs for the transport, energy, and industrial sectors from 2015. Fuel and electricity prices for households could rise by more than $400 a year. This is an unacceptable outcome.
The business community supports efforts to 'green' our economy, including emissions trading – because that is what customers want, and of course it is the best interests of the planet. But there is no need to do it in a way that loads unnecessary costs onto consumers and businesses. BusinessNZ recommends that the Government retains the current discount scheme and takes steps to keep the price of carbon at a manageable level, including retaining UN-approved units.
The Government should stand firm on its promises that we will implement our ETS fully only when other countries do too and that we will not punish ourselves unnecessarily by choosing to inflate the price of carbon. Holding to those promises will allow New Zealand to get the benefit, not just a cost burden, from our path towards a greener future.
Phil O’Reilly is Chief Executive BusinessNZ
www.businessnz.org.nz
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