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Treasury Report Opposes Thermal Ban

Treasury Report Opposes Thermal Ban, but its Definition of Carbon Neutrality Makes a Farce of Government’s Emissions Reduction Goals

“The government should own up to exactly what it means by carbon neutrality, and should heed Treasury advice about its proposed thermal generation moratorium”, Roger Kerr, executive director of the New Zealand Business Roundtable, said today.

The Business Roundtable has released (copy attached) a Treasury report on the modelling study Carbon Mitigation Scenarios undertaken by Infometrics for the New Zealand Business Roundtable and the Petroleum Exploration and Production Association of New Zealand.

The Infometrics study found that, taken alongside its goals for economic growth, the government’s goal of achieving carbon neutrality:

* could cost New Zealand households around $19,000 a year in current dollars by 2025

* but would leave the country further away from carbon neutrality than it is today.

Mr Kerr said that the Treasury report on the study confirmed some important points, including that there are indeed “economic costs from achieving emissions obligations” and that there is a need to improve the quality of environmental regulation “as a core aspect of encouraging productivity growth” (this is an apparent reference to the Resource Management Act).

“In addition, it comes out strongly against the moratorium on thermal generation, saying that “layering duplicative regulatory measures on top of the economy wide price measure [the emissions trading scheme] increases costs” and that “the majority of sector-specific measures are rendered redundant by the adoption of the ETS.” Mr Kerr said these would include the renewables and biofuels mandates and much energy efficiency regulation.

However, he strongly disputed other aspects of the Treasury’s commentary.

“Treasury describes the assumptions underlying the scenarios in the Infometrics study as “somewhat extreme”. Yet they are based on the government’s own goals for economic growth and a conservative definition of carbon neutrality (reducing New Zealand emissions to 1990 levels by 2025).

“Treasury appears to favour modelling based on the assumption that, despite the adoption of policies imposing high and varying carbon prices on the economy to reduce emissions, there will still be full utilisation of an unchanged level of economic resources, “with resources displaced as a result of a policy diverted to their next best use.”

“This is like saying that the restructuring policies of the 1980s should not have led to unemployment and other major transitional costs, and that the price uncertainty of an emissions trading scheme (ETS) will not affect labour supply, investment and other business decisions, and thereby further reduce living standards. Policies that depress living standards in New Zealand relative to, say, Australia can be expected to divert labour and capital to that economy. If anything is extreme here, it is Treasury's assumption that this would not happen.”

As the author of the NZBR/PEPANZ study, Dr Adolf Stroombergen, commented: “Calling Scenario C extreme is unfortunate, when it tried to portray an outcome that could easily occur under the sort of business uncertainty that multiple carbon prices could engender.”

Mr Kerr said that even more concerning was the Treasury’s apparent definition of carbon neutrality. “Its view seems to be that New Zealand will be carbon neutral if it buys permits on world markets to cover all domestic emissions that are not offset by domestic absorption.

“Leaving aside the fact that it is unclear whether a deep market for international trading of emissions units will actually develop, this definition makes a farce of the drive in the Kyoto Protocol to reduce emissions back to 1990 levels.

“Taken literally, it would mean that New Zealand could become carbon neutral by taking no action whatsoever to reduce its own emissions and merely have the government buy any necessary permits from offshore parties.

“Such a contrived interpretation is simply game-playing, and inconsistent with the spirit and general intent of the signatories of the Kyoto Protocol. A commonsense and logical interpretation of carbon neutrality would be zero net domestic emissions – achieved by reduced gross emissions and increased domestic absorption.

“The Treasury view is hardly likely to be the view of Jeanette Fitzsimons or environmental organisations. If buying any level of credits on world markets is the government’s idea of achieving carbon neutrality, it should come out and say so.

“If it isn’t, then the study’s conclusion that its economic growth and carbon neutrality goals are inconsistent remains valid.

“Hearings on the government’s climate change legislation commence tomorrow”, Mr Kerr said. “It is imperative that they proceed on the basis of a clear understanding of the government’s goals, recognition of the major costs to households and the economy that could arise from poor policy design, and the adoption of least-cost ways of meeting New Zealand’s commitments rather than imposing multiple and distorting carbon prices across the economy.”


Attachment: Treasury report Carbon Neutrality Economic Modelling

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