Business and the emissions trading scheme
2 April 2008
Business and the emissions trading scheme
Business has a problem – not with an emissions trading scheme, but with the design of the one currently proposed for New Zealand.
Business NZ Chief Executive Phil O’Reilly told the Finance & Expenditure select committee this morning that the Bill setting up the emissions trading system as currently designed, brings huge risk of damage to NZ economy with no great impact on climate change.
“Business is not blind to the opportunities of climate change,” Mr O’Reilly said. “I’ve seen a sea change in business opinions and thinking over last two years that makes this clear. I’d hope if we get the design right, you’ll see a flowering of business activity that the government will be struggling to keep up with. You definitely won’t get that though if you place costs on business or you sow fear in the business community because of poor design.”
Mr O’Reilly listed some of the major adjustments needed to get a workable system:
Protecting the competitiveness of NZ firms - as currently
drafted, the Bill will mean NZ firms losing competitiveness
in world markets, leading them to either reinvest elsewhere
and run down their investment here, or continue to operate
but with no new growth. This could mean, according to the
latest Infometrics study, at a carbon price of $25, a loss
of 52,000 jobs, falling most heavily in wholesale & retail
trade, services, accommodation &hospitality. Other
modelling by Infometrics, NZIER and the Australian Bureau of
Agricultural and Resource Economics (ABARE) show the ETS as
drafted delivering a huge shrinkage of NZ industries,
depending on the cost of carbon, up to:
Sheep farming -32%
Dairy farming -28%
Dairy processing -14%
Mr O’Reilly said this major industry shrinkage was not consistent with the government’s claim that the ETS will have a negative impact of less than 1% of GDP.
2. The allocation methodology and phase-out - as currently drafted the allocation methodology won’t protect many firms, and the phase out to 2025 is simply heroic. Not other country is doing this – why should we?
3. Property rights - the ETS as drafted will damage the property rights of many New Zealanders and NZ businesses. This not only relates to land but also to significant investment in capital equipment that companies have made in good faith over many years. They will need to be recompensed for this diminution of their property rights, and you can’t do that simply by giving free credits.
4. Linkages with other schemes round the world as they emerge - the EU ETS is the only other Kyoto-compliant scheme operating and they don’t include all gases and all sectors. The Australian system will be next off the block. We should ensure we do whatever is needed to align with the EU and Australia, to our national advantage. Looking at what’s happening in Australia, it’s hard for us to see any reason why we should move ahead of that country.
5. Making sure the price of carbon
is as smooth and predictable as possible - business is
concerned about unmanageable, volatile prices. The
projected price per tonne of carbon when the ETS proposed
for NZ was approx $15; Treasury’s estimation of our
current Kyoto liability is based on a price of $21; the
current international price is approx $36; the 2020 CBI
projection range is $112-175. That’s a lot of uncertainty,
and business hates uncertainty. Government has many options:
• It can ‘manage’ carbon prices and stop credits just being sold off using 1-way trade;
• It can manage the balance of liabilities between consumers and firms;
• It can monitor prices - private vs government-to-government - (the NZ government can buy wholesale and auction here, bringing considerable cost savings)
We should build these features into the legislation now rather than regulating for them at a later date. It may require a bit more time to get the legislation right
6. The moratorium on new fossil-fuelled electricity generation except to the extent necessary to ensure security of supply – this is superfluous to the ETS, increasing costs and reducing flexibility (as confirmed by Treasury report released yesterday: Carbon Neutrality Economic Modelling).
7. The nature of targets – we shouldn’t
use absolute targets (the Bill’s target is an absolute
one: to get emissions below business-as-usual levels).
• Absolute targets work against NZ’s interests (e.g. ‘food miles’ is an absolute target);
• NZ is a high-energy (but energy-efficient) processor of primary products (processed dairy food, pulp & paper, aluminium);
• An absolute target would punish us for the high energy use in these industries, while ignoring our energy efficiency;
• It would prevent our energy-efficient businesses from growing;
• The only sustainable way to reduce global emissions is to allow the most energy-efficient producers to succeed and not to artificially prop up energy-inefficient producers;
• So the Bill should use efficiency measures instead, setting intensity limits for production e.g. grams of carbon per pound of butter;
• Efficiency (or intensity) measures are fair to everyone;
• The Bill should also use a contingent target i.e. relative to what the rest of the world is doing – makes no sense to put harsh rules on ourselves if others aren’t doing the same.
8. Government revenue issues - the public doesn’t understand that by 2020 the government will be getting $1 billion a year from the scheme. Is that fair and reasonable? This should be used for helping firms maintain competitiveness, not as a cash cow for government.
“Finally, and most importantly, you need to have an open conversation with business,” Mr O’Reilly said. “There’s a difference between consulting and listening. There’s a lot of talking going on, but not a lot of listening. The impression being given is that business, in disagreeing with parts of the plan for the ETS, is somehow being nasty or trying to undermine the government. In fact, we are just trying to contribute within a climate of trust.”