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Emissions Trading - at what cost?

2 April 2008

Emissions Trading - at what cost?

In a presentation to the Finance and Expenditure Select Committee hearing submissions on the Climate Change (Emissions Trading and Renewable Preference) Bill today, the Greenhouse Policy coalition, representing the energy intensive sector, had the following to say.

Executive Director Catherine Beard said that emissions trading would be one of the most far reaching and complex reforms in New Zealand, and so it was critical that the costs of moving ahead of other countries to price carbon were well understood.

"We agree that NZ needs to contribute to the global efforts to reduce emissions and that a price based mechanism will be part of the policy mix. What we have major concerns about is that in this Bill we have the toughest and potentially most expensive solution to this problem in the world and that other countries are unlikely to follow us with similar stringency."

"In our view we should be trying to avoid a situation where New Zealand has to spend the next 20 years travelling to international meetings begging other countries to cap their emissions growth - from all sectors and all gases; in the same way we have been unsuccessfully pleading for a reduction in agricultural tariffs and subsidies for the last 20 years."

Problems with the Bill and recommended solutions

1. New Zealand is leading the world with the most ambitious ET scheme. No other scheme includes all sectors and all gases and neither are they likely to in the foreseeable future. The largest mandatory ET scheme is the EU ETS. It only covers around 50% of CO2 emissions, and while it will get broader from 2013 - it still falls far short of what is being proposed here and its impact on business has been much more benign.

In addition the European Commission is coming under increasing pressure from the largest economies (France and Germany) to soften the impact of scheme on energy intensive industries to avoid those industries becoming uncompetitive against countries that do not price carbon. They are talking about 100% free allocation to those industries, total exemption from the scheme or border adjustment taxes.
The US States are moving slowly with domestic cap and trade schemes - those that exist are narrow in focus (electricity generation), voluntary (low targets and low prices) or in gestation (California cap and trade not starting until 2012).
Canada has abandoned its KP target and is pursing an ET scheme that uses energy intensity WBP benchmarking - to allow for growth - but at a lower rate than Business As Usual.
Solution - at the very least - slow down the introduction of the ET scheme in New Zealand until we see the detail of what Australia is proposing to do later this year (July). Being a first mover in the whole of the Asia Pacific could come at a high cost to the economy.
If the scheme goes ahead - ensure adequate protection for energy intensive trade exposed companies to avoid leakage. Leakage means losing our efficient industries to other countries that do not price carbon and probably use more energy and carbon in the production of the same goods.

2. We have not done our economic homework - how much will the scheme cost?
A price of $30/tonne of carbon will have significant economic impact on New Zealand's wealth creating sectors and analysis shows we could suffer price shocks in the transition of a similar magnitude to those experienced after economic reforms in the 1980's.
Nearly three quarters of New Zealand's two way trade is tied up with Asia Pacific countries, which also provide 68% of our tourists. It is highly unlikely that increased costs in NZ as a result of ET will be able to be passed on in that sort of competitive environment.
A survey of 41 firms across a range of sectors (ref pg 23) indicates an increase in costs of $257 million in direct energy costs, putting at risk 3000 existing jobs and 700 new jobs had planned investment gone ahead. In that small sample, $1.6 billion of planned investment would not go ahead, due to every new tonne of carbon having to face the full international price of carbon. No free allocation was factored into the survey - but on the basis of the straw man proposal only 14 of the 41 companies would be allocated partial protection via free allowances.

New Zealand has only around 160 companies with annual revenues greater than $25 million.

These 160 companies generate almost 70% of all New Zealand's export earnings

These large exporters also tend to be energy intensive - using energy to add economic value through processing resources.

The Solution

We need to be very much better informed about the transitional costs to the economy. How many jobs are at risk, from which industries and in which regions?
Avoid leakage of our trade exposed energy intensive companies in the same way as is contemplated in the EU. Options include 100% free allocation of units, or exclusion from the scheme. The current proposal for free allocation in the Bill is inadequate.
In addition - assist the economy via government purchases of AAU's (as is being done by other governments) If governments can buy these at better rates than industry why wouldn't you? At $30 tonne/CO2 schools and hospitals will have to find an extra $16.3m per annum for increased electricity costs - not counting increases in costs from coal and gas use.
Introduce a price safety valve into the scheme, so that if the price of carbon becomes too high or volatile in this emerging market it can be capped.
Get rid of the automatic phase out of free allocation of units - make it dependent on what other countries are doing.
Allow for industry and agriculture to be judged against WBP on emissions intensity (emissions per unit of output). If we are the most efficient in the world at producing energy intensive goods and agricultural products - then we should be doing it and displacing dirtier production else where in the world. Much of this benchmarking work has already been undertaken for the large companies under the previous NGA policy and it should be revived.
Introduce a new entrant reserve for the allocation of free NZU's - if you can not make a new investment or grow your operation without facing the full international price of carbon that growth will go to other countries.
Once there is a global price of carbon - and all countries face it - New Zealand would be competing on its merits.

3 Poor Process:

We are concerned that for a Bill that will be one of the most far reaching and complex reforms in New Zealand's history (to use the words of Senator Wong, Australia), the process has been so poor. Industry was kept at arms length as the ET policy was designed; the consultation workshops held around the country were in fact presentation workshops with people having to think on their feet at the meetings with no formal process for feedback as the Bill was already being drafted at that time. We have already commented on the lack of rigorous economic analysis which is in stark contrast to the approach being taken in Australia and too much of importance is being left to the Regulations, which will not allow for discussion and debate in front of Parliament or the public.

The questions that the government appointed Leadership Forum is considering with regard to economic impacts should ring alarm bells about the lack of knowledge we have as we enter into this scheme. This is work that should have been done prior to the introduction of the Bill.

If the consultation process and economic analysis had been better, then it is likely that this Bill would be getting much more support from industry than is the case today.

Thermal Ban

Greenhouse Policy Coalition is of the view that the thermal ban in the Bill should be removed. If an emissions trading scheme is implemented in New Zealand - then a thermal ban is an unnecessary and costly addition (a belt and braces approach).

From a sector that produces around 8% of national emissions and is the 3 or 4th highest in the world in its percentage of renewables - the thermal ban only serves to increase costs and put the security of supply at risk - for very little in the way of emission reductions.

If, with a price of carbon in the market, new thermal electricity generation is built - then the price of the emissions will be factored in and the cost of those additional emissions paid for. That is not a failure of the market -because the emissions are not cost free, but have been accounted for. Emissions trading is supposed to find least cost abatement - this can't happen with additional regulatory cost.

In our view the thermal ban is a high risk approach in terms of security of supply and cost, with little to be achieved in the way of emission reductions.


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