Proceed With Great Care: Emissions Trading
Proceed With Great Care: Emissions Trading Proposal Has Costly, Risky, Far-reaching Consequences
The government’s climate change strategy has momentous consequences for the economy and the welfare of New Zealanders, and needs to be subjected to much more thorough analysis and scrutiny, according to a New Zealand Business Roundtable submission on the government’s Climate Change (Emissions Trading and Renewable Preference) Bill.
Presenting the submission today to Parliament’s Finance and Expenditure Committee, Business Roundtable executive director Roger Kerr agreed that it is timely to take further action with regard to global warming, but warned that New Zealand should not rush ahead with an ambitious proposal that had many design flaws and would impose heavy costs on New Zealanders.
“We are not debating the science behind the government’s strategy (although there remain many uncertainties about the extent and impact of global warming); rather we are concerned about the proposal’s economic and welfare impacts and its likely effectiveness in achieving the government’s dual goals of faster economic growth and ‘carbon neutrality’.
“The public needs to know what it is being asked to accept. There is no evidence that households currently struggling with price increases want to take on heavy extra cost burdens for a scheme whose benefits are largely reputational. It is clear that the scheme will impose substantial increases in electricity and petrol prices and other costs on households, businesses and the economy. It is also likely to discourage investment and lead to losses in business confidence and jobs.
“So we are urging the committee to require officials to undertake a rigorous cost-benefit analysis of the proposal, and in turn provide the public with a detailed assessment of its costs and implications. It is unacceptable that this has not been done; far more in-depth research is being undertaken in Australia. Unless the voting public understand and buy in to the proposal, there is little chance of achieving policy stability.
“While New Zealand should not fall behind comparable countries in its response to climate change, it makes no sense and is indeed irresponsible to attempt to lead the world, especially if it involves a risk of serious economic damage.”
Commenting on the key policy design issues of the emissions trading scheme (ETS), Mr Kerr said the overwhelming opinion of eminent international economists was in favour of a tax rather than a trading scheme. This would provide much greater certainty for business and investment decisions, whereas with an ETS prices may be extremely high and volatile. A carbon tax is a transparent instrument which is subject to parliamentary oversight and less open to abuse, and the revenue it raised could be used to reduce other taxes. If a tax is not favoured, a cap or safety valve should be included in the ETS.
“Other major design issues include the risk the scheme would pose for firms and industries that export or compete with imports and that could be lost to New Zealand if they face a carbon price here to which their competitors in other countries are not exposed. These include many small and medium-sized firms, and also large firms or industries such as steel, cement, aluminium, wood processing and many parts of agriculture. Their migration to, say, China or in the case of agriculture, Australia, would create a lose-lose situation.
Mr Kerr said a major concern in the submission is the proposal for a minister to have the discretionary power to determine the allocation of ETS units, a provision that opens the way for favouritism and politically motivated decisions. Like a tax, the administration of an ETS should be the responsibility of an independent agency, such as the Independent Carbon Bank that is proposed in Australia.
He said the Business Roundtable was also strongly opposed to the proposed thermal generation ban which would put security of energy supply at risk, discourage exploration for gas, and could lead to sharp increases in the price of electricity. He noted that the Business Roundtable’s position on the ban was shared by the Treasury, along with all of New Zealand’s major business organisations, and that, as with the ETS, no attempt had been made to calculate the likely costs and benefits of this measure.
“We also believe that the government’s approach is too focused on mitigation. It should also focus on adaptation, flexibility and economic growth. There is much New Zealand could be doing to facilitate adaptation, such as measures that would make it easier to build roads and introduce congestion pricing, and to reduce impediments to renewable generation projects.
”We believe that the work needed to remedy design features of the scheme should not be rushed, and that New Zealand’s approach should be aligned in general terms with the timetable and approach being followed in Australia. The last thing the country needs is another botched initiative which is left to the next government to fix”, Mr Kerr concluded.