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Cablegate: Nz's Emissions Trading Scheme Legislation Passes

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UNCLAS SECTION 01 OF 03 WELLINGTON 000297

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E.O. 12958: N/A
TAGS: PGOV ENRG SENV NZ
SUBJECT: NZ'S EMISSIONS TRADING SCHEME LEGISLATION PASSES
PARLIAMENT

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Reftel: 07 Wellington 695

1. (SBU) Summary. With the support of the Green Party and New
Zealand First, the Labour Party pushed through its controversial
Emissions Trading Scheme (ETS) bill on September 10 by a vote of 63
to 57. National opposed the draft legislation and has promised to
amend it if elected to lead the government. New Zealander
politicians, media analysts and business leaders continue to debate
how much the ETS will cost average consumers. The legislation is a
personal and professional triumph for Prime Minister Helen Clark and
follows her promise to make New Zealand a carbon neutral country and
halve emissions by 2040, a commitment that the business community
(and the opposition National Party) maintains is too ambitious for a
small country and will cost New Zealand jobs and economic
competitiveness. End Summary.

Parliament Passes Much-Debated ETS Bill
---------------------------------------

2. (U) Following several years of study and analysis, the GNZ in
April 2007 introduced the Climate Change (Emissions Trading and
Renewable Preference) Bill, popularly known as the Emissions Trading
Scheme (ETS) bill, to amend the Climate Change Response Act of 2002
and to introduce a greenhouse gas Emissions Trading Scheme in New
Zealand. The ETS will impose a phased-in program of emissions
limits in the form of tradable carbon units beginning in 2008.
Forestry would be the first sector to come under the ETS along with
transport fuel in 2009, electricity generation in 2010, and
agriculture in 2013 - although all industries can voluntarily begin
to reduce their emissions before their entry dates. The draft
legislation includes a review clause, which dictates that the GNZ
will compare New Zealand's climate change targets with its major
trading partners every five years so as not to place New Zealand at
a disadvantageous position.

The Price Tag for Being Clean and Green
---------------------------------------

3. (U) The proposed cost of the ETS to consumers and business is
the topic of continuing controversy. Minister of Climate Change
David Parker initially suggested that the cost of an ETS to NZ
consumers would be relatively modest. He estimated a loss of
economic growth to New Zealand at roughly 1% of the expected GDP
growth over the next five years, or approximately NZD 537 million to
cover New Zealand's Kyoto commitments. On a per capita basis, the
GNZ projected NZD 50 per year, which Parker said was worth the cost
in order to combat climate change effectively. Prime Minister Helen
Clark packaged the proposed ETS as a hallmark of New Zealand's
commitment to be a world leader in environmental causes.

4. (U) Critics of the government's plan placed the cost at NZD 1.2
billion, and Business New Zealand, which represents the interests of
New Zealand business sector, estimated the price tag as high as NZD
3.5 billion and accused the government of hiding the true costs from
voters so as not to ruin Labour's electoral chances. The Treasury
Department then adjusted its estimate to NZD 717 million, claiming
that the Reserve Bank's initial calculations assumed carbon prices
at NZD 21 per tonne and had not taken into account the rapid price
rise in fuel in 2008. More recently, Treasury again adjusted its
estimate to NZD 1 billion, fueling criticism that the GNZ is hiding
the true costs.

5. (U) The New Zealand Institute, a leading NZ think tank, argued
that small farmers and small-to-medium sized businesses would not be
able to pass on their higher costs to consumers and therefore be
less competitive. The Institute stated that New Zealand would be
better placed to be a "fast follower," rather than a world leader on
climate change issues and urged that New Zealand change its targets
and slow its ETS phase-ins. New Zealand business analysts worry
that the ETS will force NZ's remaining industrial businesses to move
to countries unfettered by regulatory constraints on carbon
emissions, eliminating more jobs in New Zealand. They say that New
Zealand will put its economic competitiveness at risk and even by
meeting its Kyoto obligations, the net impact on world greenhouse
gas emissions will be negligible.

National Will Amend ETS if Elected
----------------------------------
6. (SBU) The opposition National Party strongly opposed the ETS
legislation from the start and promised to amend the scheme if
elected to lead the next government. Despite professing support for
the concept of an ETS, National's Climate Change Spokesman Dr Nick
Smith asserted that the ETS legislation was inherently flawed and
unnecessarily rushed into law. Said Smith of the bill, "It is

WELLINGTON 00000297 002.2 OF 003


riddled with errors that will cost New Zealand households and
businesses dearly." Smith believes that more time is needed to
fully examine the full complexities and economic implications of the
legislation. National is worried the ETS will cause job losses and
force heavy industry overseas. If it leads the next government, as
polling suggests it has a good chance of doing, National will seek
to change the scheme to a target of a 50 per cent reduction in New
Zealand's emissions by 2050. Its overall position is to establish
an ETS that Smith believes will better "balance New Zealand's
responsibility to reduce greenhouse gas emissions with the need to
grow the economy." National also wants to move slower on
establishing an ETS to ensure that New Zealand's ETS complements
whatever system Australia settles on due to strong linkages between
the two economies.
Where the other Parties Stand on the ETS
----------------------------------------
7. (U) The Government relied on the support of two governing
coalition parties, the Green Party and New Zealand First (NZ First),
to pass the ETS legislation. However, this support was not easily
granted. At one time, the Greens came close to pulling its support
for the bill because it believed the Government has backslid on fuel
and industry emissions. It also had concerns about the economic
impact of increased energy costs on lower income households. After
canvassing public opinion, the Greens eventually decided to vote in
favor of the bill, but with reservations. Although wanting a tough
regime, the Greens decided it was better to have a scheme in place
than not have one at all. In return for its support, the Greens
managed to secure a NZD 1 billion fund to be spent over several
years on insulating homes and improving heating for primarily
low-income families.
8. (U) NZ First also had initial concerns about how the scheme would
impact lower income households. These were, however, sufficiently
allayed by the funding concession secured by the Greens. Labour was
particularly relieved to get the support of NZ First given that its
leader, Winston Peters, was asked by PM Clark on August 29 to stand
down from his ministerial portfolios pending investigation over
fraud allegations involving his party. However, fears that this
would result in dissolution of the relationship between the parties
were not realised and the NZ First vote for the bill provided the
Government with enough parliamentary support to see the ETS bill
passed into law.
9. (SBU) The Maori Party did not support the ETS bill because it is
opposed to "paying the polluters and rewarding the corporate
lobbyists with huge exemptions." The party also wants Parliament to
review that impact the ETS will have on Maori assets (particularly
forests), an issue it believes was not properly addressed during
debate on the bill. The right-wing ACT Party asserts that the
Government's ETS is a waste of time and money and should be
discarded.
Views Differ on Australian Model
--------------------------------
10. (U) As New Zealand debated implementation of scheme to curb
emissions, Australia is also going through a similar process. At a
political level in New Zealand, views diverge over the treatment and
relative merits of the Australian government's proposal for its
Carbon Pollution Reduction scheme. The New Zealand Government sees
the proposed Australian scheme as a buttress to its own scheme,
emphasizing shared implementation timeframes and fundamental
principles. It acknowledged that the Australian scheme has some
different design features from the New Zealand scheme, reflected in
the different economies and emissions profiles. However, the
Government underscored that these differences should not bar the two
schemes linking up in places, if deemed necessary. The National
Party wants to align as closely as possible with the Australian
scheme, particularly in areas of compliance and tradability. It
believes that New Zealand should wait until the Australians have set
up its scheme to ensure greater compatibility.
11. (SBU) The Green Party was opposed to New Zealand using the
Australia's proposed emissions trading scheme as a model as it
believes Australia does not go far enough to address climate change.
It also claimed that the Australian government has been corrupted
by the influence of industry happy to address climate change as long
the costs are within acceptable limits.
The Role of Agriculture in the Scheme
-------------------------------------
12. (U) Agriculture is a significant component of the New Zealand
economy accounting for more than 50 percent of merchandise exports.
New Zealand exports approximately 80 percent of its agricultural
production, which makes its greenhouse gas emissions profile unique
among developed countries. Agriculture accounts for over half of
New Zealand's greenhouse gas emissions (primarily in the form of
methane and nitrous oxide from livestock) compared to an average of
10 to 15 percent in other developed countries.
13. (SBU) As New Zealand is 'just one big farm' from an export

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earnings standpoint, the ETS has been controversial and the proposed
scheme has received a barrage of criticism from the agricultural
sector. Originally slated to be brought into the scheme in 2013,
agriculture is now expected to be fully incorporated in 2018. Many
decisions about the ETS for agriculture have yet to be made,
including how to measure, what to measure and the point of
obligation for paying. However, the costs to be borne by
agriculture are significant with the sheep, beef and dairy
industries being the hardest hit and it is questionable whether or
not consumers will be willing to pay more for carbon friendly food
form New Zealand.
14. (SBU) New Zealand is one of the only countries, if not the
only, to fully include agriculture in its ETS scheme. Currently,
very limited technology or strategies are available to significantly
mitigate greenhouse gas emissions from livestock enterprises.
Farmers are faced with having to buy an increasing number of carbon
credits from 2013 unless they have or make a significant investment
in forestry. Many believe that, unless other countries follow suit,
implementation of the ETS will result in higher farm costs and put
New Zealand agriculture at a competitive disadvantage with its
competitors. The policy risks are considerable for New Zealand
agriculture.
Comment
-------

15. (SBU) Passage of the ETS bill was both a policy and personal
imperative for Clark. It serves as a policy centerpiece for her
Government's much touted sustainability agenda, which also includes
making New Zealand a carbon neutral country and halving emissions by
2040. It is also symbolic of her own emergent image as a leader on
climate change in New Zealand and abroad. In January 2008, Clark
was awarded the United Nations Environment Programme Champions of
the Earth award in recognition of her government's promotion of
sustainability initiatives. Failure to pass the ETS bill would
have proven embarrassing for her in light on this honor. Since the
passage of the ETS bill, Clark has announced that further
sustainability initiatives will follow. She will also campaign on
the successful passage of bill ahead of the November 8 election.
Clark will likely draw on National's opposition to the ETS
legislation to say a vote for Labour means a vote for climate change
leadership and action. End Comment.
McCormick

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