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Heather Roy's Diary: The Emissions Trading Scheme

Friday, October 31, 2008

"Heather Roy's Diary" is the weekly newsletter from Heather Roy MP.

To receive the Diary every week, email, with "subscribe to Heather Roy's Diary" in the subject line.

The Emissions Trading Scheme

The Emissions Trading Scheme - aka the ETS - is a piece of legislation that should be a big election issue, but seems only to be of concern in rural New Zealand. It is designed to meet New Zealand's commitments under the Kyoto Protocol which, in turn, is designed to reduce the creation of gases linked to global warming.

The reason the ETS should be an election issue is that it will produce certain cost based on uncertain science and even worse economics. The legislation is hastily written and was pushed through in the dying stages of the last legislative term. It is going to cost you and me a lot of money and will make no difference at all to the Earth's ambient temperature.

The reason it ISN'T an issue is that it has the support of both National and Labour, and the media appears interested in only the two largest Parties. While serious economic problems swirl around us, the front page news is dominated by 'who is going with who' like gossip around a school leavers' ball.

First, a little history: concern about climate change has been with us a long time, with the Bible describing God's wrath expressed in the form of storms, droughts and floods. This concern developed a scientific gloss in recent decades, and it has been established that we are currently in an 'interglacial' - or warm - period between ice ages. In the 1970s there was some speculation as to how civilisation would cope with a new freeze and the general consensus was that it wouldn't be pleasant.

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In the 1980s and 1990s, however, temperature measurements began to rise. The view changed, and global warming was seen as the major issue. The mechanism was more easily understood as increasing levels of carbon dioxide and other gases affect the atmosphere's absorption of heat, and human beings are big producers of carbon dioxide.

Now, while I have doubts about the science behind the global warming policies, the issue attracts views of religious intensity.

But if we assume that rising levels of carbon dioxide are undesirable, then the question arises as to whether or not carbon emissions trading is the best solution.

It works like this: the Government sets a limit or cap on the amount of carbon dioxide that can be emitted. Companies or other groups that produce carbon dioxide are issued emission permits to establish their quota. They are said to be 'grandfathered' in, on the grounds that they're simply doing what they've always done. So a factory heated by a coal-burning furnace would get credits equivalent to its current CO2 output.

The catch for business is that any new company - or an existing one planning to expand - is required to hold an equivalent number of allowances which can be purchased from someone who has made savings in carbon dioxide output. An alternative is to plant trees, which can be considered as carbon stores.

Details Of Carbon Trading

The details of the system combine both dullness and complexity, so I would suggest that only the most enthusiastic - or the most financially exposed - read on.

Under the New Zealand Emissions Trading Scheme (NZ ETS), certain businesses will be 'points of obligation'. The Government has yet to announce who will be 'appointed' as having an obligation to obtain tradable emission units - these will be known as New Zealand Units or NZUs - to cover their direct emissions or emissions associated with their product.

For economic efficiency reasons, a 'point of obligation' will generally be an upstream point of the sector - for example: fuel companies will carry the liability in the first instance, not motorists, but costs will inevitably be passed on.

A cynic might add that being forced to carry obligations under the scheme will be very unpopular so the number will be limited. It is anticipated that there will be around 200 people or companies who will be obliged to participate in the NZ ETS. Those who are generating credits - such as foresters - may want to join.

To begin with, those with carbon obligations can expect to be allocated NZUs, and the Government has indicated that in many sectors NZUs will be freely allocated. However, where the company is capable of passing on the cost of carbon - such as electricity generators and fuel companies - the Government will NOT freely allocate NZUs. As the company could pass on the charge in higher prices to electricity or fuel, a free allocation would result in a windfall profit. The Government has applied the principle that, where carbon costs can be 'passed through' or on, NZUs will be auctioned rather than given freely.

So some carbon credits will be given away, some will be auctioned, and some will have to be bought on the 'free market'. And the decision on this will be subject to arbitrary Government whim.

All sides are predicting disaster. Some predict disaster for the planet if nothing is done. Others, like me, predict disaster for those least able to afford increased costs - electricity and fuel, for example - forced on them in uncertain economic times when they are already struggling. Agriculture is still the backbone of the country, but no one seems to care about the farmers - the greatest implications of all will be imposed on them.


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