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Business calls for transparent subsidy numbers

October 15 2009

Media Release

Business calls for transparent subsidy numbers and better future emissions trading law development

Providing extra subsidies to major greenhouse gas emitters up until 2050 could add $3.5 billion to Government debt in today’s dollars, lifting it to 8% of gross domestic product, business leaders told a Parliamentary select committee this afternoon.

It also looked as though giving away extra subsidies to large trade-exposed emitters would result in up to $2.2 billion less being available to invest in other major policies to lower emissions by 2025.

The New Zealand Business Council for Sustainable Development, however, said detailed analysis of this and other important fiscal and opportunity cost implications of the proposed changes to emissions trading law had either not been done by officials or not released, along with the assumptions used to make the calculations.

The business leadership group gave the Finance and Expenditure Select Committee ready-drafted clauses for ETS law change which would usher in a better way of developing climate change policy. The changes are modelled on British law.
The Business Council proposed amending the bill to

• Establish an independent Advisory Committee on Climate Change, to increase accountability and transparency in the making of the public policy response to climate change. The committee would

• Set national medium and long term targets to reduce greenhouse gas emission.
This approach would help deliver policy stability for investors in long life assets.
They said while it was “late in the day” they also “urged the committee to use its powers to require the Government and its advisers to present, in a clear, consistent and coherent manner, a reasoned case for the amendments proposed.”

The major changes proposed to the ETS scheme were described in the bill, but no detailed clauses were yet available for the substantive reforms, the proposed Treaty of Waitangi clauses, and, as Treasury had reported, the regulatory impact statement on the changes was inadequate given the significance of what was proposed.

The Business Council said the main issues for the committee were

• Whether or not the proposed changes to the ETS are going to get the country to its target of a 50% reduction in emissions by 2050

• Are we helping New Zealand quickly adapt to a world with a price on carbon, or alternatively

• Are we aiming to provide just extended subsidies for trade-exposed emitters without a cap – at the risk of increasing our total emissions, and

• How can we get greater policy stability and provide certainty for businesses that have to invest in long-life assets?

The Business Council said the case for the changes – which will provide greater subsidies to large emitters for up to 70 years, and also allow them to keep increasing emissions without paying for them, would have significant implications for taxpayers, the ability of the scheme to reduce emissions and might affect the amount of money available to incentivise other emissions reductῩons initiatives.

The business leaders annexed 13 pages of questions it suggested the committee have answered in order to report back a robust amending bill.

They said the case for amending the scheme in the ways proposed “should be prepared in accordance with relevant Treasury guidance and at a very minimum:

• Define the problem;
• State the public policy objectives;
• Identify the feasible options;
• Analyse the options, including a transparent (i.e. replicable) statement of the fiscal costs of the proposed changes, compared to the status quo;
• Assess how the preferred option will be implemented;
• Describe the consultation undertaken; and
• Present an overall assessment.

“The analysis should also address the three key issues identified by the Treasury that have not been adequately addressed:

• There is no clear analytical basis for the proposal to align some key design elements of the New Zealand ETS with those in the currently proposed Australian Carbon Pollution Reduction Scheme (CPRS);

• There is no discussion of the risks of harmonising with an overseas scheme that has not yet been finalised or agreed and may yet be subject to significant revision; and

• There is no information on the implied transition path for firms over the medium-to-long term, particularly given that the proposal is for a temporary period of greater assistance coupled with an ambitious long-term emissions reduction target.

“These are not just matters of seeking tidiness. The ETS is a major economic instrument.
“The public of New Zealand deserve to know that it is well designed and based on clear principles. We need not just good policy, but good policy for the right reasons,” the Business Council said.

The committee was also urged to ask those proposing major assistance to firms, which it is argued might relocate offshore where competitors might not face a price on emissions, to identify exactly which companies would relocate.

It was also asked the committee to require a proper analysis of the cost of subsidies to emitters, and change clauses which could see taxpayers continue to pay subsidies for five years after a review found they were no longer needed.

The justification for transitional assistance was that New Zealand producers may face competition from competitors not yet exposed to an emissions price. Once competitors were exposed to a price on emissions the assistance should be phased out quickly to avoid windfall gains for emitters and unjustified costs to taxpayers.

An official estimate of the fiscal implications of the proposed changes said they could increase Government debt as a percentage of GDP by 6 to 8 per cent by 2050. Eight per cent of GDP in 2009 would be the equivalent of an additional $3.5 billion in debt in 2009 dollar terms.

“This is a significant sum,” the Business Council said.

It also pointed out that up to $2.2 billion in revenue from selling emissions credits to large emitters in 2025 could be forgone by providing free credits for such an extended period.

The committee should look at the cost of the lost opportunities to invest this into other policies which would lower emissions while also creating jobs and new exports.
It should require criteria for developing intensity-based allocation plans by 2010 in the primary legislation, not regulations.

The full submissions is available at http://www.nzbcsd.org.nz/story.asp?StoryID=1032


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