Brian Fallow on the economy

Brian Fallow is the Herald's Economics Editor

Chance for NZ link with carbon scheme

By Brian Fallow

Prime Minister John Key. Photo / Getty Images
Prime Minister John Key. Photo / Getty Images

The Australian Government's plans to put a price on carbon emissions give its trade-exposed sectors a similar level of protection to their New Zealand counterparts.

It represents an important step towards an emissions trading scheme in four years time, with which the New Zealand scheme could link.

The higher carbon price it will start with may put pressure on the New Zealand Government not to extend the "buy one, get one free" transitional measure that applies until the end of next year.

But Prime Minister John Key said it was not inevitable that the half-obligation for emitters would be scrapped

And Climate Change Minister Nick Smith indicated political uncertainty about the longevity of the Australian scheme would be a factor in pending decisions the Government has to make about amending the New Zealand ETS.

From July next year Australia will tax emissions at a rate of A$23 ($30) a tonne, rising by 2.5 per cent a year in real terms until the scheme morphs into an ETS in 2015.

The New Zealand ETS that began a year ago caps carbon prices at $25 - a level market prices have never threatened, trading at or below $20.

In addition the New Zealand scheme has a half-obligation until the end of next year, effectively capping the prices liable emitters pay at $12.50.

Large industrial emitters such as the cement, steel and aluminium sectors, which have to compete in export or home markets with firms that do not face a carbon price, receive an allocation of free units to cover 90 per cent of their emissions, which effectively is 95 per cent so long as the half-obligation remains in force.

The effect is a carbon bill equivalent to 2 per cent of their revenue at most.

Their Australian counterparts will also receive a free allocation for 95 per cent of their emissions and the threshold for eligibility is similar.

Both schemes are intensity-based, that is, an eligible firm can increase its emissions and still enjoy the same percentage relief through free allocation of units.

And the Australian scheme also intends to phase out that free allocation at the same leisurely pace, 1.3 per cent a year.

Unlike the New Zealand ETS, the Australian carbon tax does not apply to road transport fuels - though trucks may be brought in down the track.

"But there are such big differences in the levels of excise anyway that those price differences are a bit academic," Smith said.

The New Zealand scheme has just been reviewed by a committee chaired by David Caygill.

The Government's response should be announced within a month.

"We have always said our bottom line was about New Zealand doing its fair share. Any progress made by our key trading partners enables New Zealand to continue to move on climate change," Smith said.

The New Zealand ETS is supported by both main parties, having been enacted by the Labour Government, albeit in its last few days in office, and then retained by the National Government, albeit watered down.

In Australia, by contrast, the Opposition is fiercely critical of the scheme.

"In making decisions about our own scheme we do need to factor in the political uncertainty in Australia, given the pretty ferocious opposition by the Australian Liberal Party," Smith said.

The Australian Government said that when the carbon tax is replaced by an ETS, linking it with other credible schemes like the European and New Zealand ETSs would be in Australia's national interest.

And unlike European ETS, it envisages allowing Kyoto forest credits into the scheme.

Those credits have been the main source of supply in the New Zealand carbon market so far.

Potentially the prospect of selling forest credits into an Australian market post-2015 could have some impact on the supply side of the New Zealand market in the interim.

"But there is a lot of water to go under the bridge, most importantly our own decisions on the ETS review," Smith said.

Much of the revenue raised by the Australian carbon tax is to be used to fund offsetting income tax relief to households.

Smith defends the absence of similar measures here.

"The cost of the New Zealand scheme was a bit over $3 a week per household, whereas under the Australian scheme it is A$9.90, equivalent to about $12 here."

THE TWO SCHEMES

Price

In New Zealand it is set by a market which has so far traded around $20 a tonne or a bit below. The price is capped at $25 for sellers, but half that for buyers (like power and oil companies) because of a buy one, get one free deal. But that is due to expire at the end of next year.

In Australia the carbon price is fixed at A$23 ($30) from the middle of next year, with an escalator until mid-2015.

Coverage

Both schemes exclude agricultural emissions and the Australian one excludes petrol and diesel too.

But because so much Australian electricity is generated from burning coal and farming is a smaller share of their economy, a slightly higher percentage of Australian emissions are caught by their scheme.

Where does the money go?

In New Zealand's case to parties whose activities reduce emissions, mainly in the forest sector.

In Australia to various schemes to compensate households for the impact on the cost of living, through income tax changes, and to various industry adjustment schemes.

- NZ Herald

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