Setting the price of keeping NZ cool

By Brian Fallow

In the first of a four-part series on Government options for dealing with climate change, economics editor Brian Fallow looks at what business lobby groups want.

Amid fresh warnings about the long-term dangers of global warming, the Government has received more than 3000 submissions on its strategy for responding to climate change, released late last year.

Some clear themes emerge from business lobby groups' submissions.

First, New Zealand is a tiny contributor to global warming. Where doing our bit for the planet ends and futile self-sacrifice begins depends on what the big emitting nations do.

So any measures to expose New Zealand to a cost on carbon emissions should not get ahead of what major trading partners, including Australia and the United States, undertake.

Secondly, relying on price signals is better than prescriptive regulation. And price-based measures should apply across the economy. Singling out the electricity sector for early action while exempting major emitting sectors - transport and agriculture - for political reasons would be distortionary, inefficient and unjust.

There is, however, no consensus on whether a carbon tax or a cap-and-trade system would be better.

Business New Zealand prefers emissions trading but the Chambers of Commerce favour the certainty of a carbon tax, provided the extra revenue is used to decrease income tax.

Both the Business Roundtable and the Major Electricity Users Groups argue that the case for preferring trading to a carbon tax - as both the Government and the National Party do - has not been made.

Business New Zealand said it was concerned the Government thought its proposed policies would impose only a moderate cost on the economy without apparently having done any cost-benefit analysis to substantiate that.

It agreed with the Government's indication that it would introduce a broad price-based measure when international conditions were appropriate, but not before 2012.

To reduce uncertainty and encourage early voluntary action it should commit itself soon to a method of charging firms - even though it would not be implemented until international conditions warranted, it said.

"We do not support the early introduction of emissions trading and certainly not before our major trading partners, as this will place New Zealand exporters at a disadvantage," it said. "Nowhere else in the world are manufacturers facing the true cost of carbon [emissions]."

Business New Zealand opposed plans to impose a carbon price on the electricity sector ahead of the rest of the economy.

It cited the Law and Economic Consulting Group analysis, which concluded that to do so would impose a cost per tonne of carbon dioxide avoided that was far higher than the current international price.

"The only way to put a price on carbon and avoid distortionary impacts is to put a price on carbon across the whole economy, including agriculture, transport and forestry," it said.

It did not accept that agriculture had limited opportunities to reduce emissions and should therefore be shielded from price-based measures - which was a major plank of the climate-change policies the Government rolled out in 2002 when New Zealand ratified the Kyoto Protocol.

Heavy industry also had limited opportunities to reduce emissions because it already had strong incentives to be energy efficient.

The Business Roundtable said the Government assumed that effects of global warming on New Zealand would be negative.

"The validity of this assumption needs to be examined, to avoid more policy failures from misjudgments about New Zealanders' willingness to bear real costs in the cause of reducing emissions."

It reiterated the "longstanding advice of the mainstream business community" not to move in advance of the United States and Australia.

Should analysis demonstrate a need to cut growth in greenhouse gas emissions, it said, the measures should be broad-based and should not exempt transport or agriculture.

Agriculture and transport between them account for 69 per cent of New Zealand emissions and 80 per cent of the likely excess above 1990s levels, which is the country's Kyoto target. Emissions from thermal power stations account for less than 10 per cent of national emissions.

The Roundtable is unconvinced that tradeable permits are better than carbon taxes. Trading sets a quantitative target for emissions and lets the market discover the price. A carbon tax sets the price and lets the market determine what difference that makes to the quantity.

"In the economic literature the general conclusion is that if it is more costly to the community to be wrong about price then taxes are preferable, and vice versa if it is more costly to be wrong about quantity."

It said getting the quantity of emissions wrong during, say 2008 to 2012, could easily be corrected by resetting the target later.

"But a pricing error that closed down some major firm or industry or transferred large amounts of wealth from citizens to some other part of the world could be politically untenable and practically irreversible."

The Chambers of Commerce said it was imperative New Zealand "did its bit on this crucial global issue".

Lagging behind other countries could seriously damage its reputation as a responsible international citizen and harm its clean, green image.

But it had to take care before moving ahead of its trading partners.

The Chambers argued that energy prices would be more stable under a carbon tax than under emissions trading. A tax would also be more transparent, whereas under emissions trading it would be hard to distinguish the impact of the emissions market on energy prices from all the other factors affecting them.

Like the other business lobby groups they oppose singling out the energy sector for early treatment as both inefficient and inequitable.

The Submissions:

Business NZ: Worried that the Government thinks climate change policies will have only a moderate cost on the economy and is considering bold objectives such as carbon neutrality, without having done any cost-benefit analysis. New Zealand should not introduce a price on carbon emissions, it says, until our major trading partners do.

Business Roundtable: Says that if New Zealand needs to reduce its greenhouse gas emissions - and it is not altogether sure it does - broad-based measures to achieve the reductions at the least cost are the way to go. Transport and agriculture should not be exempted.

Chambers of Commerce: Prefer a carbon tax to a cap-and-trade system as being more transparent and likely to provide more stable energy prices. The revenue should be used to reduce income tax.

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