Brian Fallow on the economy

Brian Fallow is the Herald's Economics Editor

Brian Fallow: Down in the forest something stirs

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The Government wants international rules on "offsetting" changed to allow more flexible use of land. Photo / Alan Gibson
The Government wants international rules on "offsetting" changed to allow more flexible use of land. Photo / Alan Gibson

The Maori Party has long insisted that Maori should not bear a disproportionate share of the costs of an emissions trading scheme.

In light of its support for the Government's amended scheme, now being pushed through Parliament under urgency, it is reasonable to ask how it stacks up on that score.

On balance, not well.

For all but the largest energy users, the scheme will act like a consumption tax on fossil fuels and such a tax is inherently regressive.

It is a heavier burden on those on lower incomes, among whom Maori are over-represented, because they pay out a larger proportion of their incomes in power bills and at the pump, and have fewer options to reduce their energy consumption.

The extra $24 million the Maori Party has secured to insulate 8000 homes is better than nothing but a drop in the bucket.

There are about 300,000 households in the lowest fifth of households by income.

The Government insists the scheme will be broadly fiscally neutral. That is just another way of saying domestic energy consumers will be paying for the free units allocated to the trade-exposed sectors - agriculture and large industrial emitters - which are responsible for around two-thirds of national emissions.

This may be one of the reasons the Maori Party voted against Labour's original ETS last year.

From the standpoint of households, National's version of the scheme is better than Labour's at least in the short term. There is a transitional period from the middle of next year until the end of 2012 during which the impact on domestic energy users will be halved.

Come 2013, however, those measures expire and a price shock awaits.

Any relief for low-income households in the short term is dwarfed by the longer-term, intergenerational implications of the changes National is making.

The Government has set a target of reducing New Zealand's greenhouse gas emissions to 50 per cent below 1990 levels by 2050.

This is not a credible target for a developed country; the UN Intergovernmental Panel on Climate Change says 80 to 95 per cent is required.

But even if it were, what matters for the climate is not what emissions are in 2050 but what they are in the 40 years between now and then. It is the area under the emissions curve, and not its end point, that counts.

The ETS amendments clear the way to increase production and emissions in the trade-exposed sectors.

Clearly emissions will peak higher and later than they would have done under the existing scheme. But the higher and later the peak in emissions, the steeper and more economically costly the subsequent decline will have to be.

The cost of adjustment is being pushed out on to a younger, and browner, generation.

What about the sectors of the economy in which Maori are a growing commercial force? Are they well served by the changes to the scheme?

Not all that much.

The fishing industry's protection from the impact of carbon pricing has been increased from 50 to 90 per cent - but only until the end of 2012.

The Seafood Industry Council told the finance select committee that fishing would not qualify for any free units from 2013, because of the amendment bill's adoption of Australian tests for eligibility.

Farmers get a much better deal under the amended scheme than the original one.

Farm emissions, which make up around half of the national total, are not brought into the scheme until 2015, two years later than under Labour's scheme, and crucially it will be on an intensity basis, so that the more they produce and therefore emit, the more free units they get.

This uncapped intensity model, which also applies to large emissions-intensive, trade-exposed industrial emitters, is the main change introduced by the amendment bill.

But there is a sting in the tail, for dairy farmers at least. Fonterra told the select committee that under the Australian test for eligibility it does not expect to qualify for any free units for the process emissions at its plants.

Even though it takes a lot of energy to remove water from milk, the Australian tests are based on emissions per million dollars of revenue and evidently the country's largest exporter would fail to qualify for relief intended to protect exporters.

All else equal, the carbon bill it will face from the middle of next year will reduce payout to its supplier shareholders.

Tuesday's agreement between the Rudd Government and the shadow Cabinet puts up A$150 million ($190 million) in assistance for Australia's food processing sector, including dairy factories and meat works. It also exempts on-farm emissions altogether.

Meanwhile, the amendment bill does nothing to fix the problem of pre-1990 commercial forests.

Under the rules of the Kyoto Protocol, if those trees are harvested and the land under them is not replanted in trees, the carbon stored in the trees (about 800 tonnes a hectare in the case of radiata pine) is deemed to be emitted then and there.

The ETS devolves that liability from the Crown to the landowners, even though they will not have received any credits for the carbon when it was being stored (nor would the Government for that matter).

About two-thirds of the pre-1990 plantation forest estate is on land owned by Maori either outright or presumptively in Crown forests set aside for Treaty settlements. Even at today's carbon price of around $25 a tonne, the ETS creates a prohibitive barrier ($20,000 a hectare) to converting that land to a more productive use.

It undermines land use flexibility, fundamental to New Zealand's' land-base economy, and retrospectively devalues the land affected.

The Government is trying to get the international rules changed. It wants them to allow "offsetting" where if a forest is felled but another is planted on bare land somewhere else that would suck up the same amount of carbon, that would not count as deforestation. The atmosphere, after all, does not care where the new trees are. It also wants the rules to recognise that not all of the carbon stored in a tree is released to the atmosphere when it is cut down. Timber would not be much of a building material if that were the case.

But unless and until those rules are changed, allowing offsetting domestically, as the forest owners want, it would create a large fiscal risk. If, say, 10 per cent of the one million hectares or so of pre-1990 forest land is suitable for conversion, at today's carbon price that would represent a liability of $2 billion. If the proportion is greater and the carbon price rises, it would be higher still.

Only Ngai Tahu and four other iwi who had threatened to sue the Crown alleging bad faith in their Treaty settlements get any relief under the deal with the Maori Party. The great majority of affected landowners - iwi and non-Maori - are no better off.

The agreement at least makes promising noises about fostering afforestation and carbon farming.

But the problem of deforestation remains unfinished business.

- NZ Herald

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