The ETS is not bringing in enough income to pay the nation's carbon bills. Five years since its start, the scheme is a tax that has not even paid for itself.
The Government is facing a significant carbon account deficit, and emissions are projected to far exceed targets in future.
Yet draft legislation before Parliament would dump requirements to properly provide for future carbon bills and would instead put costs on to future taxpayers. These changes would breach an election promise to make them fiscally neutral and would remove billions of dollars of future revenue from the ETS.
That the Government is in debt on the carbon front may come as a surprise, as the news generally heard is that New Zealand is meeting its Kyoto commitments. They are being met, because although emissions are 18 per cent over the Kyoto target, countries are allowed to offset the excess by counting carbon newly stored in forests. With this, there is a net surplus of 23 million tonnes of carbon dioxide equivalent.
Meeting those commitments is one thing, but that is just one side of the carbon ledger. On the other side is the ETS. There expenses are more than double the income for the same five-year period.
Less than half those expenses are for forests absorbing carbon.
Corporate welfare and compensation payments have eaten out all the income and more, according to government figures obtained by the Sustainability Council. All up, the ETS is officially estimated to produce a 74 million tonne hole in the taxpayer's pocket by the end of this year.
That more than wipes out the surplus from the Kyoto accounts and leaves the taxpayer with an overall deficit of 51 million tonnes.
Astoundingly, Climate Change Minister Tim Groser denied there was any deficit in the carbon accounts when responding on Morning Report to the council's disclosure.
Asked whether there is a deficit of 51 million tonnes, Groser stated: "They've got it completely wrong because the only target we've got is this target to meet the [Kyoto] first commitment period."
The minister's error is made clear by a chart the Treasury prepared, where the title says it all: "From Kyoto Surplus to Government Fiscal Cost Under the ETS". As the Treasury explains, to assess the government's overall carbon position, it adds together the Kyoto position and the net result of ETS comings and goings. The result is a deficit of 51 megatonnes of CO2 equivalent.
The overall deficit would be $300 million at today's low carbon price of $6 a tonne. As it will be paid back in future when prices are expected to be much higher, it would be a $1.3 billion debt at even the Government's conservative price of $25 a tonne.
But that is just the existing debt. The bigger issue is how to deal with the carbon costs ahead.
The Treasury projects that between now and 2050, New Zealand's emissions will exceed government targets by 1.1 billion tonnes.
To satisfy those targets, the Treasury shows New Zealand paying $28 billion to import carbon credits at $25 a tonne - a price far below UK government forecasts for the period. The ETS is set so that the scheme will ultimately raise enough revenue to purchase those credits.
Yet the bill before Parliament would freeze ETS income indefinitely at the present low level and remove the need for compulsory reviews. The changes would not only abandon an election promise, they would abandon carbon fiscal responsibility. This is in sharp contrast to the Government's emphasis on bringing the nation's budget back from deficit.
Instead of the deficit being paid off by 2020, the proposed legislation would set a course to roughly double the debt by 2020, based on Treasury assumptions. The debt would climb to over $2 billion at $25 a tonne, or over $9 billion at $100 a tonne. From the 2020s through to 2050, the gap between what the ETS would bring in and what is required to satisfy targets would grow very large if the proposed legislation still remained unaltered.
A fundamental change of approach is required that would protect future taxpayers and see New Zealand adopt carbon budgeting. This is a process of setting multiyear emissions budgets after careful analysis of how emissions targets can best be met.
Carbon budgeting would maximise the opportunities for funds to be spent in New Zealand, before purchasing credits overseas, and make New Zealand more resilient.
The UK's Climate Change Act sets out a model process that provides for a series of five-year carbon budgets. The most recent budget plans for a 50 per cent reduction on 1990 level emissions by 2025.
If New Zealand wishes to be taken seriously on its much less ambitious targets, it will need to show how the gap Treasury has identified will be addressed. Gutting future ETS income would have the opposite effect.
Simon Terry is executive director of the Sustainability Council, a research and advocacy trust, and is a co-author of The Carbon Challenge: New Zealand's Emissions Trading Scheme.
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