Phil O'Reilly: Emissions trading scheme must bring investors certainty

5:30 AM Tuesday Jun 19, 2012

ETS should be changed infrequently and with care, writes Phil O'Reilly.

Uncertainty is the enemy of investors and this is very true in the case of the emissions trading scheme.

Investors include those who could invest in opportunities arising from a price on carbon as well as those who face costs because of their carbon emissions.

Neither type of investor is likely to have much confidence that our ETS is stable and that an investment made today will not be uneconomic tomorrow because of changes to it.

There has been a lot of redesign and tinkering with the ETS.

Established in 2008, reviewed and amended in 2009, reviewed again last year and about to be amended again - it's no wonder that businesses involved in the scheme have review fatigue.

Rather than focusing on their core business they are spending effort trying to protect investments already made based on past policy settings, or trying to guess what the next change might be.

Uncertainty is apparent when they delay investing in new plant, equipment or jobs for fear of subsequent changes making them bad decisions.

Policy stability is needed now.

The emissions trading scheme needs to bring certainty - first, that it is fit for purpose and second, that the carbon price settings will allow New Zealand businesses to remain competitive in the short and long term.

Given the fluidity of international negotiations and the evolving nature of the international carbon market, there will always be a temptation to tinker with the design of the ETS, but it must be resisted if the scheme is to do its job in reducing emissions.

The ETS is an economic instrument, embedded in our economy. As such, it should be treated more like tax policy - changed infrequently and with care.

This may not be apparent to those who simply want the scheme to bite more - they see the current low price of carbon and feel the scheme should be changed so emissions cost more.

But this fails to understand the nature of an internationally linked trading scheme that seeks to deliver emissions reduction at least cost.

There are really only two price-based options for concerted emissions reductions - being part of an ETS and paying a price for carbon set by the international market, or paying a carbon tax.

BusinessNZ believes a trading scheme will deliver better outcomes than a tax.

Just because the price of carbon is low doesn't mean there is something wrong with the design of our trading scheme.

The framework is fundamentally sound and capable of allowing a stronger price signal to flow through once the international carbon market revives.

Major design changes at this point are unnecessary since higher carbon prices are almost certainly on the horizon, especially if Europe recovers.

Some of those seeking more changes to the design of the scheme are concerned about the so-called subsidy to business.

With the current need for austerity, they say, we should scale it back so other spending reductions need not be made.

But this overlooks the role of successful New Zealand exporters in earning the revenues that our economy depends on.

Their competitiveness is very much at risk. They compete against firms from other countries that do not pay a carbon price, and run the risk of being undercut on world markets as a result.

The allocation of free units allowed under the ETS is not a subsidy but a necessary protection against an uneven playing field.

Other countries' lack of action on emissions reduction is what makes the playing field uneven, and until others take action this protection is vitally needed for New Zealand's economic survival.

Fast and deep cuts to the protections for New Zealand exporters will not help them compete in international markets. Nor will it help them reduce their emissions.

But it will create more uncertainty for business investment, and that is a worry for everyone. And we shouldn't forget that the purpose of allowing emitters to buy units for only half of their emissions is to soften the impact on consumers and small businesses - fast and deep cuts to the protections in the ETS would simply mean aggressive price increases for fuel and electricity for New Zealand consumers generally.

Our ETS desperately needs a period of certainty and bedding down.

That doesn't mean it shouldn't be able to adapt, of course.

It needs to be able to accommodate technical changes as well as changes from international negotiations, such as to forestry rules.

But these are changes that participants can see are required and the debate can focus on how best to accommodate them within the scheme.

They are not changes based on someone's view of how the market can be improved or guesswork about where the international negotiations will eventually get to.

In BusinessNZ's submission on the most recent proposals we advocated the gradual removal of the unit discount and retention of price caps through to 2020.

This approach - with an escape clause to remove those protections should international circumstances trigger it - would deliver the policy certainty sought by all businesses, while continuing to provide a signal on emissions.

We need to stop the politicking, get the settings fixed, and just let the ETS get on with it its job.

This, rather than constant changes, is likely to encourage investment and the creation of jobs while ensuring action is taken to reduce emissions.

Phil O'Reilly is chief executive of BusinessNZ.