New Zealand begins a series of far-reaching economic and environmental changes tomorrow with the passing of the Emissions Trading Bill. In the first of a series on emissions trading, economics editor Brian Fallow explains how it is likely to affect you.
How much extra will we pay?
An emissions trading scheme that puts a price on emissions of greenhouse gases will have economy-wide effects on inflation and growth as well as on the Government's finances.
How big those effects will be depends on the price of "carbon" (or tradeable rights to emit) and that is unknown.
The price the Government is assuming for the purpose of reporting its liability under the Kyoto Protocol in the Crown accounts is ¬11 ($23) a tonne.
But the high-quality, low-risk units New Zealand companies with obligations under the scheme are expected to favour are trading for ¬20.
As for the future, a survey in May of market participants by Point Carbon, an authoritative provider of information to the international carbon market, found an average forecast of ¬24 by 2010 and ¬35 by 2020. These forecasts were up from ¬18 and ¬25 respectively a year earlier, which gives an idea of how much these numbers swing around.
How much will it push up inflation?
The Reserve Bank last December estimated the ETS would add about a third of a percentage point to inflation in each of its first two years (which will now be 2010 and 2011), reflecting its effects on electricity and transport fuels.
That assumed a carbon price of $21 a tonne or half the prevailing price now.
The inflationary impacts of the ETS are similar to a rise in the international oil price - not all one way.
In the short term it pushes up the cost of living and the cost of doing business. But it also leaves people with less to spend on other things and so in the medium term, all else being equal, it reduces the "demand pull" kind of inflation which arises from too much money chasing too few goods.
Officials have estimated that a carbon price of $25 would raise retail electricity prices by 2c a unit or 10 per cent. At $50 a tonne it would be 20 per cent.
To calibrate the scale: electricity prices rose 6.6 per cent last year, according to Statistics New Zealand, and have risen by an average 5.5 per cent a year over the past five years.
Petrol prices, officials estimate, would rise 6c a litre (at $25 carbon) which at today's prices would be a 3 per cent increase.
That is dwarfed, however, by the impact of higher world oil prices over recent years. Prices at the pump have dropped 18c a litre from their mid-July peak, but are still 80c a litre, or 67 per cent, higher than they were four years ago.
Is it bad for economic growth?
Critics of the scheme say it will retard economic growth and sacrifice jobs by adding costs, reducing profits and deterring investment.
But a majority of the country's emissions arise from export sectors, including agriculture which is the source of nearly half of them, and the scheme is designed to heavily protect them well into the future.
The estimate officials provided Parliament when the legislation was introduced implied that every $1 in the carbon price means about 1c a kilogram less in the dairy payout.
At current prices that would reduce dairy farmers' incomes by about 6 per cent, if they had to pay it - but that is a very distant prospect.
It would be a perverse outcome for the global climate if growth of the pastoral farming sector in New Zealand were hobbled by climate change policy here, only for the demand for dairy products and meat it might have satisfied to be met instead by production elsewhere in the world whose carbon hoof-print (emissions per litre of milk or kilogram of meat) is greater.
So the ETS exempts livestock emissions altogether until 2013 and taxpayers will continue to pick up the great majority of the bill (up to 90 per cent) until at least 2019.
Why do some businesses have to pay but others don't?
More generally the scheme differentiates between firms which will be able to pass on their carbon costs to their customers and those which will not.
The former, notably the oil companies and electricity generators, will have to buy carbon units to cover all the emission from the fossil fuels they sell or use. For the latter, those with international competitors which will not face such a cost, the great majority of their emissions will be covered by the taxpayer.
Such protection cannot last indefinitely, however. The object of the exercise is to shift relative prices in a more sustainable direction, so that builders, for example, favour timber over cement or steel where there is a choice.
The idea is that over time investment capital, labour and other resources flow into less emission-intensive activities than they do now. It changes the composition of economic activity, it doesn't necessarily reduce the level.
What polluters don't pay for, taxpayers have to.
By ratifying the Kyoto Protocol in 2002, New Zealand took responsibility for its share of global greenhouse gas emissions. What the ETS does is devolve that responsibility from taxpayers to the firms and individuals whose decisions ultimately determine how large those emissions are.