Brian Fallow: All bets off on emissions law

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When it comes to New Zealand climate-change policy there are three things you can count on.

Unfortunately they are all bad.

One is relentless, untrammelled growth in the country's greenhouse gas emissions. Currently they are 26 per cent over our Kyoto target.

The second is emitters' desire to offload the cost of those emissions on to taxpayers.

And the third is endless investment uncertainty for business.

The uncertainty level has just shot up with the confidence and supply agreement between National and Act, and with the mixed messages coming from Prime Minister John Key.

The agreement included suspending the emissions trading scheme (ETS) which passed into law on September 10, pending the outcome of a potentially wide-ranging select committee review of the legislation and "any amendments and alternatives to it, including carbon taxes".

On Monday Key was reportedly confident the review would result in an amended ETS and that it could be passed by the end of next year.

But speaking to Federated Farmers on Tuesday his message was that the option of carbon tax had been put on the table in good faith and while it was true National had long opposed it, maybe business would prefer the certainty and he wouldn't prejudge the review's outcome.

These statements are not strictly speaking contradictory, but they send a very confusing signal. All bets, it would seem, are off.

Whether all this is craven capitulation to Act, as the environmental lobbies fear, or a mere sop or something in between will be clearer when the details of the special select committee are announced, hopefully before Christmas.

The terms of reference will be crucial. If they are anything like as wide-ranging as Act proposes the select committee could sit until kingdom come.

If they are anything like as tendentious as Act proposes, it might as well not bother sitting at all.

The composition of the committee and its advisory support will also be telling.

In any case it represents further delay and uncertainty to follow the three years wasted as the previous Government failed to muster the parliamentary numbers for a carbon tax, and the three more as it designed and finally passed an emissions trading scheme.

Act's proposed terms of reference, perhaps deliberately, are a recipe for interminable further delay and uncertainty.

The committee should hear competing views on the science from internationally respected sources, it says. Apparently the careful processes of the United Nations' Intergovernmental Panel on Climate Change, endorsed by the United States National Academy of Sciences, the Royal Society and all the other guardians of the scientific method, are not good enough.

A few New Zealand MPs are more likely to get to the bottom of it.

That's laughable.

It also wants to examine claims that continuing to do five-eighths of not very much at all on this issue will damage the country's reputation and trade. Do we really want to discover the hard way that the answer was "yes" after all?

It wants to examine the "relative merits of a mitigation or an adaptation approach to climate change" as if they were alternatives.

Other items on Act's terms of reference wishlist are more reasonable.

The economic impact of the scheme on both households and businesses is an issue, given the magnitude of the financial market meltdown since the legislation was passed and the associated onset of a global recession.

But international carbon prices have fallen as you would expect as a result of those developments.

And remember that the entry of the transport sector into the ETS was delayed for two years on the grounds that the sky-high oil prices at the time were already sending consumers a resoundingly clear message to go easy on the petrol and diesel. Since then prices at the pump have fallen sharply.

It is also reasonable for the select committee to consider what the global recession does to the prospects for a new international agreement post-2012 when the Kyoto Protocol's first commitment period expires.

But it is worth noting in that context that US President-elect Barack Obama, who supports an emissions trading approach (like Europe and Australia), yesterday reaffirmed his commitment to set aggressive targets for fighting climate change.

He has promised "strong annual targets that set us on a course to reduce emissions to their 1990 levels by 2020 and reduce them by an additional 80 per cent by 2050".

That is a more ambitious target than National's 50 per cent by 2050.

Advocates of a carbon tax like the Business Roundtable say it would provide much greater certainty for business and investment decision by avoiding the price volatility emissions trading involves.

"The economic costs of volatility can be very high," it says. Which of course is why carbon markets have already evolved futures trading and the other normal mechanisms for hedging such risks.

Is the Roundtable asking us to believe that BP or Rio Tinto Alcan or Fonterra, say, can cope with swings in commodity prices and exchange rates but not in carbon prices?

And why would the Roundtable prefer prices set by politicians to those set by a market?

Apparently "an ETS is much more open to political favouritism and abuse". The bill passed two months ago "provides for a great deal of ministerial and bureaucratic discretion which could well lead to inefficient, unfair and, at worst, corrupt outcomes".

But much of that relates to the need to exempt some firms from the rigour of a one-size-fits-all scheme. That will be just as true of a carbon tax.

Large trade-exposed emitters and officials are wrestling with how to allocate the free units that will limit the competitiveness effects of the ETS, while still exposing them to a carbon price at the margin.

When a carbon tax was Government policy there was provision for negotiated greenhouse agreements with major emitters intended to achieve the same thing. Such are the complexities that only two were concluded.

The really big questions about a carbon tax, of course, are how to strike a tax rate and how often to adjust it.

The closer the tax is to the prices available in the carbon market the less commercial benefit there is for emitters.

But the wider the gap, the more the economic burden falls on taxpayers instead, and it is emitters' behaviour, not taxpayers', that needs to change.

Similarly the pleas - so far very successful - from the farm sector for special treatment are essentially a call for export subsidies.

Yet we don't hear them calling for New Zealand to revert to subsidising farmers in conventional ways just because other countries do so. What's the difference?

The Roundtable's real motivation is clear when it suggests that an initial tax should not exceed the $5 to $10 a tonne of CO2 range.

By contrast, high-quality certified emissions reduction (CER) units, which officials expect to set the marginal price in the New Zealand ETS, are trading around $34.

Let's hope Finance Minister Bill English, with future Budgets and the interests of taxpayers in mind, pushes back against this special pleading.

- NZ Herald

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