KEY POINTS:
The Government's energy strategy is a step towards having energy prices that tell the environmental truth, and that is a step in the right direction.
The prospect of higher energy costs will not be greeted with joy.
But Energy Minister David Parker has a point when he argues
that in a carbon-constrained world an electricity system, or even a transport system, relying mainly on renewable sources of energy would be a national competitive advantage.
That assumes, of course, that the world is going that way.
Given the excruciatingly difficult geopolitics of climate change, that is an heroic assumption right now, so it is appropriate that "the Government believes the pace and stringency of New Zealand's response to climate change should be ... in step with what major emitters - including our major trading partners - are doing".
Parker also has a point about the short term: "If we pursue renewables, we take off some of the upward price pressure on gas."
Compared with the comfort and security of the giant Maui field, we have moved to a more hand-to-mouth outlook for gas supplies.
The more gas-fired generation that is built, the shorter the window of opportunity for finding more gas fields and avoiding having to import liquefied natural gas, an expensive fuel on which to run marginal thermal power stations that set the wholesale electricity price.
The proportion of generation from renewables has been relentlessly shrinking. There is an upper limit on how much it can safely be increased, determined by the need to have enough thermal generation to cope with dry years for the hydro system.
But there would seem to be plenty of headroom on that score, with hydro and wind power providing only 62 per cent of power generated on average in the past five years.
It remains to be seen, however, if the measures adopted after the current consultation phase are strong enough to deter further investment in gas-fired generation for the time being.
There has tended to be a gap between bold talk and timid action.
The third point on cost is that, as taxpayers, we already face the cost of honouring our commitments under the Kyoto protocol.
The Government is in the absurd position of having undertaken that fiscal liability, which has ballooned over the past couple of years, while doing almost nothing to reduce it.
In particular, what is missing is a clear price signal to discourage emissions on one side of the ledger, and to encourage afforestation and reforestation on the other.
The result, as the Sustainability Council points out, is some substantial wealth transfers.
The current estimate is that New Zealand will exceed its Kyoto target by 91 million tonnes of carbon dioxide equivalent over the five years of the first commitment period of 2008 to 2012.
At the current carbon price the Treasury uses to calculate the liability, and the present over-valued exchange rate, that is a gross liability of $1.32 billion.
But it is offset by credits for the carbon absorbed in the net increase in the national forest estate since 1990, which reduces net emissions to 41 million tonnes and the taxpayer's liability to $600 million.
We will discover on Monday whether the Government is willing to do anything about the perverse effects of that wealth transfer from forest owners to taxpayers.
But in any case there is still that $1.3 billion (and counting) of transfer or cross-subsidies, from taxpayers to farmers, motorists and truckers, generators and large industrial emitters, in that order.
If world carbon prices rise or if the exchange rate falls to more exporter-friendly levels, or if estimates of emissions prove as optimistic as past ones have, the extent of those cross-subsidies will be higher still.
In principle and in theory, this is inefficient and inequitable.
In practice the likelihood of requiring farmers to face the full cost of the emissions arising from the bodily functions of their livestock is close to zero.
Though nitrification inhibitors and some of the lines of research on reducing the amount of methane cattle and sheep belch hold promise, there is as yet little farmers can do to reduce emissions except to cut production. Not an attractive option when pastoral farming still earns the lion's share of New Zealand's living as a trading nation.
But the discussion paper on post-2012 options released on Monday seeks feedback on some of the options the Greens have advocated, like imposing a cost on marginal emissions only, that is increases from some baseline.
"Analysis suggests that if emissions were charged at the margin for livestock production, the cost of increasing emissions through increasing stock numbers may be approximately 4 per cent of the gross revenue associated with those increased stock numbers."
Hardly the end of the world.
Another option is allowing farmers to offset emissions by investing in new forest plantings, biofuels or renewable energy.
Reducing emissions from transport is also easier said than done.
A suite of measures would probably be required, the Government says, with any price-based measures needing to be supported by regulatory intervention, on fuel economy and fuel standards for example, and measures to influence urban design.
So it makes sense to start with smokestack emitters, ahead of sectors that are a larger but more intractable part of the problem.
But in every sector price measures are key. Whatever alternative technologies there may be, it is hard to compete with free.
That leaves the question of how to send the price signal.
The choices are a carbon tax or a cap-and-trade system akin to fishing quota.
A tax sets a price and discovers what difference that makes to volumes. Trading sets a volume and discovers the price.
A tax has advantages in terms of certainly and comparative administrative simplicity.
But it requires a political process to mediate between the international price of carbon and the price to domestic emitters, which may undermine its effectiveness.
And it is volumes that we are trying to control.
Emissions trading presents formidable design difficulties, however.
Where do you set the cap?
Do you devolve obligations on an absolute basis or per unit of production, that is, do you want to affect marginal or average costs of production?
When allocating tradeable allowances to existing emitters, do you grandfather or auction or a bit of both? Err in one direction and you deliver a windfall profit to polluters, err in the other and you could deliver a fatal cost shock to major enterprises.
Would grandfathering (doling out allowances free) create a barrier to entry? Or a possible windfall profit to a large emitter with unused allowances exiting the country?
What sort of penalties should you have for non-compliance and how severe should they be? Should you allow banking of allowances from one period to another?
The right answers to these questions are likely to vary from one sector to another and over time.
The Government, while non-committal especially about, measures for the transitional period up to 2012, has indicated a preference for emissions trading.
So those are the right questions for businesses to be turning their minds to.
