The Government's plan to curb carbon emissions has run into a host of objections. Brian Fallow looks at the major roadblocks
KEY POINTS:
Support for the Government's emissions trading scheme legislation is melting even faster than the Arctic ice cap. The National Party has pulled its support for the bill, which is before Parliament's finance and expenditure select committee, although it still supports emissions trading in principle.
The question now is
what changes will have to be made to muster enough votes among the smaller parties to get the legislation passed before the election.
Indeed, will those parties think it is worth the effort, since National leader John Key has indicated it will reopen the legislation should it become the Government?
The concerns raised by submitters cluster around three main areas:
* That it is a tax grab on the sly, where motorists and electricity consumers pay more than their fair share.
* That it puts export sectors gratuitously at risk.
* That the forestry sector is once again the whipping boy.
Tax grab?
The tax grab argument arises from a feature of the scheme which was highlighted first by Simon Terry and Geoff Bertram for the Sustainability Council, then by Solid Energy chief executive Don Elder.
The Kyoto Protocol makes New Zealand as a whole responsible for any increase in its net emissions above 1990 levels. Emissions from transport fuels have risen 64 per cent since 1990.
But as the scheme stands, motorists will be expected to pay, via the oil companies, not just for that increase, but for every tonne of emissions from their exhausts - not 64 per cent of 1990 levels but 164 per cent.
At a carbon price of $30 a tonne, that would be worth over $400 million a year to the Government's coffers.
It has said it would put back the start date for this part of the scheme from 2009 to 2011.
For electricity consumers, there is a double whammy. Generators will need to buy emissions units to cover every tonne of coal and every cubic metre of natural gas they burn, not just the increase from 1990 levels.
That impact will be amplified by the way the wholesale power market works. In every half-hour period, it is the marginal generator, the most expensive electricity needed to meet demand, which sets the wholesale price.
Except when demand is light, that tends to be a thermal generator, which will have to recover its carbon costs. Renewable generators, notably state-owned Meridian Energy, will enjoy a windfall profit.
The net effect is that once the scheme is fully operational, the Government will be raking in from households and small businesses all the units it needs to cover the fiscal costs of protection for the trade-exposed sectors - and a whole lot more.
National has said that one of the key principles the ETS must meet is to be fiscally neutral "rather than providing billions of dollars of windfall gains at the expense of businesses and consumers".
Climate Change Minister David Parker says the scheme's five-yearly reviews are the way to take account of that.
United Future leader Peter Dunne says his party's support for the ETS bill will depend on the impact on household budgets.
When asked about compensation for households last week, Prime Minister Helen Clark pointed to her announcement this month of a two-year delay in introducing transport fuels into the scheme.
"We have also made it clear that there would be support for vulnerable consumers on electricity."
Dunne says: "The bottom line is that middle-income households, yet again, will bear the lion's share of the costs with no compensation other than the promised tax cuts from the Budget - and they see them as a dividend for the good years we have been through rather than as a down payment on rising future costs."
Competition questions
The second focus of concern, the impact on the competitiveness of emissions-intensive trade-exposed business, reflects the fact that most of New Zealand emissions arise from the export sector, including agriculture. Their competitors are unlikely to be facing a price on carbon any time soon.
Recognising that, the scheme has grandfathering provisions.
Large industrial emitters from 2010, and the agriculture sector once it comes into the scheme in 2013, will receive a free allocation of units sufficient to cover 90 per cent of their emissions in 2005. They will be accountable for their emissions, but only at the margin.
Some of them have argued the allocation of free units should be on an intensity basis - reflecting how their emissions per unit of output compare with any local competitors and with world's best practice - rather than an absolute cap which would penalise them for any improvements they had made voluntarily before 2005.
Others objected that the proposed minimum threshold for free allocation - emissions of 50,000 tonnes a year - was too high and afforded no protection to a lot of medium-sized emitters every bit as trade-exposed as the large emitters.
They expressed alarm about the prospect that free allocation would eventually be wound back to zero even after the Government pushed back the start and end dates of that phase-out by five years, to 2018 and 2030 respectively.
Farming argues that while the researchers are busy, there is as yet no silver bullet to the problem of cows and sheep belching methane, which is the source of a third of the country's greenhouse gas emissions.
New Zealand Steel and New Zealand Aluminium Smelters have called the scheme a threat to the medium-term viability of their operations, while cement-maker Holcim says it could stymie plans to build a larger and less emissions-intensive plant in Canterbury. Parker's response has been to point out that there will be two reviews before the phase-out of free allocation begins - two opportunities to look at the international competitive environment and the technological options for reducing emissions.
Greens co-leader Jeanette Fitzsimons argues that protecting incumbent firms will deter more carbon-efficient firms from entering their markets.
More broadly, it would retard the economy's transformation to one which can survive and prosper in a carbon-constrained world, she says.
As our starting point is one of the most emissions-intensive economies in the world, putting off embarking on that transition will only make it more abrupt and costly later.
The Greens are already unhappy about the watering down of the scheme. They want a carbon price introduced to the economy and the sooner the better, but not at any environmental price.
Forest fears
The third major area of concern is the treatment of the forestry sector.
The owners of "Kyoto" forests, established since 1990 on land not previously forested, are unhappy that half the local market for their carbon credits has just evaporated with the decision to delay the entry of transport fuels into the scheme.
The owners of pre-1990 forests, or more precisely the land under them, are unhappy indeed that that land will, in effect, be locked into forestry, which may be a second-best use of it, as the scheme imposes prohibitive costs if it is converted to another use upon harvest.
The Federation of Maori Authorities says most of that land is owned by Maori, either outright or presumptively under pending Treaty settlements. Ngai Tahu made it clear to the select committee it would not be impressed to see forests it acquired under its settlement more than 10 years ago retrospectively devalued. This issue may prove crucial to the Maori Party's stance on the bill. New Zealand First has yet to declare its position on the bill.
A scheme which in effect takes money from New Zealand households and businesses to subsidise climate-friendly projects in developing countries (mainly China so far) is not on the face of it something economic nationalists would find attractive.
But it might take the pragmatic view that since National negotiated New Zealand's commitment at Kyoto 11 years ago and since Labour ratified it six years ago, the country has this liability and the only argument now is about who pays.
Brian Fallow is the Herald's economics editor
