KEY POINTS:
Since the start of this year the meter has been running on the country's carbon emissions, yet we are still fighting over who will pay the fare.
And that is despite the fact that it is 11 years since the Kyoto Protocol was negotiated and six years since
New Zealand ratified it.
A fight was inevitable because serious money is at stake, with national emissions running around 80 million tonnes a year and carbon prices around $30 a tonne. The price is likely to go up a lot faster than the volume will come down.
For the next five years most of the bill falls to the taxpayer, owing to the phased introduction of sectors to the emissions trading scheme and the extent of the protection, through the allocation of free units, to trade-exposed firms.
That is just silly.
The whole object of the scheme, and of Kyoto for that matter, is to reduce emissions by exposing emitters to a price signal which will discourage emission rises and reward falls. The longer the taxpayer picks up the bill the less effective the scheme will be.
Households, however, are beset by rising petrol prices, food prices and mortgage bills at the same time that employment and house prices are falling. They need an additional cost like a hole in the head.
Small- and medium-sized businesses, facing some of the same costs and the challenges of an economy which may well be in recession (if so it won't be official until September), can be forgiven for feeling the same way.
So they are unlikely to be impressed when the Sustainability Council and others point out that as the costs are rolled out on to emitters it is households, small businesses and road users who will bear 90 per cent of the load - even though they are responsible for only about a third of emissions.
And there's the rub. Most of New Zealand's emissions come from trade-exposed sectors, both exporters (half the national total arises from agriculture) and firms like cement manufacturers which face competition from imports.
Farmers argue that the country relies on them to earn most of its living as a trading nation, that they have to operate in a wicked protectionist world, that their competitors show no sign of being exposed to a carbon price any time soon, and that current technology gives them few if any options for reducing the main source of agricultural emissions: cattle and sheep belching methane.
The concerns of the trade-exposed sectors relate mainly to uncertainty in the short term and the progressive withdrawal of free allocation of units in the longer term.
The Emissions Trading Scheme Bill, as reported back to the House this week, leaves many of their questions unanswered.
What will be the minimum level of emissions needed before a trade-exposed firm qualifies for protection?
The bill now leaves room for intensity-based allocation of free units and for some to be set aside for new entrants (lest the scheme prove anti-competitive) but it is not intended to increase, we are told, in the overall pool of units available. So emitters reckoning on being exposed to a carbon price for the equivalent of only 10 per cent of their 2005 emissions now face a larger exposure.
What will the size of the pool of free units for trade-exposed industrial emitters be?
The framework document which outlined the scheme last year spoke of 15 million tonnes a year but there is no number in the legislation, so that can only be regarded as indicative.
That would be a generous amount given that it represents about 19 per cent of national emissions when industrial processes give rise to 5 per cent of emissions and adding the six largest electricity consumers' share of emissions from the power sector would only raise it to 7 or 8 per cent.
The bill still contains provision for winding back the free allocation to zero over 12 years, though the start date has been pushed back by five years to 2018.
The Treasury estimates that change will reduce the cumulative fiscal gain to the Crown by 2030 from $33 billion to $21 billion. Such numbers involve a lot of guesswork about the future patch of global carbon prices, the stringency of the country's emission-reduction target under future international agreements, and the extent of the cuts achieved.
But as Solid Energy chief executive Don Elder stressed to the select committee, the prospect of a fiscal gain to the Crown is hardwired into the design of the scheme. Only the magnitude is debatable.
It arises because eventually every last tonne of emissions will incur a cost of carbon. But New Zealand's international obligations will not be so tough. The Treasury, for instance, envisages a scenario where the country might have a target which would make it liable for any emissions above 70 per cent of 1990 levels by 2030.
But the scheme would have all domestic emitters facing a liability for 100 per cent of emissions by then. The difference between the two - about 43 million tonnes a year - multiplied by the prevailing carbon price, which could easily be north of $100 a tonne by then, represents a hefty fiscal windfall.
The first group to be pinged for every tonne of their emissions is domestic electricity consumers, from the start of 2010. The big trade-exposed ones like New Zealand Steel and the Rio Tinto aluminium smelter will be sheltered against 90 per cent of the ETS-related increase in power prices.
The rest of us get no such break, and in fact the impact will be amplified by the fact that thermal generators, which will face carbon costs, have a disproportionate influence on the wholesale electricity price.
Road users face the full force of carbon pricing from the start of 2011.
The farm and smokestack sectors will be heavily grandfathered until 2018 and not liable for every last tonne until 2030.
But that will only happen if periodic reviews of the scheme don't change the rules. The reviews have to take account, among other things, of the international competitive environment and the technology options available for reducing emissions.
Climate Change Minister David Parker points out that on the Treasury's projections the Crown will not be seriously in the money until the 2020s. Before that, depending on the carbon price and the stringency of the post-Kyoto target, it may still be a net buyer of emissions units.
In any case, expanding future Governments' revenue by, in effect, taxing carbon emissions is not necessarily a bad thing.
It depends on what Governments do with the extra revenue.
They may see it as an opportunity for tax reform, a base-broadening exercise which allows lower rates on, say, incomes.
Or they may be grateful for the help in dealing with baby-boomers' pensions and health costs.
The revenue-recycling options are numerous, but tend to be ignored by those who see this as a stealthy tax grab.
Deferring the phase-out of free allocation by five years has a fiscal cost which the Treasury estimates at $11 billion.
That can be seen largely as a transfer from taxpayers to farmers.
The positive view would be that it buys a vital export sector essential breathing space for a difficult transition.
The harsher view is that it only keeps a bubble in dairy land prices inflated for that much longer.
