KEY POINTS:
Tempting as it may be for the Government to say "you'll hardly feel a thing" when selling emissions trading, the scheme it has designed is liable to be costlier and riskier than it makes out.
But if the costs were negligible so would be the impact on investment
and consumption behaviour, so what would be the point of the scheme?
The questions are always how much cost is reasonable, how soon, and whether it is fairly spread.
A report by the economic consultancy Castalia, commissioned by the Greenhouse Policy Coalition which represents large emitters, argues that many of the assumptions underlying the design of the scheme do not withstand scrutiny.
Some of the points they make will be familiar to readers of these pages, like questioning the assumptions about the likely price of carbon New Zealand firms will be exposed to and detecting a somewhat cavalier attitude towards the ability of large trade-exposed emitters to pay that price.
The report's lead author, Alex Sundakov, points to features of the scheme which make it much more ambitious than its, so far rather few, counterparts overseas.
It will apply within six years to all sectors and gases and it will devolve all the liabilities New Zealand has from its international obligations (the Kyoto Protocol) to the private sector.
It would phase out protection for firms whose competitiveness is at risk by the fixed deadline of 2025 regardless of the international context, and it makes no provision for new entrants to those sectors.
The problem is that New Zealand's comparative advantage lies in industries which are emissions intensive.
Cows belch and urinate, for example, and it takes a lot of energy to remove the water from milk and more to ship dairy products.
"Predictions that adjustment to a carbon price will be almost costless are based on general equilibrium models that are inherently ill-equipped to capture the kinds of costs that are most likely to be significant to New Zealand," Sundakov said.
In the idealised world of such models, as relative prices change the economy's resources are reallocated.
But in the real world of the Tiwai Point aluminium smelter, say, the reallocation of resources would most likely take the form of hundreds of skilled guys heading off to Queensland.
And the $1.5 billion hole left in our annual export receipts, when we are up to our necks in debt to the rest of the world, would put upward pressure on the risk-premium built into our interest rates.
Prime Minister Helen Clark said on Tuesday that it would not have been "credible" to exclude the pastoral greenhouse gases, methane and nitrous oxide, from the scheme when they amount to 49 per cent of national emissions. Yet the European scheme covers less than half of Europe's emissions.
She is confident New Zealand can lead the world in finding the answers to reducing those emissions, citing the progress on nitrification inhibitors already.
Certainly New Zealand has more expertise and a stronger incentive than anyone else to do so.
But in deciding to include the agriculture sector in the emissions trading scheme the Government is in effect betting the farm, so to speak, on the advantages New Zealand has in climate and knowhow being big enough to offset imposing a cost on farmers that their competitors will not face.
They have coped with the huge distortions from agriculture protectionism overseas for years and they may be able to cope with this further tilting of the playing field. But it is a big risk to run.
For the foreseeable future the carbon price to which New Zealand emitters will be exposed will be largely determined by European policymakers as European firms are the main buyers on the international Kyoto market.
Other national and sub-national carbon markets are under development, in Australia and parts of the United States, but it will be years before they are in a position to counter the pull of European prices.
So one of Sundakov's recommendations is to include a safety valve if prices get too high.
"To be effective this measure requires an explicit up-front guarantee on the part of the Government to provide as many permits as demanded into the market at a predetermined price."
While some provision for a safety valve is expected to be included in the legislation it is unlikely to set an explicit price cap.
Sundakov argues for the Government acting as a buffer between New Zealand emitters and global carbon prices which may prove volatile and bear little relationship for some years yet to a global cost curve for reducing emissions.
Before it abandoned its plans for a carbon tax, the Government used to say that it would provide just such a buffer, necessary until global carbon markets matured.
"The price of international permits does not reflect any single 'right' price for carbon and there is significant potential of misallocation of resources if firms base their long-term decisions on short-term price signals that may change significantly in future," Sundakov said.
He also argues that protection in the form of a free allocation of permits for large emitters whose competitiveness is at risk should be intensity-based (that is, per unit of production) rather than absolute (based on their output at some arbitrary date like 2005).
"Increased production from emissions-intensive sectors is vital for New Zealand's continued economic growth."
And that is the nub of the argument.
There is, as Sundakov says, an inevitable trade-off between economic growth and emissions reductions.
Attempting to build a political consensus by denying this trade-off is not, to use one of the Government's favourite words, sustainable.
It would be better to level with people about that, and argue that the benefits exceed the costs.
For Greenpeace the Castalia report is just another exercise in special pleading by some of the country's largest polluters.
The Greenhouse Policy Coalition responds by pointing out that the smokestack sector is not the seat of the problem as far as New Zealand's emissions are concerned.
The big emitting sectors are agriculture (nearly 50 per cent) and transport (nearly 20 per cent) which is also where the emissions growth has been.
The big industrial emitters tend to be pretty focused on the energy efficiency. The aluminium smelter's process emissions per tonne of metal produced, for example, are now more than 50 per cent lower than they were in 1990.
If the economy as a whole had matched these figures we would be in much better shape.
The negotiated greenhouse agreement process associated with the carbon tax, which linked large emitters' carbon liability to how far they are from world's best practice, was an intensity-based approach which rewarded early action.
The new policy, based on a crude grandfathering of 90 per cent of 2005 levels, just takes the gains for early action under voluntary agreements as in the bag and demands more.
