Government opens up on carbon deals

By BRIAN FALLOW economics editor

The Government has made it easier for large emitters of greenhouse gases to negotiate deals exempting them from the planned carbon tax.

Negotiated greenhouse agreements (NGAs) are intended for firms whose international competitiveness would be at risk if they were subject to the carbon tax the Government plans to introduce in 2007 under its Kyoto Protocol commitments.

A discussion document issued just before Christmas set high hurdles for whether a company's competitiveness would be considered at risk: would the tax cut its profitability (return on capital employed) by more than 20 per cent? Or would the drop in profit exceed normal profit variability over the past 10 or 15 years?

These criteria have been softened in the final policy announced yesterday. The profitability test is now whether earnings before interest and tax would fall more than 10 per cent.

The return on capital test is whether it would fall below "the appropriate internationally accepted industry investment hurdle".

And a third alternative has been added: would the firm face a significant increase in costs, defined as firms for which energy represents more than 20 per cent of their total expenses?

Climate Change Minister Pete Hodgson said the criteria were intended to be less stringent than those in the discussion document. Otherwise, the policy in that document was substantially unaltered.

In return for a full or partial exemption from the tax, firms would have to commit to a path that would get them to world's best practice in emissions for comparable plants.

Hodgson said he did not know how many NGAs the Government would be invited to do. He was thinking dozens, but that might include sector-wide agreements.

Chris Baker, chairman of the Greenhouse Policy Coalition, a lobby group for the big emitters, welcomed the prospect of simpler and less stringent eligibility criteria.

"Clearly the Government has listened to some of our concerns, but we still maintain that there are significant constraints on access to the NGAs, including the costs of negotiating agreements and then complying with them."

Hodgson and Baker both say that negotiated agreements would be more effective in reducing emissions of greenhouse gases than the blunt instrument of a carbon tax.

"You get engagement and commitment from board level down to a programme of energy and emissions management. A change of ethos," said Baker. Consequently, measures which restricted access to NGAs were counterproductive.

The Government has said a policy for small and medium enterprises, which cannot face the costs of negotiating an NGA but which face a loss of export competitiveness or are at risk from imports from non-Kyoto countries, was some time off.

Meanwhile, the Government said yesterday it would call for proposals around the middle of the year under its climate change projects scheme.

It offers incentives, in the form of promissory notes for internationally tradeable carbon credits, for projects that will reduce greenhouse gas emissions.

The story so far

* Government plans to tax the carbon content of fuels from 2007, to combat global warming.

* Big firms whose international competitors don't face such costs could suffer.

* They will be able to negotiate agreements that exempt them.

* In return they must cut their "greenhouse gas" emissions.

* The Marsden Pt Refinery is likely to be the first with such a deal.

* Smaller firms with the same problem may get some relief, but details are months away.