Brian Fallow: Few will escape proposed carbon tax

Winning exemption from the planned carbon tax will not be easy, a Government paper on negotiated greenhouse agreements (NGAs) makes clear.

NGAs are intended for large emitters of greenhouse gases, firms whose competitiveness would be at risk if they were subject to the carbon tax the Government plans to introduce in 2007 to give effect to its commitments under the Kyoto Protocol.

The rationale is to avoid what in the jargon of climate change policy is called "leakage". If, say, the Marsden Pt refinery or the country's two cement works were forced to close because a carbon tax made them uncompetitive with imports from non-Kyoto countries, it would do nothing for the global atmosphere - New Zealand consumers' demands would still have to be met - and it would do the economy nothing but harm.

But in return for a full or partial exemption from the tax, firms would have to commit to a path that would get them to the world's best practice in emissions per unit of production.

To qualify there has to be a genuine risk of leakage, and that will depend on how much the firm's costs and profitability would be hit by the carbon tax, which in turn depends on such things as how much demand for its products is sensitive to price.

Who its competitors are and what Kyoto obligations they face, if any, is also relevant.

One test will be whether the tax would cut the firm's profitability (return on capital employed) by more than 20 per cent. Another is whether the expected fall in profit exceeds normal profit variability over the past 10 to 15 years.

The thinking is that if the impact of the tax is within normal profit variability and has only a minor impact on returns, it is unlikely to result in shut down or reduced production.

But it is understood these are not intended to be hard-edged, binary hurdles: if yes, you qualify; if no, get lost. The totality of information will be considered and judgment applied.

It is expected only a small number of NGAs will be made, tens rather than hundreds or thousands.

The ultimate decision on the Government side will be taken at ministerial level, by Climate Change Minister Pete Hodgson and Finance Minister Dr Michael Cullen.

"We see that as an advantage because the notion of some bureaucrats within the Ministry for the Environment making these decisions is pretty scary," said Chris Baker, chairman of the Greenhouse Policy Coalition, a large emitters lobby group.

"At least if we think there are jobs at stake or potential investment undermined by this process, having the decision made at that level gives you some leverage you might not have otherwise."

Baker is critical of the fact that the consultation document was released just before Christmas, with submissions due in the first week of February.

He is even more unhappy at the limited scope of the NGA regime, whose elaborate and onerous requirements would restrict it to a handful of large concerns.

"We have argued for months that if they want to change behaviour, this is the wrong way to go about it."

A framework which encouraged as many companies as possible to measure and report their energy use and emissions and to develop an energy plan would be far more effective in getting to grips with the physical problem than the blunt instrument of a carbon tax, especially one set initially at a relatively low level.

"The fact that these agreements are only going to be available to a handful of large emitters is a major opportunity lost," Baker said. "What's going to happen now is that most companies below the key energy-intensive ones won't do anything until 2006."

The Government has indicated some other regime may be available to smaller enterprises which would be unduly hurt by a carbon tax, but who would qualify and how they would work is still unknown.

If an enterprise (or industry) is accepted as being in the at-risk category and a candidate for an NGA, it can start negotiating with climate change office officials.

Central to each case will be what the benchmark for best practice is.

Rather than have the company's experts slugging it out with Government experts, the two sides will agree on a neutral international expert to determine what best practice is.

Allowance will have to be made for New Zealand conditions, such as the small size of the domestic market.

The benchmark for an existing brownfield site is likely to be less exacting than for a new, greenfield one.

The company and the Government will also have to negotiate over what time frame the agreed emissions targets are to be reached. That will depend on such factors as the life cycle of assets in the industry concerned.

However, the NGAs are intended to be only a transitional measure to cover the period when leakage concerns are significant. It is unclear how long that will be, the document says, as it depends on the outcome of future negotiations on the nature of the international regime after 2012, when Kyoto's first commitment period ends.

Herald feature: Climate change

Climate change links

Herald feature: Environment