Catherine Beard: Please don't kill the golden goose

Opinion

There is a lot of emotion being peddled by environmental groups over revisions to the proposed emissions trading scheme.

While it makes good headlines to keep repeating slogans like "taxpayers subsidise big polluters" it is a long way from the truth. Like a lot of the debate over anything that happens in the climate change policy area there is a tendency to not let the facts get in the way of a good campaign.

In fact, since the biggest emissions growth has come from the domestic transport sector and many large industrials have reduced their emissions below 1990 levels, they could justifiably argue it was the other way around.

According to the most recent national inventory figures, New Zealand will be meeting its Kyoto target for the first five-year commitment period and will not have a debt to pay. The United Nations allocates each country with an emissions reduction target a certain amount of free carbon units, depending on their target.

In New Zealand's case we agreed to stabilise our emissions at 1990 levels, so the UN allocates us free carbon units up to that amount. Any emissions over and above 1990 levels we would have to reduce, or buy offsets for, whichever is the cheapest option.

However, thanks to sufficient emission removals from forest sinks, we look set to meet our target, despite emissions and population growth of about 20 per cent since 1990.

So what should the New Zealand Government do with the free carbon allocation? It needs to give some to the forest sector to encourage new tree planting and to provide some compensation to pre-1990 forest owners who can no longer change their land use without significant penalty (deforestation liabilities).

It also makes sense to give some free units to industry to keep it competitive in New Zealand until such time as our major trade competitors are pricing carbon. The Government could have sold all the free units to energy intensive businesses and made a windfall profit for the Government, but that would have put most of them out of business.

Instead it has decided to make the large energy intensive businesses pay for either 40 per cent or 10 per cent of their emissions, depending on which category they fall into for a free allocation. This is no free lunch for industry and some of them (depending on how much allocation they get) will not be able to survive.

New Zealand is the first country outside of the European Union to have a national emissions trading scheme and the only country in the world to have an all sectors and all gases emissions trading scheme.

The European Union decided it made sense to give some free allocation to firms that would otherwise be left at a competitive disadvantage to countries that had not put a price on carbon.

The reasons for doing this should be self evident. There is no point in making the cost of doing business in New Zealand more expensive than our trading competitors, if the result is a relocation of our largest employers and wealth creators to other countries.

This is called carbon leakage and means you don't get a reduction of global emissions, they just move countries and if the countries the production moves to are more carbon intensive than New Zealand, like Asia, then global emissions rise. A bad outcome for the New Zealand economy and a bad outcome for the global effort to reduce emissions.

The economists that have written reports for the Government on this issue have concluded that there is a good economic reason for not exposing your industry to the full cost of carbon, until such time as most other countries are doing the same.

To move ahead of the pack means that you could lose the industries in New Zealand which would still be internationally competitive if all other countries had been pricing carbon. The end result is a low-wage and low-employment economy.

Hardly a win for the taxpayer or the Government, with fewer taxpayers and shrinking Government budgets.

Some in the environmental movement are upset that the Government is proposing to measure emissions on an intensity basis (emissions per/$million output) which means that emissions can continue to grow, as long as you get more earnings for every tonne of emissions - or greater efficiency.

This emissions intensity approach is the way the EU and others in the developed world will go with emissions trading. The alternative approach of a cap on emissions, which is what Labour continues to propose, would just result in no new investment in the country which caps its emissions.

No country wants to discourage new technology investment in its economy, so none is likely to end up with firm emission caps until such time as most countries are prepared to do the same.

This is not necessarily a bad result for the environment since new technology is invariably lower carbon intensive than existing plant, so it is a plan for continuous improvement. In addition, if countries can keep their local industry viable then they are less likely to need to import those same goods from other countries, with all the extra transport emissions that entails.

Over time, as new affordable low carbon technologies become available and more countries are prepared to put a price on carbon, then countries are more likely to move to put an absolute cap on emissions.

Doing so in the near term will only lead to a lack of new investment, which in the case of New Zealand will flow straight to Asia.

* Catherine Beard is executive director of the Greenhouse Policy Coalition representing the energy intensive sector on climate change policy.