KEY POINTS:
The Business Roundtable and the Petroleum Exploration Production Association were inevitably side-swiped by Climate Change Minister David Parker and the NZ Business Council for Sustainable Development when they released their "get real study" into the cost of making New Zealand carbon neutral in a high-growth environment.
The organisations
argue that the Government can not hope to pursue a goal of getting New Zealand back into the top half of the OECD nations on an income per capita basis at the same time as it pursues an objective for New Zealand to become "carbon neutral." This is just fantasy land.
Parker said the scenarios used in Infometrics economist Adolf Stroombergen's model were "way out of line with government thinking" and dismissed the business lobbies' message as "economic scare-mongering." Which is precisely the point.
The aim of the Roundtable/Petroleum lobby exercise was to run some numbers (using the respected economist who had carried out the "general equilibrium" modelling for the Government's emissions trading group) positing what the costs and implications of the Government's stated desire for New Zealand to be carbon neutral would be, if New Zealand did also sport the higher growth needed to get back into the top half of the OECD. This rather than the less ambitious (but more realistic) economic growth projections Treasury uses.
The swift reaction suggests this is another area where the Government prefers to send out the spin patrols rather than debate whether its stated aims are achievable.
But when even Ministry of the Environment officials are now exposed for censoring the real cost of NZ's "dirty dairying" and transport emissions from their landmark State of the Environment report, it's incumbent on third parties to subject the Government's sustainability policies to a reality check to get the debate back onto a realistic platform.
The assumptions that underpin the three separate scenarios in Stroombergen's latest work can and should be challenged.
His "business as usual" case assumes an annual economic growth of 4.5-5 per cent and a shadow carbon price of $300/tonne (with an international price of $100/tonne). It is assumed the Government would need to raise the growth rate of the economy to around 4 per cent to get a lift per capita incomes into the top half of the OECD, but Stroombergen says 4.5-5 per cent would result in an average 4 per cent growth rate once the impact of reducing emissions to 1990 levels is netted out.
Infometrics did not directly model the effects of achieving carbon neutrality by 2050. It opted for a 2025 date and looked at what would happen if NZ emissions were restored to 1990 levels by 2025 rather than more ambitious targets.
The baseline scenario is that if no carbon pricing is used there will be a 180 per cent increase in emissions by 2025 (over 1990 levels).
The second scenario uses a $300/tonne shadow price (which factors in the impact of other Government policies like the ban on thermal plants on top of the international price). On this scenario private consumption would drop by 3.5 per cent but emissions would still increase by 85 per cent over 1990 levels. The shortfall would have to be purchased on the international market at $100/tonne.
The worse-case scenario, which is based on NZ experiencing transition shocks like reduced employment and productivity growth, results in GDP growth falling 11.2 per cent from the baseline scenario position. Various sectors - agriculture in particular - will be exposed to the point of being non-competitive.
Once the effects on aggregate investment, employment and productivity of investment uncertainty and transitional costs are taken into account, policy action to reduce New Zealand's emissions could lead to a fall in private consumption of 14 per cent relative to the business-as-usual scenario.
This is about $7000 per person at current prices or $19000 per household. It also implies a doubling of electricity prices relative to 2007/08 and increases in petrol prices of more than 50 per cent.
Nevertheless, New Zealand's emission levels rise significantly rather than reduce relative to 1990 levels, and question the consistency of the Government's twin goals of growth and carbon neutrality.
Stroombergen's original analysis for the Emissions Trading Group also projects to 2025. Using a carbon price of $100/tonne with no free allocations, real private consumption falls by 2.2 per cent despite a significant income tax reduction - corresponding to about $800 per person in 2025.
Stroombergen has not factored in any major uplift from developing new technologies to address emissions reduction: such as carbon sequestration in coal plants, reducing animal emissions through nitrogen inhibiters, electric cars, solar technology or more use of renewable energy and biofuels.
Concerted programmes on this score are few and far between.
Given New Zealand's record in talking big on climate change - but having failed to get any reduction in greenhouse gas emissions - some skepticism is not out of line.
Take NZ's original Kyoto commitment which is based on reducing greenhouse gases to 1990 levels by 2012. The forecasters did not accurately predict the big switch to dairying, or the impact on forestry investment and tree harvesting through mismanagement of policy expectations and the growth in transport emissions.
Latest Treasury figures estimate NZ's Kyoto liability is now $967 million - treble the $307 million figure in May 2005.
Analysis by reputable economists Castalia Strategic Advisers reinforces the view that the Government's emissions trading scheme is not sustainable because it does not balance economic and environmental objectives.
Castalia's analysis was commissioned by the Greenhouse Policy Coalition which represents NZ industries and companies which are major greenhouse gas emitters. Members include: NZ Aluminium Smelters, NZ Steel, Fonterra, Coal Association, Carter Holt Harvey, Norkse Skog Tasman, Winstone Pulp International, Pan Pacific Forest Products, SCA Hygiene, Solid Energy, Holcim and Business NZ.
Between them they account for one-third of New Zealand's exports.
Castalia principal Alex Sundakov - former chief executive of the NZ Institute of Economic Research - is proving to be a thorn in the Government's side.
His review of the Climate Change (Emissions Trading and Renewable Preference) Bill gets to the point. By exposing New Zealand businesses to the relatively high and variable price of emission permits - when their competitors do not face similar constraints - the trading scheme will discourage economic activity here. He points out that the Government's own modelling indicated significant declines in exposed sectors like dairying.
"The fact that NZ has one of the highest emissions growth rates in the world, and that successive governments have struggled to introduce viable measures despite the rhetoric of commitment to the Kyoto Protocol shows that the community is not willing to address emissions at any price."
Sundakov points out that the European Commission's plans for the 2013-2020 phase of the EU's trading scheme highlights the seriousness with which economic risks are being taken into consideration elsewhere compared to New Zealand.
* The European scheme provides domestic firms with more protection against competition from foreign firms that don't face a carbon price. Sundakov notes that the NZ Government plans to cap free allocation of permits to competitiveness exposed firms at 90 per cent of 2005 emissions and begin phasing out all free allocation from 2012. NZ firms will therefore, increasingly, face costs that their competitors do not.
In contrast competitiveness exposed firms within the European trading system may be provided with 100 per cent free allocations for the foreseeable future shielding them from cost disadvantage.
* The European scheme will be less ambitious in its coverage. The New Zealand scheme aims to cover all sectors by 2013, but the European scheme will continue to exclude agriculture, forestry, road transport and shipping until at least 2020.
* The European scheme will continue to allow growth in emitting industries. While all emissions from new entrants or expansion of existing production will face an immediate carbon charge in New Zealand, Europe will continue to allow for some free allocation for new entrants (5 per cent of the total quality of allowances) which will allow growth to occur within emitting industries and avoid unfairly advantaging incumbents. Here, free allocation will only be possible if companies suffer competitive effects as a result of: carrying out industrial policies in 2005, directly using coal, gas or geothermal steam in 2005 or directly consuming electricity in 2005 - thus putting a burden on new entrants. Sundakov's analysis shows New Zealand's leadership position will increase the costs and risks to the economy.
So what to do about it? The first step would be for Government officials - and Parker - to confront the defects in the emissions trading scheme.
The carbon price - of some $15 a tonne - which underpins the Government's own analysis has already doubled since the emissions trading scheme was unveiled. A "safety valve" is needed to protect NZ industry and producers from undue fluctuations in the international carbon prices. But while the Government could feed in extra NZ units into the market to offset the damage from price hikes, Castalia contends the legislation does not allow the NZ market to be delinked from the international market in an effective fashion.
The second major issue is to ensure that New Zealand does not reduce protections for those "at risk" sectors at a faster pace than the phase-in periods for their major international competitors.
The third issue is whether the Government should transfer all the risks associated with implementing climate change policy to business and households.
These issues won't go away - neither will the debate.
