Carbon tax deadline imminent

Firms which may be eligible to negotiate an exemption from the fast-approaching carbon tax need to get cracking and apply, the Climate Change Office says.

The tax is only two years away. Even with the latest moves to simplify the process of negotiating a greenhouse agreement (NGA), it was likely to take about a year to conclude one, said the Government agency's acting manager NGAs, Bruce McLean.

A briefing on the new rules will be held in Auckland on Friday.

McLean said there was a perception that negotiated greenhouse agreements were designed for big businesses, but they were intended for any firm with high energy use or process emissions and whose competitiveness would be at risk if subject to the tax.

The tax, the level of which is to be announce in next month's Budget, will affect transport fuels and electricity costs as well as applying to on-site emissions.

So far only two NGAs have been concluded, with the New Zealand Refining and gold miner OceanaGold.

Seven are in negotiation and a further 12 companies have registered their interest. "We expect the final number to be between 20 and 40," McLean said.

The process has been simplified in response to industry and Government concerns that negotiations were getting bogged down, that it required officials to become experts in the technology of a range of industries, and that the agreements in effect pre-empted investment decisions which were the province of the companies' boards.

Without relief through NGAs, the tax could be expected to bring in $600 million to $700 million a year at first and as much as $1 billion if it hits the $25 a tonne of CO2 level it has been capped at.

Industrial emitters account for between a third and a half of that.

To qualify, firms have to produce internationally traded goods, which includes competing with imports and show their competitiveness would be at risk if subject to $25 a tonne tax.

In practice that means that energy costs exceed 20 per cent of total costs, or that the carbon tax would impact on their earnings before interest and tax by more than 10 per cent, or push the firm's profitability below its weighted average cost of capital.

Securing an NGA requires undertaking to achieve world's best practice for emissions for comparable firms by 2012, normally taken as being within the top 10 per cent of firms with similar technology and of similar scale and age.

Under the new rules, an expert consultant will be engaged by a firm to establish best practice, under the Climate Change Office terms of reference. The Government will appoint its own validator to check that the process and outcomes are reasonable, avoiding the need for officials to learn enough to be able to second guess the expert themselves.

Another major simplification relates to the pathway from existing emissions to the negotiated end-point. A straight line will be drawn from 2004 to target 2012 levels.

If at the two milestone dates of 2009 and 2012 a firm does better than that line, it will receive tradeable emissions units for the difference. If it falls short it will have to pay for the excess.

McLean said smaller firms in the same industry, such as sawmillers, could band together through their industry association to pool the costs of negotiating agreements on best practice for various categories of plant. That could form the basis for individual NGAs with the companies concerned, lowering transaction costs.

What are NGAs?

* Negotiated greenhouse agreements exempt a company from the impact of the carbon tax in exchange for moving to world's best practice in emissions for the gases blamed for global warming.

* They are only available to firms whose international competitiveness would be threatened by the tax.

* Industry complained they were becoming too complex and prescriptive and taking too long to negotiate. So the process has been simplified.

* The level of the tax, due to come into effect in 2007, will be set in next month's Budget.