Brian Fallow: Lip service to Kyoto but no carbon tax

This country will pull its weight in the global effort to tackle climate change, the Government tells us.

After all, we have a climate-dependent economy, a tradition of being good international citizens and a national brand image of being clean and green.

The reality is more tawdry, however, and has become more so with the Government's decision just before Christmas to abandon what had been the central plank of its climate change policy: the carbon tax.

The global warming issue is one of those cases where everybody wants to save the planet but nobody wants to pay.

The upshot has been a series of exemptions and exceptions and carve-outs of which scrapping the carbon tax is merely the latest example.

It began at the geopolitical level with an agreement to exclude developing countries from any binding limits on their greenhouse gas emissions.

You only have to catch a glimpse of Third World poverty to understand the case for doing that, but it gave political cover to those in the United States, and its loyal sidekick across the Tasman, who do not want a bar of any quantitative restriction on emissions.

That has left the rest of the developed world, which has accepted emission limits under the Kyoto Protocol, in the unhappy position of collectively representing a minority of global emissions, and a dwindling minority at that. The problem is that such holes in the international system create the risk of leakage. Industries that use a lot of energy and generate many emissions will migrate to those countries where the right to emit continues to be free.

At the national level, it was the same story. The policy package announced in 2002 began by exempting the agriculture sector which is responsible for just under half of the country's greenhouse gas emissions. That policy has just been reaffirmed.

The rationale is that there is little farmers can do to reduce those emissions, which largely arise from the bodily functions of cattle and sheep, except to have fewer of them.

A quick look at our trade accounts shows the flaw in that approach.

Farmers contribute through levies to the cost of research into this problem but, after the successful "fart tax" campaign, they have got that contribution down to about 1 per cent of what the taxpayer will have to pay to cover the international cost under Kyoto of their sector's emissions.

Officials estimate that by 2010 agricultural emissions will be between 20 and 30 per cent above 1990 levels.

Under the 2002 policy package, the taxpayer is also liable for the cost under Kyoto's rules when forests are felled but not replanted. That is only fair, given the concomitant decision for the Government to retain ownership of the credits that arise from the establishment of new forests.

But the policy put a cap on the deforestation liability which the industry believes may well be breached. The result is uncertainty and a perverse incentive to deforest now before the new regime bites. This is the subject of ongoing negotiations between the Government and the industry.

Meanwhile, the decision to retain ownership of forest sink credits has proved something of an own goal in that it is at least partly responsible for the rate of new planting dwindling to almost zero.

A conditional exemption also exists for the smokestack industries, because of the leakage issue referred to earlier.

They can negotiate individual greenhouse agreements with the Government under which they are only accountable for emissions over and above world's best practice for comparable plant. That element of the existing policy may be retained.

The effect on national emissions may not be large, however. Because these are energy-intensive industries they already have an incentive to use energy efficiently.

The combined effect of exempting agriculture, deforestation and large industrial emitters was that only about a third of the country's greenhouse emissions were going to fall within the scope of the carbon tax.

In effect, households, smaller businesses and the transport sector were to bear the brunt. That was despite the fact that residential energy use per capita is the lowest in the OECD.

As electricity consumers, householders may still face a carbon tax, which would push up their power bills by about 6 per cent. A "narrow" carbon tax on large energy users, including the power companies, is still under consideration.

But electricity generation is predominantly from renewable sources. Power stations using gas or coal that would be hit by the tax represent about 8 per cent of national emissions, a lower proportion than in most developed countries.

The transport sector, representing about 20 per cent of emissions, is the main beneficiary of the decision to scrap the carbon tax.

At the indicated initial level of $15 a tonne of carbon dioxide, the tax would have added about 4c a litre to the price of petrol and diesel.

Modelling by the Ministry of Economic Development indicated that at that rate the tax would cut total emissions by just 1.25 per cent by 2020.

Even at the present low international price of carbon of about $8.50 a tonne, those extra emissions would cost the taxpayer about $115 million over the five years of Kyoto's first commitment period, 2008 to 2012.

It can be argued, however, that the faint price signal an extra 4c a litre would have given is drowned out by the resounding signal the steep rise in international oil prices has already delivered.

Petrol prices at the pump rose 17 per cent last year.

If people are not going to let that influence their next vehicle purchase decision, the carbon tax would not have had its intended effect on them either.

But the international oil price can fall as well as rise, with the changing balance of supply and demand.

The carbon tax was always a long-term game.

Even if the initial rate of the tax was low and its short-term effects on emissions correspondingly negligible, having one on the statute books would be seen as the thin end of the wedge that was liable to widen over time, just as the rate of income tax has.

To be effective that would have required support across the political parties, which was clearly not forthcoming.

Even so, in administering the coup de grace before Christmas the Government has sent a signal that it is not serious about reducing this country's contribution to global warming, small though it may be.

Instead, we will pay someone else to pull our weight.