Focus goes on carrots now tax stick gone

Business lobby groups have welcomed the Government's decision to scrap its proposed tax on the carbon content of fossil fuels.

"Now the big taxation stick has been put away, we are keen to help the new Government focus on carrots for the development of technology that will cut greenhouse gas emissions," said Employers and Manufacturers Association chief executive Alistair Thompson.

The EMA suggests a 150 per cent tax write-off for such R&D.

Business New Zealand chief executive Phil O'Reilly said a carbon tax would not have worked.

"It would have made fuel costs higher for everyone and would have penalised enterprises that, in most cases, have to increase energy use in order to grow."

But Climate Change Minister David Parker signalled yesterday that some kind of carbon tax was still on the cards for large energy users, including thermal power stations.

A regime could stay like the negotiated greenhouse agreements (NGAs), under which large smokestack industries could win exemption from the tax in exchange for moving to world's best practice for emissions from comparable plants.

Stuart Frazer, who negotiated the first NGA for the Marsden Pt oil refinery and now works as a consultant in this area, said most large emitters welcomed the NGA approach rather than cruder alternatives like grandfathering-in historical emission rates.

Such an approach would still be useful if the Government moved after 2012 - as officials favour - to an emissions trading regime.

In the meantime, Frazer said the design of a narrow carbon tax regime for "large" emitters, with an NGA-style exemption mechanism, would have to decide what the threshold for inclusion was, whether it applied to particular sites or was company-wide, and how to handle the carbon price content of electricity prices.

Officials have also been asked to report back to the Cabinet in March on encouraging new planting of Kyoto forests and reducing deforestation.

Forestry Minister Jim Anderton has been talking for months to the forest industry, which is unhappy with much of the policy. That consultation will continue.

"The Government is sending all the right signals that it wants to take a pragmatic and forward-looking approach to Kyoto and forestry issues," Kyoto Forestry Association - which represents the owners of Kyoto forests which entitle a country to carbon credits - spokesman Roger Dickie said.

Forest Owners Association chief executive David Rhoades said now one of the major planks of climate change policy had been removed, questions were raised about how the country's Kyoto obligations would be met.

One area where forestry could contribute was in the use of biofuels.

"Removing deforestation liabilities is part of the answer. Providing credit for carbon absorption is the other."

But the chairman of the Environmental Defence Society, Gary Taylor, a former adviser to the previous Climate Change Minister Pete Hodgson, described dropping the tax as pathetic.

"Ministers and the Climate Change Office have been captured by advocates for energy-intensive industries such as the Greenhouse Policy Coalition which have a vested interest in getting the tax dropped," he said.

"New Zealand's emissions are 22 per cent above the level they were in 1990. We have a commitment under the United Nations Convention to get them back to that level. But now the policy cupboard is bare."

Greens co-leader Jeanette Fitzsimons said because of the time needed to develop new policies, it was unlikely anything meaningful would happen before Kyoto's first commitment period began in January 2008 or even before the next election that year.

Even if a carbon price remained in electricity costs, scrapping the tax would remove any incentive for firms to shift from burning coal or gas to wood waste where it was available.

While the minister was right that the price signal from an extra 4c a litre on petrol and diesel was largely drowned out by the more resounding one delivered by the international oil price, she said that at the margin it would still make a difference.

"This is about influencing people's decision about the next vehicle they buy, how far they live from work, whether they ship goods by rail or by truck and so on,"she said.