KEY POINTS:
The present introduction of emissions trading is overriding sound process. What's the rush? Already the Government has announced it will introduce an Emissions Trading Scheme and has prepared a Regulatory Impact Statement for it.
Unfortunately, the impact statement failed to identify the real reason for having such a
scheme, which is to meet our obligations under the Kyoto Protocol.
And it did not mention the biggest impact from meeting them, which will cost New Zealand $717 million a year, according to the latest Treasury estimate.
The scheme's stated objective is to "reduce New Zealand's net emissions below business as usual levels to comply with our Kyoto obligations, while maintaining economic flexibility, equity and environmental integrity at least cost in the long-term".
The impact statement boldly says the problem being addressed is human-induced climate change, and adds as an afterthought that New Zealand's international credibility is at stake.
There's nothing in it saying that if we did reach the emissions target set for us under the Kyoto Protocol, that our climate change challenges would be lightened. And there is no evidence on how our international credibility might be harmed. There is nothing about our national interest or whether the scheme's benefits exceed its costs. The objective is said solely to be to reduce net climate change gas emissions.
The policy basis of the scheme favours a trading scheme on the grounds that the New Zealand price for carbon would better track carbon's world price than a carbon tax would. But it wrongly assumes an international market for carbon is already established.
Its proposals will not impose costs on business and households equitably. For example, it states the Government is "particularly concerned" to alleviate the effects of price increases on residential electricity.
The impact statement does not acknowledge the cost to all Kiwis from investment forgone because of increased price risks around energy supply in the absence of a single "world price" for carbon.
There is no adequate way to insure against potentially wild price fluctuations, or inadequate or corrupt practices on how emission credits are calculated.
One real outcome we can count on from the scheme is it would transfer the Crown's $717 million a year Kyoto liability over to business.
This could result in many of our large industries, Fonterra perhaps among them, emigrating to countries where they are unlikely to face carbon charges.
By achieving this, the Regulatory Impact Statement implicitly affirms, we would meet our Kyoto targets. But that would cut New Zealanders' standards of living and do nothing for global warming.
Because the Government ratified Kyoto, and is determined to make us pay for the decision, it accepts that emitting industries should move overseas.
To counter business emigration of this sort, the Government seems ready to offer some "assistance" probably by issuing free emission credits. But unless the free credits were non-tradeable, this assistance would not help meet our Kyoto obligations.
What about the net benefits we might expect from the scheme? There's no mention of them. It would do little or nothing to reduce global warming. Our greenhouse gases contribute just 0.15 per cent of the world's total, with most from methane emissions from the world's most efficient dairying industry.
Regardless of the failures of the present policy proposals, we do need to take action to reduce emissions to try to avoid harm of a diplomatic and trading nature. In acknowledging this we should consider what our best response to Kyoto really ought to be.
As the NZ Institute recommends, we ought to be a "fast follower". Pretending global leadership on this issue is reckless.
Originally the Government believed ratifying Kyoto would deliver New Zealand a windfall worth hundreds of millions of dollars each year. It didn't, and the Employment and Manufacturers Association said it wouldn't at the time.
EMA, Business NZ and the NZ Institute consider an emissions trading scheme may be a sound response to climate change. I have drawn on their analysis and from economist Bryce Wilkinson.
Each of them are certain the policy proposed needs much more careful analysis, flexibility and maybe price capping. What if, for example, in a thin market (where there is more demand than supply), the price for carbon reached $150 a tonne, or 10 times more than the price on which the present $717 million liability a year is based?
The impact statement assumes a market for carbon with supply and demand more or less in balance, and with sound hedging options. Its assumptions are wrong. Until the market is well developed a price cap is needed on carbon emissions.
We also need time to review other options, such as aligning with Australia or the European Union, or backing out of Kyoto liabilities as Canada has said it would.
Renewable energy in New Zealand offers big scope only so long as we are prepared to allow resource consents more readily for hydro and wind generation.
We could even investigate reducing dependency on fossil fuels, and unreliable weather by exploring our nuclear options, except our recent governments are politically opposed to it.
Let's not delude ourselves that the trading scheme proposal will help. And getting our public policy right in this instance is hugely important.
* Alasdair Thompson is chief executive of the Employers & Manufacturers Association (Northern)
