The National Party confirmed yesterday that it will phase out over three years the "buy one, get one free" deal for domestic energy consumers under the emissions trading scheme.

One of the modifications the Government made to the ETS was to require oil companies and power companies which burn fossil fuels to surrender only one carbon credit for every two tonnes of emissions when the transport and stationary energy sectors came into the scheme in the middle of last year.

The concession is due to expire at the end of next year.

Even though the market price has fallen by a third in the interim, the Caygill review of the scheme recommended phasing out the half obligation over three years.


Climate Change Minister Nick Smith said the fiscal cost of phasing in the full obligation would be $410 million but other changes to the scheme would render the overall package fiscally neutral.

As the scheme stands, owners of plantation forests pre-dating 1990 are liable for the carbon deemed to be emitted when they fell their trees, unless they replant the same land in trees.

They are compensated for the loss of flexibility in land use by an allocation of credits.

National announced yesterday that it would permit "offsetting", where the deforestation obligation is avoided if equivalent land is reforested elsewhere.

Consequently it will review whether the second and larger tranche of compensation to pre-1990 foresters should be scaled back.

Smith said the pre-election economic and fiscal update (Prefu) had a provision of $730 million for that second tranche, while the fiscal costs of a more gradual phasing in of a full obligation for domestic energy consumers would be $410 million.

The existing legislation also requires the agricultural greenhouse gases, methane and nitrous oxide, which arise from the bodily functions of livestock and which represent nearly half the national total, to be brought into the scheme in 2015.

National would review that in 2014, Smith said, and he reiterated the conditionality the Government has put around it. It will not impose a liability on farmers unless there are practical technologies for them to reduce emissions and more progress is made internationally on reducing emissions.


Labour's policy is to include agriculture in the scheme from 2013, with a free allocation of 90 per cent of 2005 emissions.

It has not taken a position on the phase-out of the half-obligation for domestic energy consumers.

"We have said we will take time to analyse the Caygill review," associate finance spokesman and architect of the ETS David Parker said.

There might be a case for saying that the prospect of full carbon pricing had already had its effect on the investment decisions of electricity generators, he said.

At present the ETS does not generate cash revenue for the Government. Emission units are allocated free to eligible foresters and trade-exposed industrial emitters and are surrendered to the Government by companies with obligations under the scheme. Money changes hands between those third parties.

Labour, however, is counting on a revenue stream - a cumulative $680 million over the next four years - to partially defray the cost of its tax policy.

This would require auctioning units, Parker has acknowledged.

The Prefu forecasts a positive impact from the ETS on the operating balance of a cumulative $1 billion over the same period.

But Smith said this was not cash income, and the Government had made no decisions about auctioning.

The net revenue booked from the scheme reflected the Treasury's view that the units have a monetary value and so therefore did the Crown's stock of units and the net flow of these units between it and emitters and foresters. Parker dismisses this as sophistry.