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Climate change policy could cause large increase in electricity costs

A new report by economic consultancy LECG concludes that a narrow based emissions trading scheme applied to the New Zealand electricity sector in 2008-2012 would impose significant costs on electricity consumers for little or no decreases in carbon emissions.

The report concludes that the consumer cost per tonne of CO2 emissions reduced over the period could be $124-$165 per tonne of CO2, potentially higher.

The report was prepared by Toby Stevenson and Simon Hope of LECG for the Greenhouse Policy Coalition, an industry association representing energy intensive companies on greenhouse gas and climate change issues.

Executive Director of the Greenhouse Policy Coalition, Catherine Beard, says a narrow based emissions trading scheme for the electricity sector is one of a number of policy options the government is calling for submissions on, with a view to developing new climate change policy in the near term.

“It has been hard for industry to properly respond to the range of policy options on the table because there is a lack of quantitative analysis to assist us to judge the relative merits of the different options.  We asked LECG to undertake an examination of emissions trading applied to the electricity sector between 2008 and 2012 because we suspected that it would add substantially to the cost of electricity to consumers, while achieving dubious benefits, and this has proven to be the case.”

Toby Stevenson, co-author of the report, says there are a number of reasons that a narrow emission trading scheme applied to the electricity sector would be an expensive option for electricity consumers.

“Under this option it is going to be difficult to produce material emission reductions from the electricity sector without imposing significant costs on consumers for a range of reasons, such as;
· the relatively low contribution of electricity generation emissions to total greenhouse gas emission in New Zealand
· the existing generation mix and the influence of hydro in the market
· the limited number of participants in the electricity market
· the way the spot market operates
· the range of conditions that would be required for new renewable generation to displace existing thermal generation between 2008-12
· the transaction and other costs over such a low base.

Toby Stevenson said that they had looked at a range of scenarios for emissions trading in the electricity sector, using a range of possible prices of carbon.  “The results indicate that there will be an immediate impact on consumer electricity costs as soon as credits need to be purchased, rather than being gradually introduced to electricity prices as the credit purchase costs to generators might be under some scenarios.”

Catherine Beard said that while there are a number of ways that the analysis can be undertaken, it is important for New Zealand Inc that we have some idea of the costs versus the emissions reduction potential of the various policy options in order to make informed choices.

“We need to have an idea of whether the policy is going to achieve its objective of emissions reductions and at what cost.”

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