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Emissions trading proposal - how do we make it work?

Is the emissions trading scheme proposed by government leading the world or out on a limb?

A new report by Castalia, the economic consultancy that was the first to point out New Zealand would have a Kyoto liability rather than a big cheque, concludes that the emissions trading scheme proposed by the government requires important modifications if it is to protect New Zealand from unviable economic costs and deliver long-term environmental objectives .

The report, “NZ ETS how do we make it work?”, was commissioned by the Greenhouse Policy Coalition, which represents many large companies in the energy intensive sector.

Lead author of the report, Alex Sundakov, says that a limited and carefully managed carbon trading scheme may be a useful way to introduce a carbon price into the New Zealand economy, and to promote efficient emission reductions where they are possible.

He sees risks for New Zealand under the proposed scheme because it rushes to expose the entire New Zealand economy to a high and potentially volatile carbon price.

”Policy-makers overseas have made sure that a good balance is struck between environmental and economic objectives by keeping control over the carbon price and what activities are exposed to that price. A price of carbon is imposed only when it can make a real difference to emissions.

Mr Sundakov says an extremely ambitious and broad approach that is out of line with international action makes no sense given the shape of the New Zealand economy. “Given what New Zealand exports and produces, the scheme would simply force a reduction in production in the few areas where we have a demonstrated comparative advantage. This production will be taken up by our competitors, and this may actually increase global emissions. For no real environmental gain, New Zealand will face the costs or realigning our economy and becoming a less attractive place to invest and do business.”

Mr. Sundakov doesn’t think that any scheme posing such risks will be credible. ”New Zealander’s won’t be willing to face real economic costs for the sake of arbitrary international targets and illusory environmental benefits.” Even if the scheme is passed into law now, it will have to be modified and amended over the next few years until it allows New Zealanders to make their own decisions in terms of balancing economic and environmental objectives.” But he warns this process will be costly. “By the time things settle down, firms will have acted on the basis of distorted incentives, investment will have been diverted from New Zealand, and transition costs will have been incurred.”

He says these costs could be avoided by immediately including a combination of best-practice measures that are used to limit economic risks in other countries. These include:

· Adopting a more realistic timeframe for transitioning to a lower carbon economy, in keeping with our trading competitors

· Setting within-scheme emission caps that reflect our emissions profile and limited abatement opportunities

· Introducing a price safety valve to avoid volatility and exposure to high carbon prices that would cause economic damage

· Using intensity based rather than absolute emissions targets for firms – so that NZ firms are judged on world’s best practice benchmarks and can continue to grow as long as they are at world’s best practice.

· Retain a focus on protecting competitiveness and limiting carbon leakage

· Establish a new entrant reserve of free allocation to industry; otherwise New Zealand will fail to get any new investment in our most important income earning sectors.

Catherine Beard, executive director of the Greenhouse Policy Coalition, says it is important that people read and understand the Castalia report and that recommended changes are made to the scheme to avoid unnecessary damage to the New Zealand economy.

“If the scheme goes ahead in its current form, it will be small comfort to us in the years ahead that Castalia was right again. Companies are making investment decisions about New Zealand right now and if we lose investment in our key productive areas to other countries, it will not come back,” she said.

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