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Look at what the Aussies are doing first

- Guest column, NBR

9 May 2008

Submissions are currently being heard on the Climate Change (Emissions Trading and Renewable Preference) Bill and the Minister David Parker wants a report back to Parliament by June.

The vast majority of submitters hold grave concerns for the future profitability of their firm or sector if the Bill goes ahead without significant change and if you read through all the submissions, support for the current proposal is very thin on the ground, despite what proponents of the scheme would have people believe.

In addition recent economic analysis by NZIER paints a very bleak outlook for the economy if we introduce an ambitious emissions trading scheme ahead of our trading competitors. Their analysis shows that the proposed emissions trading (ET) scheme will be eight times more expensive (with no additional emission reduction benefits) than if the government just met our commitment through purchasing emission units internationally to make up the shortfall. Critics of that view would say why not make the polluter pay rather than be subsidised by the taxpayer, but NZIER point out that the taxpayer would benefit as well through more jobs and better wages than there will be if the emissions trading scheme goes ahead.

Another argument against this approach is that one of the benefits of an emissions trading scheme is supposed to be that it encourages new investment to be cleaner and greener through sending the right price signals, but this is unlikely to happen in New Zealand with the current proposal. Any new investment will face the full cost of carbon, so unless you are a company like an electricity generator and can pass the full cost of that price increase through to your customer, any new investment is likely to be uneconomic if it has to face the full international price of carbon and those investment funds will go to countries that do not price carbon.

One irony of the NZIER analysis is that it shows over the longer term (20 years) no sector in New Zealand is a winner, even the service sector. This is ironic because the vision of the government is that an ET scheme will help speed a transformation to a ‘low carbon economy‘. In a nutshell the reason for even the service sector taking a hit is that the whole economy contracts and the sectors that are the hardest hit are our greatest income earners – the productive sectors and exporters. If they shrink then all sectors shrink and instead of just being slightly less wealthy than we would have otherwise been in 20 years time, by then we will be just catching up with where Australians are today (in terms of GDP per capita).

This vision of ‘carbon neutrality’ and a low carbon economy ignores where our natural competitive advantage has been (agriculture and processing of primary products) and where future demand is coming from - an increasingly wealthy Asia which wants our products in an increasingly food constrained world. The UK’s new chief scientist has warned the UK government that a food crisis will take hold before the effects of climate change and indeed the media is already awash with stories about people in many countries unable to afford their usual food staples.

What needs to Happen?

People in the business sector appreciate that New Zealand needs to act responsibly and work collectively with the rest of the world to reduce our emissions – the question is how to play a constructive role and maintain the ability to grow our economy. The solution that most in business are putting forward is the need for New Zealand to apply intensity targets (emissions per unit of output) which will encourage new investment in low emission technology and allow growth from those that are at world’s best practice (WBP) in emissions intensity.

If New Zealand producers are the best in the world in emissions intensity – in industry and agriculture, then we should be producing more and displacing that product being produced in a more carbon intensive country. That would be a win for the environment and a win for our economy. If New Zealand imposes an emissions cap, then we will kill off growth – go backwards economically and other countries will pick up the slack – notably those in Asia and South America where emissions caps will not be imposed.

Working out your emissions intensity takes more time and effort than an absolute cap on emissions, but the large companies are prepared to do it (have already done it with the NGA policy) and the benefits to the economy and to global emissions are worth the effort. We should not be looking for ‘quick and dirty’ solutions to a long term problem that requires a more sophisticated response.

If New Zealand does go ahead with an emissions trading scheme – we should at least wait to see what the Australian scheme design will be. There are many risks to being a first mover in our trading region – and they won’t be good risks. If the New Zealand scheme goes ahead, then the government must listen to submitters and the economists and do all they can to prevent the leakage of our trade exposed energy intensive sector.

This includes sufficient allocation of emission allowances, no early phase out of allowances regardless of what other countries are doing, remove the cap and move to an intensity based scheme to allow for growth and new cleaner investment and retain the ability to cap the price of carbon if it gets too high and is causing economic pain.

In thinking about future international commitments on climate change and a vision for where New Zealand wants its economy to head, don’t ignore the mega trends (increasing food demand) and our natural competitive advantage and lets position New Zealand to be able to take advantage of those trends.

In the interests of keeping food on tables and taking into account that emissions from agriculture are not the major problem where global emissions are concerned, I would be arguing that agricultural emissions be excluded from future global climate change deals. If you take agriculture out of the picture, New Zealand’s per capita emissions start to look much more manageable!

We should be trying to avoid a situation where New Zealand has to spend the next 20 years travelling to international meetings begging other countries to cap their emissions growth – from all sectors and all gases; in the same way we have been unsuccessfully pleading for a reduction in agricultural tariffs and subsidies for the last 20 years.

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