Article that appeared in The Dominion Post, 27 July 2010
It has become commonplace for those seeking a dramatic response to climate change to criticise the Emissions Trading Scheme on the basis that it subsidises big companies.
This argument is just plain wrong. It also betrays an economically naive “them-and-us” attitude to business by suggesting you can dump the cost of tackling climate change on businesses without any impact on the rest of the country.
On 1 July, the Government began a process that will see the ETS grow into a world-leading comprehensive, all gases, all sectors carbon pricing scheme. The companies in the ETS now have to pay for the carbon they emit. They are also, like consumers and householders, paying higher fuel and electricity prices as a direct result of the ETS.
The Government has been sensible and has recognised that if the companies affected have to pay the full price of carbon, some will go out of business, adding to unemployment queues and cutting export receipts and tax payments to the state’s coffers. Prime Minister John Key has confirmed this concern about unemployment in recent media comments.
The Government has received free emission units under the Kyoto Protocol and, rather than keeping the units for itself, it is preparing to allocate some to trade-exposed companies to help them while they adjust to carbon pricing. Units are to be allocated at a 60 percent or 90 percent level on an intensity basis, ie emissions are considered relative to productive output. There will also be an optional fixed $25 carbon price per unit until the end of 2012, with companies until then required to surrender one unit for every two tonnes of emissions, an effective halving of the $25 ceiling price.
To call this a subsidy is misleading. Subsidy implies the Government is propping up uncompetitive, inefficient industries. In reality, the ETS has introduced a charge on businesses that threatens to undermine the competitiveness of good, solid companies.
Sensibly, the Government is easing in the full cost to avoid causing serious economic damage. This moderated approach safeguards New Zealanders’ jobs. Nevertheless the ETS, in its current form, will still cost New Zealand companies millions of dollars a year. It is also far from generous given that our hugely important food processing sector is likely to get almost nothing.
The European Union’s ETS, in comparison, has for years allocated units to companies at levels well above 100 percent in most countries across almost all affected sectors, except electricity generation. A key food exporter like Fonterra would likely get a substantial allocation in Europe. Under the New Zealand ETS its allocation is more likely to be 5 percent. Furthermore, New Zealand companies do not get the extra subsidies and incentives provided to EU businesses.
Complaints that New Zealand companies in the ETS are unfairly supported because of the gradual phase-out of allocated units (1.3 percent a year from 2013) are unfounded. The 1.3 percent figure compares well with the 1.74 percent that applies in the EU.
Some people are frustrated as they think we should do more to combat climate change. It would be nice to do more, but it would be foolhardy to do this if it harms the economy and when our major trading partners have not put a price on carbon.
Australia has shelved its plans for an ETS until 2013 at the earliest. The US has abandoned trying to get a cap-and-trade climate bill through the Senate in the near future. Japan’s ETS bill is stalled. China is not looking at an ETS, full stop.
New Zealand has imposed a cost of carbon on businesses. We need others to do the same. When the Government reviews the ETS next year, it is to be hoped it will take into account what other countries have, or have not, done. This is certainly the route Australia has taken.
If other countries price carbon as we have, there will be less justification for allocation of units to New Zealand businesses. In any case, the Government will need to balance its climate change policies with the need to support economic growth and protect New Zealanders’ jobs.
(NB the text of this article is as submitted and may differ slightly from the published version)