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Emissions trading recommendation not supported by the analysis

29 June 2009

A peer review of the economic analysis undertaken by NZIER and Infometrics for the Select Committee Review of the emissions trading scheme, is critical of the conclusion it reached because the conclusion is not based on the results of the economic modeling.

Economic Consultancy Castalia, undertook the peer review for the Greenhouse Policy Coalition, which represents the energy intensive sector.

The NZIER/Infometrics report to the Select Committee recommended that an ETS should be introduced in the near term, with free allocation to competitive at risk sectors, with agriculture excluded until measurement becomes economic for that sector.

Author of the peer review, Alex Sundakov, said the problem with the recommendation is that it did not reflect the modeled results, which were that a “government pays” model is the least cost in the short-run.

Overall, the peer review concludes that while the economic modeling would have been useful as one of several inputs into the debate, it would be dangerous to rely on the report as a stand-alone review of the climate change policy options.

“While the economic models used have a role to play in predicting long term impacts on an economy of pricing carbon, their limitations, which are spelt out in the report, mean they are not well suited to advising policy makers about the near term adjustment an economy would have to go through.”

“The modeled scenarios also do not reflect the real policy options among which the policymakers must choose. The issue is not whether New Zealand should, once and for all, choose a carbon trading scheme or some other regime. Most economists agree that carbon trading is the best solution when all countries participate in it. The real issue is how to manage the evolution of New Zealand’s policy as the global policy evolves, without causing undue damage to the New Zealand economy during the transition phase. The NZIER/Infometrics report provides little information for making such decisions?”

Given the acknowledged limitations of the model, the NZIER/Infometrics report to the Select Committee could not be considered a useful Regulatory Impact Statement, Mr Sundakov concluded.

Catherine Beard said the Peer Review by Castalia would be provided to the Select Committee Review of the ETS as a supplementary submission.

Copy of the Peer Review is attached (5 pages).


For Further information contact;

Alex Sundakov, Executive Director, Castalia ph +61 2 9231 6862, +61 433043337 or Catherine Beard 0274 633 212

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