The Green’s carbon tax

June 2nd, 2014 at 11:00 am by David Farrar

The Greens have proposed scrapping, the ETS, replacing it with a carbon tax, and compensating for the carbon tax with a reduction in income and company tax.

Overall the policy appears to be credible, and has some merit to it. Let’s first look at the pros and cons of an ETS vs a carbon tax. Of course some people will say we should have neither, but they can go scream loudly somewhere else.

The ETS basically lets the market set the price of carbon. The idea is that as emissions rise, the price rises, and the greater the economic incentive to move to less carbon intensive activities – and the greater the incentive for tree planting etc which reduces net emissions.

But here’s the problem. With the global failure to get an agreement post-Kyoto on emissions reductions, the price of carbon has fallen significantly. Also the GFC lead to a decrease in global economic activity and emissions. So it is a fair criticism of the ETS that it no longer provides much of an incentive to reduce emissions. This is not a fault of the NZ Government, but of the reality of the international economy.

The current price is around $5 per tonne.

The Greens are proposing a simple tax at $25 per tonne, with agricultural emissions at $12.50 per tonne. This has the advantage of certainity. It will provide more of an incentive in the short term. However if there is a future global agreement, then a simple carbon tax may end up providing less of a price signal than an ETS. Also the ETS allows the allocation of free units to reduce over time, which can be an effective way to reduce emissions.

It is positive that the Greens are not proposing a carbon tax as a way to just increase revenue for the Government. Their proposed tax cuts of no tax on the first $2,000 of income and a one cent reduction in company tax to 27% is welcome and does make the package relatively cost neutral.

My concern is that Governments in the future would increase the level of the carbon tax, with no corresponding income or company tax reductions. So would the level of the tax be something that only Parliament can change (like most taxes) or something that the Greens would allow the Government to alter in future.

The other issue is the wisdom of taxing agriculture when no other country does this, and in the absence of an international agreement or any significant way to reduce emissions short of just having fewer cows. I think at some stage agricultural emissions should be priced, but if we are the only country in the world doing so – then we may just export jobs and income to other countries.

But overall the proposed carbon tax does have some merits over the current ETS. If NZ does proceed with one, then there is a good way to set the price which may please both sceptics and non-sceptics. Tie the level of the tax to the mean global temperature. That way the level of the tax only increases if the mean global temperature increases. That way future Governments can’t use it as a cash cow.

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Labour on clean and green

July 5th, 2012 at 12:00 pm by David Farrar

Grant Robertson has put out this pamphlet, which really needs a response. It is hard to know where to start, so let us take them in order.

Climate Change

Labour is great on rhetoric, but crap on results. In 1999 NZ’s gross emissions were 67,395 CO2e. Under nine years of Labour gross emissions went up 10% to  74,198  (and net emissions went up 13.4%). In the first two years under National gross emissions dropped 3.4% to 71,657.  There was a failure to deal with climate change -Labour’s. Under National we are set to come in under our Kyoto Protocol target.

Labour’s policy blunders saw 30,000 hectares of deforestation in their fianl three years.

Maritime Disasters

This is a reference to the fact that National did not pass a law to give effect to the International Convention on Civil Liability for Bunker Oil Pollution Damage that would have doubled the liability of the Rena’s owners from $12m to $24m.

What Grant omits to mention is the convention was adopted in 2001, and Labour didn’t legislate for seven years on it, and the Labour Cabinet gave the legislation the lowest priority rating. Sure with perfect hindsight would have been good for National to have passed it, but for Grant and Labour to claim not passing the law has dented our clean green image is stupid. The impact of not having changed the law is potentially fiscal, not environmental.

EEZ environment

National has in fact passed a law to give give environment protection to the EEZ. Previously there was no protection at all. One can dispute the balance in the legislation, but again ironic and rich for the party that did nothing to protect the EEZ to be saying that actually passing a law to protect the EEZ damages NZ’s clean green reputation while having no law at all, bolstered it!

46 wells were drilled in the EEZ under Labour – all without any legislation at all to protect the environment.

Mining conservation land

Oh my God, National put out a discussion document on mining. Oh yeah, I am sure that really undermined NZ’s clean green image – a discussion document.

And do I even have to mention that Labour approved 218 permits for mining on conservation land – all done without harming NZ’s clean green image. You see in Labour world, it is only bad if National talks about it. It is good when Labour does it.

MFE Funding

Now this is just getting silly. No funding has been cut for environmental activities. The $1.75m budget cut was for 12 admin staff, after a review found their admin/non-admin staff ratio was 1:10 and in most agencies it was 1:20 to 1:40.

In Labourland, I guess there are hordes of foreign tourists thinking about coming to New Zealand because of its clean green reputation, and they decide not to come because 12 admin staff were got rid of in the Ministry for the Environment!  Really, what planet do they think people live on.

I guess it is easy to stick five nonsensical bullet points on a postcard with a lovely picture as a backdrop. Far harder to actually have a track record that comes anywhere close to matching your rhetoric. I’ll take substance over rhetoric any day.

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Tiwai Point

April 24th, 2012 at 7:00 am by David Farrar

David Shearer in his big speech last week said:

Tiwai point could have been an obsolete aluminium smelter decades ago, but it didn’t work out that way.

That’s because management and workers at NZ Aluminium came together and looked at what they had to do to keep the operation running.

Through their ingenuity they began producing the highest quality aluminium in the world. They identified their niche, they got the business, they scored the contracts 
and today everyone shares in the success.

They are well paid for working well and it’s an important business in a regional area.

It is good to see a Labour leader championing Tiwai Point.

But there is a problem. Labour’s ETS policy would close Tiwai Point down. Labour opposed the changes National made to the ETS to protect trade-exposed industries, and their policy is still to undo those changes.

So the poster boy employer heralded by David Shearer would close down under their policies. Whoops.

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National’s ETS changes

November 9th, 2011 at 3:16 pm by David Farrar

National has released its policy on climate change and the environment. The policy has a long list of achievements, but I want to focus on the ETS changes:

The 2011 ETS Review Panel recommended moving to full obligation in three equal steps between I January 2013 and 1 January 2015. It is National’s intention to implement this recommendation.

This is nothing major, and seems sensible to phase in the full obligations.

National believes it is important to maintain land-use flexibility for pre-1990 forest land. We will introduce offsetting on 1 January 2013 regardless of the lack of international agreement.

This is very sensible. It basically says you can offset new forests against cutting down existing ones. Allows a landowner to use the land most suited to forestry for forestry and the land most suited to (say) dairy for dairy.

The agriculture sector is liable to surrender units for agricultural greenhouse gas emissions from 1 January 2015.
National will review this in 2014. We will not impose a liability unless there are practical technologies to reduce emissions, and our trading partners have made further progress with their climate change policies to reduce emissions.

I actually disagree with National on this one. The ETS review panel chaired by David Caygill did a very good job I thought, and made the case that the industry has shown the ability to reduce emissions. Sure, there is no silver bullet, but I don’t think delaying the start date endlessly is a good idea. The industry moves into the ETS at a very slow rate, and a preferable strategy would have been to have it come in, and maybe then cap the level it moves to if technology has not found ways to reduce emissions.

Advocate for an international agreement that requires all major emitters to reduce their emission levels over time.

National sees no point in any future international agreement that does not include a commitment from major emitting countries to reduce their business-as-usual emissions levels. We’ve made our 2020 target conditional on this.

This is vital. If China is not part of any agreement to at a minimum hold, if not reduce, emissions then the efforts of the rest of the world will count for nothing.

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The ETS Review

September 15th, 2011 at 3:56 pm by David Farrar

The ETS Review Panel reported back today. It’s a fair read at 98 pages.

The panel was chaired by David Caygill, who was Labour Party Deputy Leader to Helen Clark. Another members was David Russell, the former head of the Consumer’s Institute. Their mandate was to look at the ETS, to look at what has been happening globally, and to recommend changes to it. And no before you ask, their mandate wasn’t to look at the science.

The ETS was passed into law by Labour in 2008 and it was amended by National in 2009. The major event since then was the collapse of the Copenhagen talks and the growing probability that there will be no binding post-2012 Kyoto type agreement.

The dates sectors have or will enter the ETS is currently:

  • Jan 2008 – forestry
  • Jul 2010 – liquid fossil fuels, stationary energy, industrial processes
  • Jan 2013 – waste, synthetic greenhouse gas sectors
  • Jan 2015 – agriculture

At present there is a 2:1 subsidy so that a business can buy two carbon credits for the price of one. This was a temporary measure to reduce the immediate impact on petrol prices and power prices. The panel recommends that this phase out by 2015. This would mean petrol would rise over four years by around 3c/litre and power would go up around 3% over the next four years (beyond any other price increases), Note that AFAIK Labour’s policy is to stop the subsidy immediately which would have those price increases occur all at once next year.

There is also a price cap carbon credits of $25. The price cap gives price certainty to businesses and consumers but if set too low doesn’t provide enough of an incentive to reduce emissions. They recommend the cap increase by $5/year. That does not mean the market price will be that high. I think the current price is around NZ$19.

I thought the panel might advise that agriculture not enter in as scheduled in 2015, however they say it should still enter. Their reports says:

For agriculture, the Panel has noted submitters’ concerns that the sector lacks abatement options. However, based on evidence it has heard from stakeholders, the Panel believes the options available to the sector are sufficient to enable surrender obligations to begin in 2015, as currently legislated. Under the current allocation regime, the obligation on agriculture’s biological emissions will essentially be intensity based (emissions per unit of product), and the sector has shown an ability to decrease emissions intensity year‐on‐year. The ETS will increase incentives for emissions‐intensity improvements.

However they do recommend two changes for the agricultural sector:

The Panel strongly believes the point of obligation for agriculture should be at the farmer level, rather than the processor level as currently legislated, as this will ensure those who are best able to reduce their emissions are motivated to do so. The Panel supports the work of the Agricultural ETS Advisory Committee as it explores the practicality of doing this.

Makes sense to have the costs and incentives apply to individual farms, but very hard to manage in a practical sense.

Given that agriculture’s entry into the ETS will mean it will not be able to benefit from the one-for‐two obligation as it phases out, the Panel recommends the sector benefits from a one‐for-two obligation for the first two years after it enters the ETS (i.e. 2015 and 2016). This surrender obligation should then be phased out over the subsequent three years, consistent with those sectors already in the ETS.

This will give the agriculture sector more time to adjust to a carbon price and to take up abatement options. The Panel notes that, combined with free allocation of NZUs, the agriculture sector would face an obligation equivalent to only 5 per cent of biological emissions for the first two years after entering the ETS.

So basically soften the impact for the first five years.

I predict Labour and the Greens will decry the report as watering down the ETS and how we will be seen as evil polluters if we adopt the review’s recommendations.

And likewise I am sure ACT will campaign against agriculture even entering the ETS. There is some potential for ACT to gain votes with Don Nicolson campaigning on this issue.

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ETS Debate continued

November 1st, 2010 at 9:00 am by David Farrar

On Tuesday I blogged a “fact sheet” by the NZ Greenhouse Policy Coalition which compared the NZ ETS and the European ETS,

On Thursday I blogged a response to it, from the British High Commission, pointing out NZ’s high emissions per capita, and what Europe is doing on top of having an ETS.

Today, I’m happy to present a response to that response, from the Greenhouse Policy Coalition. Personally, I’m finding it a very useful debate as the NZ ETS will have its first formal review next year – and a key issue will be comparing what NZ is doing, to what other countries are doing.

The GPC responds:

NZETS and EUETS

Response to Kiwiblog item “British High Commission on European ETS”

29 October 2010

The British High Commission’s comments on the differences between New Zealand’s and Europe’s emissions trading schemes and wider climate change commitments require a response.  Specifically:

  • The focus on per capita emissions is deeply misleading in understanding New Zealand’s situation, especially the role of agriculture;
  • New Zealand’s experience with an ETS is much less than Europe’s; and
  • New Zealand performs well in its own commitments outside the ETS.

Per capita emissions and agriculture

Focusing on per capita emissions is a standard approach used to make New Zealand and some other developed countries (e.g. Australia) look bad on climate change while making more populous countries (particularly China and India and some EU countries) look relatively good.  It helps avoid the real issue, which is the total amount of carbon going into the atmosphere.  New Zealand accepts its responsibility to do its share, but New Zealand isn’t the problem – action (or inaction) by the major emitters (China, the US, India, Russia and Japan) will determine whether global emissions keep rising or start to fall.  Per capita figures are a red herring.

What if we measured emissions in terms of each country’s consumption of goods, i.e. the amount of carbon embedded in the products used in an economy?  By this measure, New Zealand’s per capita figure would fall significantly, while that of the EU and the UK would rise dramatically.

The central issue to consider is why, with 73% renewable electricity generation (as against the UK’s 2020 target of just 30%), New Zealand rates so high on an emissions per capita basis.  The answer is simple – our super-efficient agricultural sector.  Our relatively small population produces a huge amount of highly-nutritious, high quality food largely for export to feed a booming world population.  We do this so efficiently that the productivity (and hence emissions of agricultural greenhouse gases methane and nitrous oxide) per person is very high by world standards.  The carbon footprint of our agricultural produce is not bettered by any of our competitors.

So, why don’t we just do something to reduce emissions from stock (methane) and fertilizer (nitrous oxide)?  Many options for this have been suggested but none has yet proved cost-effective (methane) or they have limited regional application and are not yet recognised by the UN (nitrification inhibitors).  New Zealand is doing more than its share in this respect.  We have put $45 million into the Global Research Alliance on Agricultural Greenhouse Gases, which we are leading with the UN’s blessing.  The challenge facing this group is to produce more food while reducing the intensity of emissions.  The bottom line is the world needs New Zealand to keep producing food, but at the moment the only way to cut agricultural emissions is to cut stock numbers, which is no solution at all.  If we stop producing, other, less efficient, producers will simply take over.

Efficiency is an important point.  It’s not just about being efficient in terms of emissions per unit of production, which this country’s agriculture sector certainly is.  New Zealand also produces food without subsidies that, in other parts of the world, such as Europe, soak up huge amounts of money.

It’s also worth noting that New Zealand has the only ETS with agriculture in it.  While the agricultural gases methane and nitrous oxide are not due to come into the ETS until 2015, farmers are already paying a price for their emissions through increased fuel and electricity bills.  Our food processing sector is fully in the ETS and gets almost no allocation of free emission credits, which will cost these companies tens of millions of dollars over the next year and more in future years.

New Zealand’s short ETS experience

The High Commission makes much of the EUETS having a cap on emissions, which the NZETS does not have.  This is misleading on two counts.  First, New Zealand does operate within a wider cap – its binding commitment to keep net emissions (total emissions less the carbon taken up by trees) at 1990 levels for the period 2008-2012.  Furthermore, New Zealand’s ETS, like the EU’s, phases out the support of companies via free carbon credits – and at almost the same rate.  Second, emissions trading is a brand new experience for New Zealand companies.  The EU has been doing it for five years and has made some huge mistakes along the way.  Its initial effort crashed the price of carbon because of over-allocation of emission credits.

Yes, it’s true the EU is on track to meet its 2020 target of a 20% reduction on 1990 emissions.  However, this is due to the recession cutting production in emission intensive areas and not the ETS.  Recent publications point to minimal gains from the EUETS.  Michael Jacobs, a Visiting Fellow at the London School of Economics, says analysis shows the EU scheme is projected to cut just 32 million tonnes of carbon emissions in the period 2008-2012, which is tiny alongside annual European emissions of over 3500 million tonnes.  The Climate Spectator (5 October 2010) reported recently that the EUETS had also failed to deliver a move towards renewable energy.  The story reported on a survey of investment managers conducted on behalf of the Institutional Investors Group on Climate Change, called Shifting private capital, suggesting this failure stemmed from the piecemeal nature of EU climate policy.

On balance, the NZETS isn’t looking too bad.

New Zealand’s climate change commitments outside the ETS

The High Commission focuses a lot on what the EU is doing outside its ETS to cut emissions.  As noted above, most of the success here is due to the recession.  The EU’s commitment to renewable energy is much less than New Zealand’s – an overall 2020 target of having 20% of all energy coming from renewables (i.e. including transport).  The figure for the UK is lower – 15%.  This compares with New Zealand’s renewable electricity generation last year reaching 73%, with a national target of 90% by 2025.

New Zealand’s international leadership of agricultural emissions research is also evidence of this country not sticking solely to the ETS in responding to the risk of climate change.

Finally, one contextual point leaps out as we consider New Zealand and the EU on climate change.  The EU is a collection of 27 countries, which largely trade with each other and are all in an emissions trading scheme together.  New Zealand is on its own; its major trading partners do not have a price on carbon.  This is a dangerous spot to be in when your entire economy rests on trading with the outside world.

The things I am also interested in, in this debate, are:

  1. What will China do? If China does not sign up to anything meaningful, then by 2020 I estimate their emissions will exceed total global emissions in 2005
  2. What will the US do, if it does not do an ETS?
  3. Will there be a formal post-Kyoto agreement?
  4. Will the next few years of climate data strengthen or weaken the projections with regard to future warming
  5. what are the relative costs and benefits of mitigation vs adaptation.
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British High Commission on European ETS

October 28th, 2010 at 12:00 pm by David Farrar

I blogged on Tuesday a comparison between the NZ ETS and the European ETS, concluding the NZ ETS is more “pure” as it includes all gases and all sectors.

The British High Commission has sent me this response, articulating the European view:

Same Game – Shared Targets

Many people note that New Zealand generates only a small proportion of global emissions and ask whether it matters if NZ acts or not. It very much does matter. If New Zealand – with its clean, green image – can’t make the move to low carbon, what hope for other countries? The important statistic in terms of global responsibility is greenhouse gas (GHG) emissions per person, that puts New Zealand near the top of the global league table.

Accurate figures vary depending on the source but the global average is around 7 tonnes of GHG per person per year. The UK and EU average is about 10 tonnes per year while New Zealand is around 19 tonnes GHG per person per year. To meet our global target of reducing emissions by 50%, everyone in the world needs to be at around 2 tonnes per capita by 2050. This shows the scale of the challenge facing New Zealand and all other countries.

The EU’s Game Plan

The ETS is only part of Europe’s response (more on this below). Commentators can only sensibly critique the European approach if the ETS is viewed in this context. More generally, no comment on European efforts should be made without acknowledging what Member States’ are already committed to. For example, by 2050 the UK is committed in law to having GHG emissions 80% less than those in 1990 (and so move from 10 to 2 tonnes per capita). In the nearer term the EU as a whole is committed to 20% (or possibly 30%) reductions by 2020.

It is misleading to make too much of a direct comparison between the EU and NZ ETSs. The crucial fact is that action to reduce an economy’s greenhouse gases requires a portfolio of policies. This is what we have in the EU. The key issue is to look at the best policy tool for reducing emissions in each sector. For example, the EU has looked at light vehicles (cars and vans) and recognised that they produce 12% of the EU’s emissions and so need to be tackled. So the EU passed legislation on the fuel efficiency of cars. It is now EU law that the fleet average for all cars registered in the EU is 130 grams per kilometre (g/km). This is being phased in over the next few years and there are hefty fines for companies that exceed the limit (up to 95 Euros per extra gramme of CO2 over the limit!). This is a sensible and effective approach to tackling transport emissions. So the fact that it is not in the EU ETS does not mean action is not being taken.

The same argument applies to housing, agriculture and waste. Each country also has a binding renewable energy target and their own range of policies (energy tax, feed-in tariffs etc) to ensure those targets are met. In addition the EU is contributing EUR 7.2 billion to climate finance over the next three years. Ultimately when comparing and contrasting the response to climate change of different economies the most important fact is the overall impact on GHG emissions. This shows that the EU is on the right track – 2009 emissions were around 17% below their 1990 level.

If forced to compare the NZ and EU ETS one key difference is that the EU ETS sets binding caps on emissions. So participants in the scheme will have their allocations gradually reduced to 21% below the 2005 level by 2020. There is currently no similar cap in the New Zealand scheme.

Climate change matters

Every country in the world will face stresses from climate change. Increased frequency and severity of floods, storms I and droughts will have a direct impact on New Zealand’s agriculture sector and infrastructure. The faster we all move to a low carbon economy – and there are a whole range of policies to get us there – the better.

Its great to get a response on what is a complicated and challenging issue.

Our per capita emissions are high, but that is partly because of the large number of cows we have, relative to humans. I have not calculated what it would excluding the cows, but suspect we would then be close to the UK average.

The UK response does impress upon me that doing nothing is not a viable option. Even Tony Abbott is not a proponent of doing nothing – he just proposes direct Government spending on climate change mitigation rather than an ETS.

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The NZ ETS

October 26th, 2010 at 9:00 am by David Farrar

The Greenhouse Policy Coalition have published a fact sheet on the ETS. Specifically they compare it with the European ETS and the ETS proposed for Australia.

This is very useful as in 2011, our ETS will be up for review. Labour and the Greens both say that our ETS is far too weak, and far greater costs should be imposed on businesses and consumers. So it is very useful to be able to compare it with the European scheme especially. First they not the different profiles:

New Zealand’s emissions (2008 figures) primarily come from agricultural gases (46.6%) and energy (45.3%) while the EU’s emissions are largely from energy (79.1%), with agriculture just 9.6%. There are few internationally recognised mitigation options currently available for agricultural emissions, while renewable energy generation is a proven industry.

That is a key aspect – 47% agriculture compared with 10% for Europe.

New Zealand generates much more electricity from renewable sources – 73% in 2009, with a 90 percent target for 2025, as against a European target of 20% of total energy coming from renewables by 2020 (15% in the UK). Europe therefore has much more scope than New Zealand for increasing renewable generation.

This is also key background. Europe can fairly easily reduce emissions by replacing non-renewable power plants with renewable ones. We already have four times the proportion of renewable energy.

The combination of these two factors means it is much harder (ie expensive) for NZ to reduce emissions.

Emissions coverage

The EU: Covers 43% of emissions, rising to 50% from 2013. There are no plans to cover methane from farm animals or agricultural nitrous oxide from fertilisers or global warming synthetic gases like sulphur hexafluoride.

New Zealand: From 1 January 2015 the NZETS will cover nearly all emissions, including all six gases identified by the United Nations.

So 100% coverage vs 50%. This means that even if one left agricultural gases out such as methane, we would still be covering more than the Europe scheme.

Sector coverage

The EU: Combustion and most industrial sectors are currently covered, with aviation due to enter in 2012. From 2013, petrochemicals, aluminium and ammonia will be included. Agriculture will not be covered.

New Zealand: Virtually the entire economy will be covered by 2015. Currently, the scheme covers forestry, industrial processes (includes iron and steel, aluminium, cement, glass and gold), stationary energy (includes coal, natural gas and refining petroleum) and liquid fossil fuels.

If no other country in the word is including agriculture by 2011, then the logical thing to do in the review is to suspend its inclusion into the scheme.

Allocation of free emission units

The EU: Historically, free units have been allocated to many companies at levels well above 100% of their emissions. Average allocation across EU countries in 2009 varied between 92% and 152%. Allocation also covers more sectors than in New Zealand. The scheme will feature more auctioning of units (ie companies having to pay for them) from 2013, with a sinking cap, but 100% allocation is still on the cards for significantly trade-exposed sectors, including those the NZETS covers.

New Zealand: Trade-exposed companies are to be allocated units at a 60% or 90% level on an intensity basis, ie emissions relative to output.

So again NZ is “more pure” than Europe.

Phasing out of allocation

The EU: The number of units allocated to companies will be cut by 1.74% each year from 2013.

New Zealand: Unit allocation will be cut by 1.3% each year from 2013.

The phase out rate is one of the few areas where Europe is moving faster. But considering the lack of movement from the US and China and India, this is fairly prudent.

Carbon pricing

The EU: Has no price caps, but from 2013 member states will be allowed to influence carbon prices by bringing forward auctioning of units within the overall cap.

New Zealand: Has an optional price cap for carbon until the end of 2012, set at $25 per unit (one unit = one tonne of CO2-e), with companies until then required to surrender one unit for every two tonnes of emissions, an effective halving of the $25 price.

This is the major difference. It halves the cost for businesses (and consumers) by way of effectively a subsidy from the taxpayer.  Unless a change is made this will end in 2013.

Now of course some say there should be no ETS at all, but that is as likely as NZ implementing a flat tax. The real debate next year will be over what changes are made to the ETS – the National Government will review the ETS and decide on some changes. Labour and the Greens will also draw up policy on what changes they want. It will be very interesting to compare the policies after the review is done.

My position is pretty simple. China, India and the US are essential to any meaningful reduction in emissions. Unless those three countries have announced concrete plans to reduce emissions, then there is little point in NZ self-flagellating itself by having the purest ETS in the world. Having no ETS and no emissions reduction target at all is not politically viable as doing nothing would invite trade and reputation repercussions. We need to be doing enough so that we are not seen as the problem, but not so much that we end up exporting jobs to other countries.

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Nolan on ETS

May 27th, 2010 at 2:00 pm by David Farrar

Economist Matt Nolan blogs:

People see this and then they say “global warming isn’t real” or “we are too small to impact on global warming” and then they say “NO ETS!”.  However, this isn’t the point of the ETS.

The ETS is a scheme to raise the funds to pay for our Kyoto Liability.  Even if you don’t believe in global warming, we have a liability that is based on carbon emissions.  As a nation, either people who produce the carbon pay for it – or everyone pays for it through higher taxes.

So here in lies the question – do we want higher prices for carbon goods or lower incomes because of higher taxes?  Given that the liability is a function of the amount of carbon we produce, it follows that pricing carbon on the basis of this will lead to the “best” solution – no matter what political party you support.  I know that National, Labour, and the Greens all understand this – so if you guys could like, explain it to the ACT party, and then like, explain it to the public, I’ll be very happy

Let the howls of outrage begin.

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Editorials 27 May 2010

May 27th, 2010 at 12:00 pm by David Farrar

The Herald talks racecourses:

Not so long ago, Avondale and Ellerslie enjoyed virtually equal status in the world of horse-racing. The Avondale Cup was a highly prestigious event. How times have changed. This week, the Avondale Jockey Club suspended racing at its course after its meeting on July 3 because of severe financial problems. …

The same applies to Avondale. Its potential closure is not just a matter for the club and the industry. It is about a community and city resource that would be lost forever. Even now, the course is valuable for more than just racing. It is the venue for a Sunday morning market, and the club leases the infield to the city council for football and cricket. Other events could be held there. If the course were closed and the club raced elsewhere, Auckland, which proclaims so often that it wishes to be known as a vibrant city full of attractions, would lose one of its entertainment options.

Can’t say I care too much.

The Press criticises ACT over its ETS campaign:

The misleading and alarmist figures being propagated by the ACT Party and Federated Farmers about the cost of the carbon emissions trading scheme which will start in July are a last gasp from groups that have had difficulty accepting the idea at all.

In their latest scaremongering, ACT and Federated Farmers have suggested that the financial impact of the scheme in higher fuel and electricity prices has been seriously underplayed by the Government and that consumers, and particularly farmers, are in for an unpleasant shock when the scheme begins.

And the Dom Post reserves judgement on the three strikes law:

Now that the three-strikes legislation is in place, its real trial begins.

Supporters believe it will see a drastic fall in the number of serious offences – ACT MP David Garrett, pressed on Radio New Zealand to give a figure, said he expected a 5 per cent to 10 per cent fall in violent offending in the first five years of the law’s operation.

That will be easy to assess from the crime statistics.

I believe we will see a fall in serious violent offending, but only after a few years as it takes time for people to get a first strike, let alone a second or third strike.

If the new law had been in place when Graeme Burton began his life of offending, he would have been unable to shoot and kill Wainuiomata father Karl Kuchenbecker in Lower Hutt. At the time he killed Mr Kuchenbecker, Burton had more than 100 convictions. He was on parole for an earlier murder.

Exactly.

The ODT focuses on the creation of an artifical organism:

Even in the rational world of biological science, the publication in Science of the findings of an American-based team of researchers caused considerable excitement.

A bacterial cell had been controlled by a chemically synthesised genome.

That meant that the cell began replicating and making a new set of proteins entirely controlled by man.

In the secular world, this was briefly sensational, and described somewhat effusively as the creation of the world’s first “artificial cell”. …

There is no doubt that the team employed at the J. Craig Venter Institute has achieved an important technical step towards the goal of creating artificial or synthetic life.

But we are a very long way indeed from realising some of the speculation: the construction of human limbs or body parts or even a human being in the laboratory.

That remains in the realm of fiction.

For now.

I believe that within two generations, humans will be living to 150 or older as science discovers uses for stem cells, gene therapy etc.

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Small on Inflation

May 24th, 2010 at 2:23 pm by David Farrar

Vernon Small critically looks at Labour’s claims on inflation:

Labour’s Phil Goff and his inner circle had settled on attacking over the forecast spike in inflation, figuring there was a ready market for suggestions the tax cuts would be swallowed by rising prices.

But the case Labour has tried to make risks backfiring, because frankly, the evidence looks a bit fishy.

I had planned to write along these lines, but glad Vernon has done it for me.

The Treasury forecasts that inflation will surge to 5.9 per cent next year before falling back and staying at 2.4 per cent for three years; well within the Reserve Bank’s 1 per cent to 3 per cent band. It also notes that “underlying” inflation would remain relatively subdued and have a limited impact on interest rates

Next year’s spike includes 2 per cent from the rise in GST, which is compensated for by tax cuts and increases in superannuation, benefits and support for others on state-supported incomes.

More than compensated for.

It also includes a contribution of 0.5 per cent from the rise in tobacco excise (that Labour enthusiastically supported in Parliament)

Which will only affect smokers, and for those whom quit smoking will save them money.

and another 0.4 per cent from the fuel and power prices associated with the Emissions Trading Scheme, which Labour would implement with bells on, pushing inflation much higher. (In any case, the inflationary impact of the ETS was already included in the December half-yearly update.)

Now this is crucial. Quite a few people are unhappy at the impact of the modified ETS scheme, which adds 0.4% on 1 July to overall costs through higher petrol and power charges, but what Labour have not mentioned is their unmodified ETS would add 0.8% to inflation. They had passed a law which would have doubled the price increase due to the ETS.

Take those and the impact of GST away, and underlying inflation next year would be about 3 per cent, close to the top of the Reserve Bank’s 1 to 3 per cent band, but not so unusual.

The other thing Labour has not mentioned is they have constantly called for more government spending. This would mean a higher deficit and more borrowing, which would be inflationary. So their crocodile tears over inflation are less than convincing – their stated policy is to spend more, and to have an ETS which doubles the impact on power and fuel prices at 1 July.

On the other side of the ledger, as the economy improves, the Treasury expects wages to increase by 2.6 per cent next year (the year Labour chooses, because of the unflattering comparison with the 5.9 per cent inflation spike) and then rise by 3.5 per cent, 3.7 per cent and 3.9 per cent in subsequent years, while inflation is tipped to stay at 2.4 per cent.

These are just forecasts, and should be taken with the usual shaker of salt. But if you take one year into account you should be prepared to take them all.

On that basis, wages could well outstrip inflation in the next four years, and beat underlying inflation by even more.

As is generally the case.

Does Labour really want to argue that, as well as compensating for any GST rise, the Government should offset all the effects of inflation? That was above 3 per cent in 2001, 2006 and 2008 – when Labour was in power – and there was no similar call then.

Personally I would be delighted if Labour adopted a policy of giving people tax cuts every year to compensate for inflation. But somehow I don’t think they intend to.

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O’Reilly on ETS

May 5th, 2010 at 10:00 am by David Farrar

I agree with the sentiments expressed by BusinessNZ CEO Phil O’Reilly:

In business there is a wide range of opinion stretching across the spectrum, from zealous green through to emissions denial. The most common reaction has been concern about increased energy costs just as businesses start to recover from the recession.

Why not delay it, they say – especially since Australia is now pulling back from its earlier commitment to emissions trading. The answer is probably that delay wasn’t a feasible option.

New Zealand’s situation is very different from Australia’s. Australia has never had an emissions trading scheme, so delaying the introduction of one would have been relatively straightforward.

To delay it in New Zealand would mean introducing amending legislation under urgency and ramming it through Parliament without even going to select committee. This would be Labour’s wet dream – National breaking its election promise and doing an u-turn, and even worse forcing it through under urgency to over-turn previous legislation that had been the subject of three years or consultation and debate.

If National did this, they would be suffer much the same fate as Kevin Rudd just has (fallen behind in the polls for the first time ever), but arguably even more.

But New Zealand has been committed to it since the trading legislation passed in 2008 by the previous Labour-Greens Government.

The present Government came into power that same year, on an election promise to improve the scheme passed by Labour and the Greens. Their mandate wasn’t to dismantle or delay it but to improve it.

The failure of Copenhagen has happened since then, and we should respond to that failure. But scrapping the entire scheme is daft and would lead to higher Government debt.

Had the Government sought to dismantle or delay it we would have had a fourth parliamentary/select committee process in as many years, with even more divisive, rancorous debate.

With Labour committed to returning New Zealand to the previous draconian emissions scheme and the Greens unwilling to compromise on their climate change stance, the issue would have become a long-running, festering sore.

Labour’s scheme had less protection for trade exposed industries, and would see greater costs on businesses, despite their competitors not having them.

Taking the longer view, it’s hard to deny the certainty that the world is headed towards a price on carbon. Whether it’s by way of carbon taxes or emissions trading schemes and whether within two years or 20, the clear intent of Governments around the world is to restrain emissions using economic tools.

I agree a price on carbon is almost inevitable. Even if you do not believe the claimed indirect warming effects of carbon emissions (which there is debate about), even the direct warming effects (which there is almost no debate about) makes a price on carbon sensible.

Official figures show New Zealand is on track to meet our 2012 Kyoto target. In 2012 our gross emissions will be 23 per cent higher than in 1990, but this will be more than offset by forests planted since 1989, with many New Zealand foresters actively receiving tradeable carbon credits.

This is key. Forestry is already in the scheme. You can not simply scrap a scheme that has already started. Forest owners are owed hundreds of millions of dollars for their forests under the scheme.

The fact that we already had the legislation as far back as 2008 and the kinds of decisions made by other Governments over the last year have led to the situation where New Zealand is now a leader in taking action on emissions, rather than our desired position of fast follower.

And this is a concern. But the answer is not to scrap a scheme that has been in place since 2008. It is to use the 2011 review to decide whether to amend the rate at which businesses get exposed to the full cost of carbon, and when sectors such as agriculture enter the scheme.

We are scheduled to have a review of the scheme before the end of next year. Business NZ believes this review should be brought forward starting no later than the end of this year.

The review should cover issues like the cost impact on consumers and businesses, competitive disadvantage issues and the position of agriculture and other sectors within the scheme.

Positions need to be developed based on current economic and international considerations.

We should all keep in mind the fact that the world’s consumers are increasingly seeking low-carbon goods and services and our trading scheme is the vehicle for nudging our producers on to a profitable low-carbon path.

And we shouldn’t forget that taking action to reduce emissions and look after our environment is, in the long run, the right thing to do.

I think it would be useful to wait for the Mexico conference, and see if that is as unproductive as Copenhagen. If it is, then the review of the ETS should look towards slowing or delaying the impact of the ETS in trade exposed sectors especially.

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Editorials 3 May 2010

May 3rd, 2010 at 11:00 am by David Farrar

The Herald is on judicial transparency:

The legal profession, at least in its upper echelons, is so small that there are bound to be close and long-standing relationships between senior lawyers and judges which may create the appearance of conflicts of interest.

The possibilities have been amply demonstrated by the case of Supreme Court Justice Bill Wilson, who finds himself facing the Judicial Complaints Commissioner because, when he was a Court of Appeal judge, he failed to fully disclose the extent of his indebtedness to a lawyer appearing before him.

And that is the problem – the lack of disclosure. The debt, by itself, does not mean the Judge could not sit on the case, and be impartial. In fact Justice Wilson ruled against the lawyer’s clients in a number of cases.

But the matter does not end there because now the Judicial Complaints Commissioner must decide whether the judge’s conduct in failing to promptly and fully disclose the nature of the relationship needs to be referred to either the Chief Justice or the Attorney-General. Unfortunately, either course of action may also raise questions of the kind mentioned by the Supreme Court because Justice Wilson has had close associations with both office holders.

He and Mr Galbraith have been in a racehorse-owning partnership with Chief Justice Dame Sian Elias. On the other side of the equation, Justice Wilson and Attorney-General Chris Finlayson were partners at the law firm Bell Gully and Mr Finlayson is on record as calling him a friend. So whichever way this case may turn, it gives rise to the very kinds of doubts that the courts, quite rightly, are at pains to avoid.

The Attorney-General is friends, I am sure, with a large number of Judges. I think we have to be careful about not having unrealistic expectations that Judges and lawyers have no dealings with each other at all, except in court.

But whatever the outcome of this particular case, the courts should reconsider the old policy of secrecy and remoteness as a means of preserving confidence in the system generally. More openness in the form of a public register of judges’ pecuniary interests – much like that which applies to MPs – would be much more effective.

Compulsory listing of such things as business interests, partnerships, trusts and, importantly, debts would make any possible appearance of conflicts of interest immediately apparent and therefore defuse any controversy such as the one engulfing Justice Wilson before it had a chance to arise.

The idea of a register is worth considering.

The Press suggests the winner of the UK elections will inherit a poisoned chalice:

When the British deliver their electoral verdict on Thursday, the winning party will be presented with a poisoned chalice. The huge cuts the new government will have to make to spending ensure it will be hounded into deep unpopularity and be long branded as the Scrooge that ended a decade of prosperity.

The reality that the golden economy has been dead for two years and has been sustained by massive borrowing will not ease the predicament of the incoming administration. In the cause of weathering the economic storm, spending and borrowing was maintained; only now do the bills have to be paid.

Yet the Lib Dems and Labour keep insisting one should go on borrowing and spending more for a wee bit longer.

The Dominion Post marks World Press Freedom Day:

For most New Zealanders, today is just another working day to be endured before the next long weekend heaves into view. To journalists, however, it means more than that. May 3 is the annual date that Unesco has set aside as World Press Freedom Day, an occasion to celebrate the value of a free media.

It is a prize worth winning, but comes at a price. New Zealand journalists don’t get killed for doing their jobs in this country, but that is not true elsewhere. In 1975, Kiwi Gary Cunningham was one of five journalists murdered by Indonesian forces in East Timor wanting to prevent the world knowing of their invasion. And already this year, at least 12 journalists have been slain for following a vocation with attendant dangers.

Here, the risk normally involves being called a “little creep” by an angry prime minister, being ejected from the team bus by an irate sports coach, or being sued for defamation for – perhaps – wrongly criticising someone with a reputation to defend.

True.

Thus it is harder in a modern democracy to persuade a cynical populace that to do away with a free press is to do enormous damage to the body politic and civic discourse. In the West, it is more common for the public to dismiss the work of reporters as sensationalism, trivia, and “lies”. Sometimes, they are right.

More usually, they are wrong. People often forget that everyone errs and that their errors are rarely exposed for others to judge. Chefs’ mistakes are buried in the rubbish; doctors’ mistakes are in a graveyard.

In the media business, mistakes can be of fact, emphasis or omission – and are usually inadvertent. Unlike the mistakes of others, however, journalists’ errors are published or broadcast for everyone to see, and – in the best of the breed – corrected publicly.

Alas the public correction is all too rare.

The ODT calls for no delay to the ETS:

Having once claimed to be a “follower” of our trading partners in such legislation, New Zealand, the critics claim, now looks likely to be an international leader – out on a limb with a feigned carbon tax that may in time come to be regarded as either innovative or foolish.

Businesses, for one, have not been slow to remind the Government of this risk, arguing that the policy will make it even more difficult to trade successfully with other countries which have yet to implement climate-change responses, or plan to defer them.

They have asked for New Zealand’s policies to be “aligned” with those of our major trading partners – a request that on the surface appears reasonable but is realistically impracticable. …

Yet, if the world has so much to lose from climate change, then it behoves countries to take whatever steps they can to minimise the effects – as a matter of urgency.

A global solution is obviously required and Western nations, including New Zealand, must lead it, since they are in the best possible position to afford the costs and provide the technology and innovation to achieve it.

Here the ODT is wrong. If China is not part of a deal to reduce emissions, then the efforts of the rest of the world will be futile. China by 2020, will be producing more greenhouse gas emissions than the rest of the world does today – even if they live up to their Copenhagen pledge.

For New Zealand to now delay further what has already been a slow, step-by-step procedure, would deny pragmatism in favour of the changing winds of political fortune.

I don’t support a change to the ETS legislation being done under urgency. If however there is no post Kyoto agreement, which includes commitments from China, then the rationale for an ETS is greatly reduced.

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Fran on ETS

April 28th, 2010 at 7:21 am by David Farrar

Fran O’Sullivan writes:

John Key’s refusal to postpone the implementation of the next phase of the emissions trading scheme (ETS) is setting the scene for a ‘winter of discontent’ with New Zealand business.

In just two days the perception of the Key Government as a climate change laggard has morphed into an unwitting climate change leader as our major trading partners, like Australia and the United States, prepare to defer their own schemes leaving this country out in front of the pack instead of the “fast follower” the PM promised.

The decision by Kevin Rudd to delay his ETS until 2013 does place pressure on NZ. It is almost ironic that National is at risk of accidentally achieving Helen Clark’s aim of being a global leader rather than a fast follower in terms of responses to climate change.

Of course the Australian ETS has never been passed into law – it is easy to delay something not yet legislated for.

The NZ ETS was passed into law by Labour in 2008, and them amended by National in 2009. It is already in effect for sectors such as forestry.

The Auckland Regional Chamber of Commerce has been adding fuel to the fire by asking its membership to email Key directly to ask for the July 1 cost hikes to be deferred.

The chamber reckons it will increase electricity prices by 5 per cent and add 4c a litre to the cost of petrol and diesel. Its boss Michael Barnett reckons the cost hikes will jeopardise the profitability of small to medium businesses as they get back on a growth curve after the lengthy domestic recession.

I’ll have to read the ETS legislation to check, but am unsure whether or not the Government can defer the entry of those sectors, without amending or repealing the ETS law. If a law change is needed, it couldn’t realistically be done by 1 July.

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ETS and Climate Change

November 24th, 2009 at 10:01 am by David Farrar

As I am travelling, I have not yet had time to read through the detailed documents on the ETS changes, and agreement with the Maori Party, or the stolen/hacked e-mails from climate change scientists. So I am not yet in a position to give my take on both of them.

Ian Wishart has a detailed post on the stolen e-mails. Again I have not had time to read them myself, and check for context – but there are links to the originals, so people can do so.

The Beehive announcement on the ETS agreement is here. I imagine it will be passed into law by the time I am home. If the changes are not passed, then the status quo of Labour’s ETS will come into force next year.

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Kyoto Costs

November 12th, 2009 at 11:00 am by David Farrar

An article by Brian Fallow covers issues around the proposed ETS:

Taxpayers will be stuck with 84 per cent of the bill for meeting New Zealand’s obligation under the Kyoto Protocol, while farmers and large industrial emitters get hefty subsidies, according to a report out today.

The report on the Government’s planned changes to the emissions trading scheme by the Sustainability Council’s executive director Simon Terry and economist Geoff Bertram says farmers will be subsidised to the tune of $1.1 billion by the end of 2012, while large emitters get nearly $500 million.

Sounds awful doesn’t it. Certain bloggers rant on about how people are getting paid to pollute etc, But the situation is far more complex than slogans.

Kyoto requires New Zealand to take financial responsibility for any increase in its emissions over 1990 levels during the five years from 2008 to 2012 inclusive. Current estimates are that we will exceed that target by 76 million tonnes, which would cost $2.3 billion (at the carbon price of $30 a tonne the report assumes).

At present we actually (as at 2009) have net emissions that are 10 million less than our 1990 levels – thanks to forestry plantings.  Also the current price of carbon is $20.35 a tonne, not $30. So the projections for 2008 to 2012 are some way from the current situation.

Changes to the ETS being considered by a parliamentary select committee lighten the burden on “trade-exposed” sectors, including farming, which account for around two-thirds of the country’s emissions, to protect their competitiveness when most of the world has yet to impose a price on carbon emissions.

Climate Change Minister Nick Smith said the Government was providing allocations of free emissions units more generously for those emitters because they were trade-exposed.

“It has nothing to do with favouring big over small,” he said.

And this is key. Making trade exposed industries pay straight away the full cost of carbon will merely see them lose production to other countries. And those other countries will often be more carbon intensive. So the net effect is bad for the environment and bad for our economy.

When No Right Turn thunders on about subsidising polluters, he is actually calling for something that will lead to increased carbon emissions.

Dr Smith said it was misleading to talk about subsidies to farmers on the basis that they are not paying for their emissions during Kyoto’s first commitment period (2008 to 2012).

“No country … is imposing a cost on their agriculture industry in the first commitment period. We are likely to be the first in 2015.”

Again this is where the purists just have no idea. They want us to tax (through the ETS) our farmers, in advance of any inclusion of agriculture by any other country. Again if we do what they want, then it is a lose-lose – bad for our economy and bad for the environment.

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Maori, forests and the ETS

October 19th, 2009 at 2:00 pm by David Farrar

Roar Prawn is predicting a major fight ahead over the ETS:

There’s a six billion fight over the ETS about to blow up. That’s how much Maori-owned forestry land has been devalued by the ETS. …

Select Committee could get very messy.

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ETS Editorials

September 16th, 2009 at 6:55 am by David Farrar

The NZ Herald laments the missed bipartisan opportunity:

A bipartisan policy on a subject so important for long-term investment decisions would be a rare and splendid thing, giving all sectors confidence that carbon emission costs would survive the next change of government. …

The economic good sense of ensuring emission costs are passed into prices will be obvious to those in industries that may be relieved by National’s transfer of their costs to the taxpayers.

Relief in those industries will be tempered by the knowledge that the next government is quite likely to reinstate economic sense. That likelihood already makes investment decisions difficult. Such is the folly of National’s failure to embrace a bipartisan approach.

My preference also was for a bipartisan deal, but I would not assume there would be changes made to the ETS by a future Government. National only had an opportunity to amend Labour’s ETS because it got passed just weeks before the election. I think, despite the rhetoric, Labour will be very wary of campaigning in 2011 on the platform of increasing prices.

In some respects the scheme National can now enact with Maori Party support is superior to the previous government’s. Permissible emissions will be based on an industry standard rather than an arbitrary base year so that firms that are efficient by their industry’s measure will be allocated free emission rights. The free allocations will be withdrawn much more slowly than Labour’s scheme allowed, sensibly aligning New Zealand’s scheme with Australia’s.

Labour might have agreed with all of these changes for the sake of a bipartisan consensus. It has found that leadership on climate change is not an election winner. The subject is too big for campaign slogans and some of the nominated solutions – dimmer light bulbs, dribbling shower heads – are annoyances that Labour now regrets.

The issue over allocation of permissible emissions being on an intensity basis, to reward efficiency, was one of the crucial aspects, and I suspect was the issue hardest for National and Labour to agree on. However it does seem that negotiations had not concluded with Labour, and it would have been desirable for them to be allowed to consider in private if they could back the changes the Maori Party agreed to.

The Dom-Post says:

Once the emissions trading scheme was about saving the world from global warming. Now it is about who pays and who gets to pass the cost of their emissions on to someone else.

Actually it was never ever about “saving the world”. Our reduction commitments at Kyoto and Copenhagen are about that, so to speak.  The ETS was always about who pays.

The deal cobbled together by National and the Maori Party is a triumph of political pragmatism. It is also an agreement that has ended, at least for the foreseeable future, the prospect of an enduring bipartisan approach by Labour and National. That turns New Zealand’s emissions policy into a political football.

The deal is a political solution that fails to solve an environmental and economic problem. It will not provide long-term certainty to business or to consumers.

The ETS was always a political solution. And as I said previously I would be surprised if in two years times Labour really wants to campaign on changes, as it will meet massive resistance from the losers from any changes.

Other changes will result in some businesses and agriculture being given more time to adjust, with a delay in bringing them into the scheme, while others are given less time.

That is good news for those who benefit, but it rather misses the point. The aim of the exercise is not to raise money to pay for New Zealand’s Kyoto obligations. It is a stick to encourage those responsible for emissions to cut them.

The Dom Post needs to read up on trade exposed industries and how imposing costs on NZ businesses and farmers that their overseas competitors do not have, may actually lead to an increase in global emissions.

Finally the ODT:

Having stitched up a deal with the Maori Party on its revised Emissions Trading Scheme – which has exercised environmentalists and received only lukewarm plaudits from two of the revised scheme’s more notable beneficiaries, industry and agriculture – the Government might venture to suggest that since no-one is entirely happy it must have the numbers about right.

Indeed.

The big question for the Government has been how to be seen – ahead of the Copenhagen climate meetings in December – to be making a meaningful contribution to mitigating the effects of emission-induced climate change as a good global citizen should, but to be so doing in a manner that does not place an undue burden on industry and agriculture, and thus circumscribe economic growth; nor, in the midst of a recession, place too much immediate cost on the individual consumer.

The proposed new scheme, which it will be able to pass into law with the support of Peter Dunne’s United Future vote, and that of the Maori Party, seeks to achieve this by, in the first instance, delaying entry of agriculture into the ETS from 2013 until 2015.

For the purists who decry the delay, it is worth noting this will be the first ETS in the world that includes agriculture, I believe.

In the face of climate change with its dire predicted consequences, all countries are having to grapple with striking a similar balance, nuanced according to the demands of their individual economies and political sensitivities.

This is new territory. There is an element of guesswork and gamble in reaching all such accords. National has, for better or for worse, both spurned Labour’s hand and taken a conservative approach. In the short term this is likely to pay handsome political dividends; in the longer term, it may prove to be less advantageous – electorally and environmentally.

Again, it would have been desirable to continue negotiations with Labour.

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Carbon leakage

September 15th, 2009 at 6:37 am by David Farrar

The Herald reports:

The transport and stationary energy sectors will now come into the scheme on July 1 next year, six months earlier and later respectively than under the existing law.

That will provide a local market in which owners of post-1990 forests can sell carbon credits should they wish.

But for the first 2 years, oil and power companies will now have to surrender only a one-tonne carbon unit for two tonnes of emissions. The taxpayer would pay the cost of the other one. Alternatively they could pay the Government a cash price of $25 a tonne.

Agriculture, which is responsible for half the country’s emissions, will still come into the scheme, but two years later, in 2015.

It will also get a more generous allocation of free units.

So will the smokestack industries – large industrial emitters like the Glenbrook steel mill, the Tiwai Point aluminium smelter and the Marsden Point oil refinery – whose international competitiveness would be jeopardised if they had to pay the full cost of their emissions.

I find what the Government has done is interesting. They have moved some sectors into the ETS faster than under Labour’s EST, while they have delayed other sectors. Why the difference?

Basically carbon leakage for trade exposed industries.

Moving the transport sector into the scheme earlier is relatively safe, as we’re not about to start filling our cars up in Australia with petrol.

But certain sectors, such as agriculture, are trade exposed and if one forced them to start paying the full cost of carbon too soon, they may lose market share to overseas producers who are not paying a price for carbon. And this can turn into a lose/lose for the environment and the economy. The environment suffers if we lose agricultural production to China (as per unit we are lower emitting), and our economy suffers also.

So when you read stories about how “polluters” are being subsidised, the reason is because we do not want our trade exposed industries to be losing market share to countries not charging for carbon. Now if you get a global agreement that brings in China, India etc then you get a different scenario.

I would have thought that having seen the massive increase in unemployment when our economic growth drops away, some groups would be less keen to advocate a scheme that would damage economic growth, and not actually benefit the environment.

Of course even this amended ETS will see some reduction in economic growth. But I’ve never regarded it as realistic to think we could be the only country in the OECD that doesn’t set a price for carbon and participate in an international agreement to reduce emissions.  We are far far too small to be able to get away with that, without facing some nasty consequences for trade access.

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Hooton on Goff and ETS

September 11th, 2009 at 1:00 pm by David Farrar

Matthew Hooton writes (offline) in the NBR:

The clock is surely ticking on Phil Goff’s leadership. New Zealand’s most accurate polls, TV3 and Roy Morgan, both put Labour below 30%, half the support of National and its partners.

Worse for Mr Goff, while the Greens are secure in Parliament, Labour’s other essential ally, Winston Peters, has no chance of resurrection.

And Anderton is retiring. That means Labour and the Greens between them need to get at least 62 seats.  They currently have 52 but on the latest polls are below 50.

Mr Goff does not help himself with his choice of issues. This Tuesday he used all his parliamentary questions to quiz John Key on whether the Ministry of Foreign Affairs and Trade (Mfat) had advised sending SAS troops back to Afghanistan before the cabinet decided to do so.

Mr Key easily swatted Mr Goff away, saying that no specific advice had been given. The cabinet would decide about putting kiwi soldiers into harm’s way, not bureaucrats.

Yet Mr Goff pushed on, asking increasingly detailed questions about what Mfat may have told Mr Key about security in central Asia. …

It’s difficult to see what Mr Goff hoped to achieve. Afghanistan is far from a driver of voting behaviour.Informed observers also know that Ms Clark was so committed to Afghanistan that she broke up her coalition with the Alliance and called an early election on the issue in 2002.

I’ve said it many times before. Labour keep concentrating on Wellington issues, not issues that connect with the average voter.

And a useful reminder of how committed Labour was to the war in Afghanistan.

Were Mr Goff prime minister, it’s likely he’d be far quicker than Mr Key to provide military support to the United States.

Most embarrassing, Mr Goff’s parliamentary attack coincided with revelations that Ms Clark had secretly sent kiwi spies to Afghanistan.

As her foreign affairs and then defence minister, there is no doubt Mr Goff was intimately involved in that decision. Only parliamentary rules prevented him being called a hypocrite.

The thought that Labour would turn down President Obama’s request for assistance from the SAS, after lending them to President Bush on three previous occasions is farcical. Of course they would have.

Mr Goff’s last hope lies with the emissions trading scheme (ETS). Labour understands that Mr Key became prime-minister-assumptive when he stood with Ms Clark on smacking.

Mr Goff knows that if a deal is done, he and Mr Key will stand as equals. Labour’s broad approach to climate change will be implicitly endorsed.
More importantly, the National/Maori Party/ACT Government would be seen as dysfunctional.

The business, farming and iwi sectors would be furious.
The ratings agencies and influential media such as the Wall Street Journal would continue lampooning New Zealand for our stupidity.

What international investment that might be possible in the midst of a global recession would evaporate.

National would get the blame for the $5,400 a year the ETS will cost a family of four.  And Mr Goff would be back in the game.

It is definitely an opportunity for Goff. His problem is whether he has enough control of his caucus to get them to back any compromise he does with Key.

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Goff should get to negotiate with Key

September 4th, 2009 at 8:02 am by David Farrar

I attended the AGM of the NZ Institute of Economic Research last night. After the AGM and guest lecture (which I will blog on separately) there was a dinner at Icon Restaurant at Te Papa.

It was perhaps the only dinner I had been to, where you could have a discussion about the pros and cons of an intensity based approach to credit allocations in an emissions trading scheme, and the entire table understood the discussion!

In discussing the ETS, it became very clear that the preferred options of the NZ business sector is for National and Labour to reach agreement on the ETS, rather than National to rely on the Maori Party or ACT. They want certainty of policy.

Now Labour and National do actually agree on around 32 of the 35 issues around an ETS. However the issues they differ on are pretty big – the dates certain sectors enter the ETS and the merits or otherwise of an intensity based approach (which I will try and blog on at some stage also).

Now NZ already has an ETS, passed into law. Labour did this in 2008. So if Labour and National do reach an agreement, it is Labour that is arguably making the greater concession in order to give businesses policy certainity.

The Herald reports:

Labour is trying to rope Prime Minister John Key into the climate change negotiations, saying leader-to-leader talks are the way ahead. …

This is an opportunity for Phil Goff. In fact again at last night’s dinner we discussed how if Labour does do a deal with National on the ETS, this could be the equivalent of John Key’s compromise with Helen Clark on the smacking law.

And if Labour do put the national interest ahead of partisan interest, and strike an agreement with National, Phil Goff deserves his day up on the podium with John Key, looking Prime Ministerial.

But the issue is at what stage do you turn this into a negotiation at the leadership level.  If I was advising John Key, I would have two reservations about negotiating with Goff at this stage.

  1. Can you trust him to be sincerely wanting an agreement, or is he just trying to get the PM involved so Key gets personally blamed when Goff walks away. Up until the Richard Worth affair, Goff would have been trusted. But his behaviour over the Choudary allegations, has dented Goff’s trustworthiness. And his use of confidential MFAT staff notes to embarrass Don Brash has not been forgotten either. In a negotiation both sides need to be able to put forward positions in confidence, and trust the other not to report the details.
  2. Can Goff deliver his caucus? Key had a strong enough grip on the leadership that he could strike a private deal with Clark, and cheerfully walk into Caucus and tell them all that they are now voting for the bill they have spent the last six months fighting. A deal with National might involve (for example) a change of stance on the intensity issue. Could Goff get his Caucus to agree to that, just to get him his day in the sun?

Now these are not reasons to not meet with Goff at all. If Labour does do a deal, he should be the one to get the credit and share the podium with the PM. For putting the national interest of policy certainty first, he would deserve it.

But such a meeting is unlikely to happen, until the lower level negotiators can report back that there are reasonable prospects of success.

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The ETS Review

August 31st, 2009 at 9:02 pm by David Farrar

It is 132 pages long and can be read here.

The main recommendations are:

  1. Accept IPCC 4th assessment report as consensus of the science, noting there are uncertainties but not enough to delay action
  2. The point of obligation for agricultural sector should initially be at the processor, not the farm gate, as administratively too costly to do for now
  3. An ETS is preferred over a carbon tax as it can better link up internationally.
  4. That all sectors be included in the ETS long-term
  5. Important to have certainty legislated for forestry asap to ensure further planting not inhibited
  6. Consider a price cap in the short-term while the market matures
  7. Agriculture to be in the ETS but no date specified
  8. Will support changing rules to allow offsetting for forestry, but need international agreement

Labour, in its minority report says:

  1. Supports an all gases all sectors ETS
  2. Are against capping the price of carbon initially
  3. will support delaying entry of stationary energy, industrial and transport sectors until 1 July 2010
  4. all other sectors to enter by 1 Jan 2013 (status quo)

Greens say:

  1. Used to support carbon tax but ETS now preferable
  2. ETS should be all sectors and gases
  3. Against a price cap

ACT say:

  1. says response to climate change should be based on actual measurable change, not projections of future change
  2. If one has to respond, prefer low rate carbon tax to ETS
  3. Much of NZ emissions come from producing food for export, not domestic consumption.
  4. Does not accept there is a strong chance of trade reprecussions, as seen by Singapore and Hong Kong

Maori Party say:

  1. Against ETS as won’t sufficiently lower domestic emissions
  2. Prefer carbon tax

To my mind there are no big surpises here. And from what I can see, the ETS will proceed. It will be amended from what Labour and passed, but not in a fundamental way. The three big issues appear to be:

  1. Do you have an initial cap on the price of carbon? I actually tend to favour the Labour/Greens view that you should not.  A price cap will make the ETS less effective, and more importantly may not get the forestry sector sufficient incentives to increase plantings.
  2. What date do sectors enter the ETS.  The big two sectors politically are transport and agriculture. The first will put up the price of petrol and the second will see an increase in costs for the agricultural sector. And if you bring agriculture in too soon, you risk merely exporting the emissions overseas making it a lose-lose. Remember that when Labour/Greens demand a 2013 entry.
  3. How many free allocations in each sector? A sector will be given an allocation of credits initially, so that you don’t have sudden and massive price shocks. Key issue is how big that allocation is, and when does it run out.

The ball is now clearly in the Government’s court. There is little doubt we will have an ETS – in fact we already have one – passed into law. The Government will want to make some changes to it. ACT look unlikely they will support changes as they don’t want an ETS at all. However they might be reluctant to vote against (for example) a delay in Agriculture entering the ETS.

Labour and Greens are relatively happy with the current ETS and unlikely to want to vote for changes. So this means the Maori Party is pretty important for getting any changes made.

It is possible National will not be able to get agreement on any changes. Unlikely, but possible. If that happens it does not mean there is no ETS. It means the one passed in 2008 will continue.

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Modified ETS recommended

June 18th, 2009 at 9:00 am by David Farrar

Nick Smith said:

A joint report by economic consultants NZIER and Infometrics concludes that a modified emissions trading scheme is the best way forward for New Zealand on climate change policy.

“This report is a useful contribution to the important debate on how New Zealand meets its environmental goals to reduce greenhouse gas emissions at least cost to the economy,” Dr Smith said today in releasing the report.

The report was commissioned by the Ministry for the Environment and provided to the Emissions Trading Scheme Review Committee as part of its terms of reference.

“This report concludes that a modified emissions trading scheme is the best way forward. I am releasing this report to assist with informed public debate on climate change.

“The report highlights that the costs to New Zealand’s climate change policy are significantly greater if other countries do not put a price on carbon. This reinforces the Government’s policy of aligning our response more closely with other countries.

Yep any post-Kyoto arrangement must include all major emitters.

Anyway let us look at the actual report. They note:

There are a number of policy options available to New Zealand to pay for any international liability. The options are all on a continuum between the following two ‘extreme’ bounds:

(i) The government purchases all of the liability offshore using general taxation to raise the revenue required to do so. In this scenario, no carbon price is introduced in the New Zealand economy.

(ii) The government introduces a price for all greenhouse gases in all sectors, with no exclusions. In this scenario, emitters face the entire burden of the international liability.

They conclude:

Our modelling shows that if the rest of the world takes steps to price carbon, and technological change is induced by this pricing, then a broad-based domestic carbon pricing scheme is the least cost way to meet New Zealand’s international obligations. Without action by the rest of the world or technological change, the least cost option can include the free allocation of permits and exemptions for some industries and/or gases.

My version of this is they say we should have an ETS. If the rest of the world signs up to a price on carbon, then our ETS should cover all sectors. If however major emitters (such as China and the US) do not sign up, then some industries should be exempted from an ETS – agriculture being my guess as the most likely.

Indeed I am right. They say:

On balance, our recommendation in the short run is to introduce an ETS with free allocation to competitiveness-at-risk sectors, with agriculture excluded if measurement of its emissions is prohibitively expensive. Free allocation should be output-linked and phased out as our competitors adopt carbon pricing. If agriculture is initially excluded it should be transitioned into the ETS, with free allocation if required, as measurement becomes economic.

It will be interesting to see what the Select Committee recommend.

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Fed Farmers on ETS

May 8th, 2009 at 10:11 am by David Farrar

The Fed Farmers VP has an op ed in the Dom Post:

Today, we can ill afford to further weaken the economy unless we wish to replace recession with depression. Research by the New Zealand Institute of Economic Research shows that the ETS could lead to 22,000 job losses.

The Agriculture and Forestry Ministry says the ETS will progressively reduce farm profitability and viability by 61.6 per cent for the average dairy farm and 80.3 per cent for the average sheep and beef farm. That is an economic implosion.

All of this will be taken from a sector that has outperformed the rest of the economy for 25 of the past 27 years.

The ETS over-reaches itself by putting a price of carbon on all emissions, whereas Kyoto requires New Zealand to account only for emissions above 1990 levels. We don’t need an ETS to meet our Kyoto obligations.

For better or worse we are in Kyoto. But whether a carbon tax, an ETS or simply just paying our liability (if we even have one) is the best option is far from clear. And if we have an ETS, will we be the only country in the world to include agriculture?

Worse, the ETS takes us where no other country has gone and applies a price of carbon to emissions arising from food production. It also prevents productive land being used for farming if it has trees on it. Forests are best planted on marginal land unsuited to food production, so we need pragmatism not dogmatism.

Therefore, we must ask, where is the global upside if New Zealand artificially throttles back its agricultural production, allowing less efficient producers to fill the void?

And that is why any replacement to Kyoto, must include all emitting countries. Otherwise we will damage our economy and damage the environment more.

But before anyone accuses Federated Farmers of being reactionary, climate change is real. There is no doubt that 6.8 billion human beings affect the environment and humanity grows at the rate of 80 million new mouths each year.

So, if we abandon the ETS, what could be done to get New Zealand through to 2012 when the Kyoto protocol lapses?

Given carbon is cheap right now, the Government could purchase Kyoto emissions units to put in the bank, giving us the means to meet our liabilities through to 2012.

A low-level carbon charge could be introduced and set at a rate that recovers just enough revenue to account for any emissions deficit.

The Government could fund the planting of lots of trees to develop new forestry sinks and jobs. Instead of following the international pack, New Zealand could lead it by pushing for each country to allocate a percentage of GDP toward climate change initiatives.

It is interesting that even Australia has delayed its ETS by a year.

Denmark, one of Europe’s greenest countries, considered a tax on its farming sector in February but quickly realised what folly this was and excluded the primary production of food from its Kyoto response in March. Denmark correctly saw there was no point in sacrificing its farmers when less efficient countries would only produce more.

In Denmark, agriculture accounts for about 19 per cent of all exports; in New Zealand, it’s a jaw- dropping 64 per cent. So why should we care if New Zealand agricultural emissions actually increase? Our farmers generate enough food to feed at least 1 per cent of humanity but are continually chastised for the supposed 0.1 per cent of global emissions this generates.

He makes a strong case.

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Kyoto deficit now a surplus

April 15th, 2009 at 11:20 am by David Farrar

Wow, National has been in office over six months, and it has already solved climate change. Nick Smith announced today that previous Kyoto deficit (which had been getting as high as $1 billion) is now a Kyoto surplus of $240 million. We can all relax now – the world has been saved.

Okay I am being sarcastic, but the change in forecast shows how much uncertainty there is – even counting the level of greenhouse gases is no simple thing.

We are now forecast to be 9.6 million tonnes under our Kyoto target of 1990 levels of net emissions. So what has happened?

The 2007/08 drought and better information on carbon captured in forests. I always said we should simply shoot one in ten cows, but instead a drought is just as good it seems. Now here is an interesting idea – global warming is predicted to cause more droughts, which will lower our carbon emissions – so maybe it is self correcting?

Now the figures may be a bit dodgy, as they are done by the Ministry for the Environment. They are being checked, rechecked and audited.

But whatever the figures really are, even the possibility of a surplus completely undermines Labour’s claim that its Emissions Trading Scheme was about “who pays New Zealand’s deficit?”

The truth is that Labour’s ETS was always about one of the biggest illicit tax grabs in New Zealand’s history.

According to David Parker himself  (see attached document letter-from-minister-re-revenue-and-cpr-30-may-20081 which a friendly Kiwiblog reader dropped me) Labour always knew that it would receive a $21 billion windfall from households and firms. Colin Espiner wrote about this before the election but it never really took off as a story because everyone was distracted by Winston Peters and the election.

The $21 billion windfall was why Michael Cullen was so keen on the ETS – he could raid our wallets by $21 billion without us even noticing. It was taxation by stealth at its worst. This is also why Cullen was so willing to pay billions in policy concessions to New Zealand First and the Greens – it was nothing compared with the $21 billion he knew was on its way.

National has always promised to make the ETS fiscally neutral but here’s the problem. Cullen designed the scheme to take money from households and firms and deliver it to him – how can you modify it to turn a $21 billion tax grab into a fiscally-neutral scheme? Or even one that hands the $241 million back to the public?

It is looking more and more likely that a carbon tax is the superior way to go, as the Greens originally proposed.

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