The ETS Review

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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