New Zealand (Image by: niko)

Article by Guest Contributor: David Hall

On July 1st this year, New Zealand’s Emissions Trading Scheme (ETS) began to turn the screw on its greenhouse gas emissions. With forestry liable since 2008, the energy and industrial sectors finally entered the carbon era.

Fuel and power companies immediately displaced the cost of greenhouse gas emissions onto consumers, raising petrol prices by roughly 3 cents a litre and the price of electricity by over 3%. Government estimates put the average annual cost at $165 per household, rising to $330 by 2012. Not much, perhaps, but enough to cause some grumbling, especially given that electricity prices had already risen 72% in the last eight years.

Unfortunately for the New Zealand public, this is only the beginning. Analysts have warned that in the first five years of the ETS, 52% of its costs will be carried by households, despite their accounting for only 19% of total emissions. Including road users and small to medium businesses, this group is expected to shoulder 90% of emissions costs while producing only 30% of emissions.

Where do these additional costs come from?

To begin with, agriculture is exempt from any costs until 2015, even though the sector accounts for 49% of the country’s greenhouse gas emissions. Until then, the Government will pick up the tab—on behalf of present and future taxpayers.

Next, the ETS employs an intensity-based allocation of emissions units (known as NZUs) which means that NZUs are allocated to companies as long as their greenhouse gas emissions do not exceed the industry average, measured in tonnes of greenhouse gases per million dollars of sales. These NZUs are eventually surrendered to Government, along with any additional credits needed to cover an excess of emissions.

As such, there is no cap on individual emissions, nor any fixed volume that total emissions cannot exceed. If the nation’s total emissions exceed its Kyoto target by 2012—presently they are 24% above 1990 levels and rising—then the Government will have to buy credits on the international carbon market. How much this will cost taxpayers will depend on market price, but Treasury has put its net Kyoto liability at $1.1 billion, with warnings that it could be as high as $5.7 billion.

Finally, the ETS provides a transition phase for export industries exposed to international competitors. Thus, until the end of 2012, each NZU is capped at $25 a tonne. Not only does this mean that any shortfall on the international carbon credit market must be met by the Government, it also dampens the price signal of emissions, removing another incentive to adopt cleaner technologies. Furthermore, during the transition phase, polluters are only required to surrender one NZU for every two tonnes of carbon. Only in 2013 will this revert to a ratio of one-for-one, yet even then industries will be gifted NZUs equivalent to 90% of 2005 emission levels, phased out at only -1.3% per annum.

Little wonder that public attitude toward the ETS is decidedly ambivalent, a combination of confusion, resignation and discontent. Politically, this is a major problem, because it fosters public hostility toward an area of policy that desperately needs its support. Widespread resentment toward an unjust distribution of emissions costs could easily mutate into (or be interpreted as) a popular unwillingness to do anything at all.

Furthermore, the over-protection of industry and agriculture from emissions costs removes any strong incentive to evolve. And that, ostensibly, is what the ETS is for. When government protections are removed, these sectors may find themselves in a world that has moved on without them—their international competitors cleaner, and their key markets less tolerant of carbon-intensive products.

This is especially frustrating in agriculture where technological solutions are both available and affordable. With half of all greenhouse gas emissions produced by agriculture, mostly from dairying, any reduction will have a significant impact on New Zealand’s overall emissions. As it stands, however, the will to adapt must come from farmers themselves, many of whom seem instinctively hostile to change. Federated Farmers’ stubborn resistance to past policy proposals is evidence of that.

In the meantime, the ETS is only expected to cut emissions by 2% at best. The policy is a demanding test of the wisdom that anything is better than nothing.

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