The ETS is the prime mechanism chosen by New Zealand to meet its international obligations to cut greenhouse gas (GHG) emissions. It is an example of the pricing of pollution (i.e. internalising external costs) and a polluter pays approach. It has been preferred to a carbon tax or full direct payment by the Crown (i.e. taxpayer). By placing a price on carbon, there should be incentive for a move to lower carbon technologies and practices.
The current ETS was introduced by the Labour government in 2008. It is an “all gases, all sectors” scheme, placing an obligation on GHG emitters (polluters) to make a financial contribution for their emissions, through the purchase of carbon credits. However, the scheme is designed so that only those at, or near, the top of the supply chain (e.g. mining companies, fuel importers) are directly involved in the scheme. It also rewards those who plant trees, through the issuing of carbon credits which can then be sold to emitters.
At the 2008 general election, National campaigned on a policy of amending some aspects of the ETS. Following the election, National agreed to an ACT demand for a full select committee review of the ETS and climate change, as part of their confidence and supply agreement. The committee reported at the end of August 2009.
The main changes in the ETS amendment bill introduced by the government are:
- The entry of agriculture into the scheme moved to 2015 (from 2013)
- All other sectors (energy, transport fuels, industry) to enter the scheme in July 2010
- Until the end of 2012, emitters have a 50% reduction in their obligations (i.e. through a 2 for 1 carbon credit arrangement) and a carbon credit price cap of $25
- Trade-exposed industry and agriculture receive free allocation based on the emissions intensity (rather than free allocation based on a level of historic emissions)
- A slower phase out of free allocation
For consumers and businesses not directly involved in the scheme, the impact of these changes will be lower increases in fuel and electricity prices from July 2010 (estimated to be 3.5c per litre, and 1c per kilowatt hour respectively) until the end of 2012. For a typical household these changes are expected to result in rises of $165 per year, rather than $310.
The amendments have been welcomed by major industries, but severely criticised by many others, including the Labour Party, Green Party, economic commentators, and other environmental groups. Critics state, with some justification, that the net effect of the changes will be that the Crown (i.e. taxpayers) will be subsidising industry and agriculture more, and for longer. In effect, they point out, the polluter is not paying. Further, the intensity based free allocation may well lead to a rise in the country’s emissions from some industrial activities (where the activity is more efficient than the industry average). The counter argument, from industry, is that it is better for industrial production to increase where it is more efficient than move “offshore” to countries where production is less emissions efficient (termed leakage). However, others claim that the risk of this “leakage” has been overstated by industry.
The failure of the Government to achieve cross-party consensus for its changes (at least to date – there is the possibility that this will change before the bill is passed), means that there will be ongoing uncertainty for business and industry in the years ahead. Labour has indicated that it would review the ETS if it is returned to power.
Respected commentators and businessmen have voiced strong concerns on the ETS outcome. One has stated “since the days of Think Big and GST reforms, this has to be the most disappointing public policy reform I have observed in both policy and outcome”. Further the Treasury, quoted in the ETS amendment bill, with reference to the Regulatory Impact Statement (RIS), states that “the level and quality of analysis presented is not commensurate with the significance of the proposals………and the RIS does not provide an adequate basis for informed decision-making.”
Whilst acknowledging the complexities of balancing economic and environmental goals, the proposed ETS changes do not seem to be moving New Zealand towards a low carbon future, at anything like the pace the scientific community thinks is necessary to minimise the risk of dangerous levels of warming and climate change.