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NZCPR
Guest Forum
The
great Government green-wash
Barry
Brill
15 April 2012
Deception
has always been at the heart of the Emissions Trading Scheme
legislation.
When
it was enacted in great haste by a Labour Government in 2008,
the public were told it was intended to stave off global
warming. In fact, its purpose was to settle a major law suit
brought against the Government by the forestry industry.
Then
a National Government told us in 2009 that it needed to be
retained “to do our fair share” in the international fight
against climate change. They rushed it through the House
because, they said, it had to be passed before the Copenhagen
conference.
None
of this was true.
A
select committee was set up to produce a cost-benefit study,
but failed to do so. The
Regulatory
Impact Study issued by the Environment Ministry was rubbished
by The Treasury (a first!). NZIER/Infometrics modelling said
it could only be viable if there was
a
large and liquid international market for carbon credits.
The
Climate Change Response Act expressly says its purpose is to
help meet Kyoto
Protocol
commitments, which were expected to run on for decades. But
then the international negotiations collapsed and everything
quickly changed. There will be no treaty obligations until
2020 at the very earliest, and they may never happen.
The
forestry debt has been settled. Kyoto is gone and the world
has lost interest in climate change. We no longer need an ETS.
Last November, I wrote to the newly re-elected Prime Minister
asking for the whole regime to be suspended until at least
2020.
A
copy of this letter is below. I am still awaiting a reply.
“It
is not a tax. The Government does not receive any revenue.”
These words have appeared in thousands of letters sent out by
Nick Smith. And he was believed. The
Scheme
basically took money from the energy sector and transferred it
to the forestry sector, and we all paid for it.
Last
week, the Government has heralded its intention to convert the
ETS into an Energy Tax Scheme. In future, the energy companies
will have to buy their NZ Units (carbon credits) from the
Government. The Government will pocket the cash revenue.
It
gets worse. The Minister will have power to ban imports, so as
to be a quasimonopoly supplier. Auction prices will be pushed
up to $25 from the current market level of about $7 per unit.
On top of all this, the obligation on energy companies will be
doubled over three years.
In
summary, the burden on energy companies is to increase from $7
to $50 for two units. Virtually all of this 7-fold increase is
a new tax.
The
Government will say that the direct burden on a household of
four will be only $1000 per year. But this is more deception.
The electricity, petrol, gas and diesel companies will all add
their normal margins, as will the transport firms, importers,
retailers, insurers, Councils, etc. It will all land on the
householders and exporters -– who can’t pass it on.
The
Reserve Bank estimates the “first round effects” will be
about 150% of the direct costs. And then there will be second
round effects.
What
about saving the planet? Oh yes, I forgot. That’s an
important ingredient too – but only in the politician’s
speeches, not in the actual policymaking.
It’s
called green-washing, and it’s an offence against the Fair
Trading Act.
LETTER
TO THE PRIMIE MINISTER:
December 2011
Rt
Hon John Key
Prime Minister
Parliament Buildings
WELLINGTON
Dear Prime Minister
DOUBLING
OF ETS OBLIGATION 2013-15
The
Minister for the Environment released the report of the
Emissions Trading Scheme
Review
Panel (‘the Panel’) on 15 September 2011.
The
Panel’s 61 recommendations have gained little media
attention during the ensuing Rugby World Cup and Election
periods. As far as we are aware, the cabinet is yet to
consider the report, although the Minister has indicated his
preferences in certain areas.
Our
concern is focussed on the recommendations for ending the
transitional provisions –viz: phasing-in the full ETS
obligation from the 2:1 currently required, and phasing-out
the price cap. The former will double the current burden on
our household and export sectors, while the latter
substantially increases economic risks.
We
would urge that the transitional provisions be maintained
until 2020 (the Durban target for international action) or
such earlier date that carbon pricing becomes standard
practice amongst the majority of our key trading partners. At
the very least, the position should be frozen until 2014, when
the Government proposes to review its policy regarding the
inclusion of the agriculture sector.
The
International Setting
The
expression “fair share” has usually been taken to indicate
“equal pain” with those countries with whom we have close
trading and economic relationships. They are Australia, USA,
China, Japan, South Korea and (to a lesser extent) the EU
countries.
None
of these has yet begun to consider the adoption of all-sector,
all-gases carbon pricing.
The
Government has long intended to improve liquidity and choice
by establishing a common Trans-Tasman carbon trading area.
This aim was initially frustrated when the proposed Australian
ETS was deferred, and the governing party promised that no
carbon tax would be introduced.
It
now needs to be recognised that the new Australian carbon tax
legislation was the consequence of a very particular set of
political circumstances. The Australian Opposition has
“pledged in blood” that the tax will be repealed – and
there will be a general election before the tax converts into
an ETS in 2015. The conversion cannot occur without a series
of decisions by the next Government. We understand that
would-be Australian traders are adopting a “wait and see”
attitude, and we should clearly do likewise.
When
the phase-out was enacted, it was widely understood that
similar ETS schemes were imminent in USA, Japan, South Korea
and Canada, as well as Australia. It was also expected that
these countries would be bound to ambitious second and
subsequent Commitment Periods under the Kyoto Protocol. Those
expectations were extremely important – and we now know they
were not fulfilled. To quote J M Keynes: “When the facts
change, I change my mind”.
To
date, there have been only two country-level ETS experiments
– the European Union and New Zealand. The EU scheme has been
the subject of incessant criticism, errors, frauds, internet
scams, and volatility. Just last week, Swiss banking giant UBS
released a study showing that the EU scheme has cost consumers
some NZ$400 billion for “almost zero impact on cutting
carbon emissions”. Describing it as having “limited
benefits and embarassing consequences”, UBS noted that there
was “fading political support” for the scheme.
It
is also relevant that the EU scheme has failed in its goal of
improving energy efficiency.
Der
Spiegel reports
that during the 20-year period to 2010, energy-related
emissions in the EU27 fell by just 1.1 tonnes per capita
(12%), whilst the USA dropped by 2.8 tonnes per capita (22%)
during that same period.
New
Zealand’s 2009 legislation was passed under urgency prior to
the COP15 Conference in Copenhagen. Following that meeting,
the goal of an international treaty has moved further away and
COP17 conceded that it will not be operative in this decade.
Our commitments under the Kyoto Protocol, cited as the major
motivator in our Climate
Response
Act, will cease next year.
Although
the Panel lists some other countries as taking certain climate
actions since 2009, those policies are almost invariably
related to increasing renewables as a percentage of energy
supply. New Zealand is already a world leader in that area.
In its November 2011 Environmental Outlook, the OECD described
our Climate Response
Act
as the most developed and most comprehensive trading scheme in
the world. It already goes a great deal further than “doing
our fair share”.
International
comity is the sole basis of the Act and its time-schedules.
But the world is now much further away from consensus
emission-fighting than it was in 2009, and there is no
justification for stepping up the economic pain imposed by the
Act.
Impact
on households
The
Australian government, recognising that a tax on “500 big
polluters” would inevitably flow through to consumers, has
spent $14.9 billion in compensating households, along with
additional large amounts for businesses.
In
New Zealand also, the ETS flows through to households and
exporters. The Reserve
Bank
estimates that the “first round effects” include an uplift
of 50% by the time the costs reach the CPI. During the
transition period, at the statutory price, the end costs are
$873 million pa (23.3MT x $25 x 1.5) plus GST.
If
we assume that 20% is absorbed by businesses in the tradeable
goods sector, then the GST-inclusive balance of $803 million
is met by the household sector and equates to about $750pa for
a family of four.
This
calculation omits several important cost factors, such as the
windfall profits taken by electricity generators and the CPI
effects that boost benefits and therefore taxes. $750 pa is a
very conservative estimate of the ETS cost currently borne by
an average household.
Phasing-out
the 2:1 transitional arrangement during 2013-15 will double
the ETS impost to $1500 per household of four. That is
a very significant after-tax burden which will weigh
particularly on low-wage-earners and superannuitants on fixed
incomes. It will boost the CPI and slow the country’s
potential recovery from its long-running recession/stagnation.
For
those reasons, it will also reduce tax revenues and contribute
to the longevity of the fiscal deficit.
Impact
on exporters
In
the calculation above, we assume that businesses are required
to absorb 20% of the
ETS
end effects, and this share will amount to $350 million pa
post-transition. All of that will sit with the tradeable goods
sector. It will particularly affect farmers and small
exporters, as the large energy-intensive industries receive
allowances.
In
an Op-ed in the Dominion-Evening Post of 10 November, Phil
O’Reilly of Business New Zealand speaks for most businesses
when he says: “2015 is still too soon to end the discount
scheme... a price on carbon materially higher than the current
price of $14 a tonne is unaffordable for many businesses.”
He
goes on: “The Government should stand firm on its promises
that we will implement our ETS fully only when other countries
do, too, and that we will not punish ourselves
unnecessarily...”
This
is not the time to load additional and unnecessary costs on to
exporters.
Cost-benefit
analysis
The
“tax” imposed by the ETS is unique in that it has no
corresponding upside for the Government. The counterparties
for the cost burden on New Zealand households are likely
resident abroad, probably in China. If the Units are purchased
from forest owners (unlikely in present circumstances) how
many additional hectares of trees will they subsidise, if any,
and what is the net economic benefit of that wealth transfer?
The
calculation changes dramatically with the expiry of the Kyoto
Protocol commitment which, in effect, provided a guaranteed
purchaser for Government-owned carbon credits.
The
first term of reference for the 2009 Select Committee was to
produce “a high-quality quantified cost benefit analysis”
as required by the C&S Agreement with the ACT Party.
The
Dunne Committee was unable to deliver this, and the Government
relied instead on carbon-tax modelling commissioned jointly
from NZIER-Infometrics.
Subsequently,
when the 2009 Amendment Bill was introduced, the Treasury was
scathing regarding the merits of the accompanying Regulatory
Impact Statement. The Select Committee on the Bill was unique
in producing five separate minority reports, all of which had
different views regarding the relevant figures.
The
Caygill Panel’s terms of reference were deliberately narrow
and it made no attempt at assessing the cost benefit of
alternative policies. Its assessment of “fiscal costs”
were based on accounting fictions.
In
short, there are no available figures to justify a decision to
allow/defer/decline the pending leap in ETS costs. The 2009
modelling is now seriously outdated, and cannot provide any
foundation for a billion-dollar policy.
Conclusion
In
this letter, we have assumed that a robust ETS remains
possible, despite the crash in international carbon prices and
the predictions that markets will be grossly over-supplied
until 2025. The Government will need to have a view on these
issues before adopting long-term policy positions, but it is
prudent to assume that market pricing will remain
unpredictable.
We
need to remind ourselves that the ETS cannot contribute
materially to future global temperatures and that its
post-Kyoto purpose is merely reputational. In this context,
New Zealand is already world-leading, and no valuable
additional symbolism will flow from extending that existing
lead.
The
current ETS position should be frozen in place until the
majority of our
key trading partners catch up, and the future path and pace of
international co-operation is clarified.
Yours
faithfully
Barry Brill OBE
Chairman
New Zealand Climate
Science Coalition
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