WHEELS START TO TURN ON CLIMATE CHANGE
4 May 2008Rod Oram
It's been an important week in the climate change debate. Thanks to a flurry of reports and political comment, we are starting to see where compromises might be made in the emission trading system and related policies.
Some of the compromises will be good and beneficial but others will be bad and harmful thanks to lobbyists and politicians pandering to various constituencies.
Worryingly, we're running the risk of making more bad decisions that we can ill afford to, thanks to serious failures in some of the latest analysis. Some of the reports, like most of the previous ones from business lobbyists, exhibit a lot of short-term, ill-informed, unrealistic and ultimately damaging thinking.
The biggest weakness remains the myopia of the reports. Analysts have laboured mightily to model the economic impact of pricing carbon and trading emissions in our drive to reduce greenhouse gases.
But by and large, the reports continue to consider an essentially static economy. They give little credit to businesses' ability to seize the opportunities of climate change by, for example, investing in cleaner, more efficient technology or developing products and services that meet changing consumer and market demands.
And they also fail to consider how rapidly the political, economic and market landscape is changing overseas. The likes of increasing environmental sensitivity by consumers and the possibility of taxes on imports from countries that fail to adequately address their greenhouse gas emissions pose a significant threat. We could pay dearly for failing to act decisively and effectively.
These analytical deficiencies were particularly apparent in the report from the NZIER. It argued that the least-cost way for us to meet our Kyoto commitment to reduce greenhouse gases would be for the government to buy carbon credits overseas with tax money. This would spread the cost broadly across the economy rather than hit the productive sector directly through the emissions trading system here.
But just imagine what the NZIER's suggestions mean. We would be funding the adoption of cleaner, more efficient technologies in other countries while letting business here off the hook. We would be making overseas businesses more competitive while removing the incentive for companies here to improve their competitiveness.
NZIER says it favours market mechanisms and emitters having to face the cost of their emissions. But its proposal runs counter to both. Thus, this and other flaws undermine the credibility of its analysis.
It says the emissions trading system proposed by the government, assuming a carbon price of $40 a tonne, would reduce economic activity by $900 million or 0.5% in 2012 compared with business-as-usual; it would cost 22,000 jobs and leave each household $600 less to spend that year. If government paid for credits instead and funded them from taxes, the hit would be only $100m, 1500 jobs lost and $300 in each household's spending.
Once the government phases out free allocation of carbon credits by 2025, the economy would be $5.9b or 2.1% smaller that year than business-as-usual. And emissions would have been reduced by only 10.4%. So, NZIER argues, it would be better for those companies exposed to internal trade to continue to get free credits to protect them. Then the economy would only be 1.2% smaller but emissions would fall only 4.2%.
What the NZIER is advocating is the worst of all outcomes: a cost to the economy, barely any reduction in emissions and no incentive for companies to adapt in the 17 years between now and then. New Zealand's international credibility and competitiveness would plunge.
The NZIER also argues it is a mistake to penalise our farmers with greenhouse gas liabilities when they are among the most efficient in the world and none of their competitors overseas face the same liabilities. This will push a big chunk of agricultural production out to countries that are less efficient than us.
But this is another example of static, and thus flawed analysis. Our farmers, particularly in dairy, are no longer the lowest-cost producers in the world. Other countries with far cheaper land and labour, such as Chile and Uruguay, are becoming large-scale competitors.
We can address that challenge, though, by gaining two big benefits from tackling agricultural emissions: animals will become more productive; and consumers more responsive. We are the global leaders in the science of ruminant animals. That's our biggest technology advantage of all. We should be pushing hard to lead now because it is only a matter of time before other countries bring their agricultural sectors into emissions trading systems.
But we must not make the mistake, as the Sustainability Council is doing, of pushing agriculture too hard. Its latest report says that the government's emissions proposals would put 90% of the cost of emissions trading and reduction, some $4b over the next five years, on households, small businesses and road users.
We would only achieve by 2012, though, a 2% reduction in emissions from business-as-usual levels. Emissions would be 30% above 1990 levels and thus leave us ill-prepared for more stringent international requirements thereafter. These could aim to get global levels down to 25-40% by 2020.
The council fingers agriculture as the culprit. By letting it stay outside the emissions trading system until 2013, the government is letting it off the hook and forcing the rest of the economy to carry the can. This represents a $1.2b subsidy to farmers.
Yet, the council says, a study for the government shows farmers could cut emissions by 5 million tonnes at a cost of only $30 a tonne. So farmers should come into the trading system much earlier.
But there are two problems with that analysis: new science and farming practices are starting to reduce emissions but a lot more technology needs to be developed before farmers can make bigger reductions in emissions in cost-effective ways; and second, primary sector profits are under great pressure, particularly for sheep farmers. Even dairy farmers will face higher costs and probably a lower payout next season.
Thus farmers need more time to drive the science. This is not letting them off the hook. Rather, their 2013 entry into the trading system is focusing their minds and efforts on the challenges.
Of all the reports out this past week on climate policy, the most balanced and encouraging was from the Climate Change Leadership Forum. This grouping of 34 business and sector leaders chaired by Stephen Tindall is giving strategic advice to government.
It said it supports the architecture of the proposed emissions trading system. For example, it approves of bringing all gases and all sectors into the system on a phased basis. You never know where business and technology opportunities will come from as companies respond to these new disciplines.
It said there were substantial commercial opportunities for New Zealand in taking the lead on developing and adopting greenhouse gas reduction technologies. And the trading system "can have a major influence on the architecture, coverage and a rules of the post-2012 (international) agreement to the benefit of NZ and the world". It also made some useful recommendations to the government, particularly on switching from carbon volume to carbon intensity as the basis for allocating free credits.
That would reward companies that invest in better technologies rather than arbitrarily locking them into current technology and plants.
However, one forum member, Business New Zealand, said it did not endorse the 10-point statement. So it remains to be seen if the forums position shifts after further discussion.
The low point of the climate debate week, though, came from politicians. Led by National, some of them are clearly getting cold feet about introducing on petrol and diesel the first climate change-related costs from the likes of carbon charges and biofuels.
Rather than introducing, for example, a 5c to 10c a litre fee in the Auckland region to help pay for electrification of trains and other transport infrastructure, National says it might be better to look at other funding mechanisms such as public-private construction partnerships.
The trouble is, the Auckland Regional Transport Authority needs to know by mid-year whether it has the money to order the trains. If it doesn't, it won't be able to get them and the electric system in place in time for the Rugby World Cup.
Switching now to a public-private partnership would delay the project one which will give some commuters a more economic and pleasant alternative to car travel by a couple of years.
Meanwhile the cost of fuel and the levels of road congestion will only keep rising. So suggesting it might ditch the fee now is an example of electoral expedience and short-term thinking of the worst kind by National.
Sunday Star Times
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