The resolve in Europe to make meaningful emission reductions’ is crumbling by the day in the wake of the financial credit crunch sweeping the globe, bringing with it fears of a global economic recession.
Europe looks to be beating a hasty retreat from ambitious emission reduction goals (20% by 2020), with the realization that the goals will be hugely economically challenging in what will be tough economic times. The EU will not finalise their emission reduction plans until December this year, but the signals do not look good. Even if the EU confirms the 20% emission reduction goal, new “flexibility” provisions that take account of various counties “individual circumstances” which will ensure plenty of wriggle room.
The revolt is being lead by Germany, Italy and Poland, and includes all the former communist countries Hungary, Bulgaria, Estonia, Latvia, Lithuania, Romania and Slovakia . They are all fearful that the cost of additional emission reductions will harm their economies, forcing energy intensive industry to exit Europe and set up in parts of the world where there will be no carbon charge.
Europe has long been the moral thought leader in the climate change policy stakes, setting up the first emissions trading scheme. The intention was to take a global leadership role on climate change, transform the economies of EU countries into leaders in low emission technology and be the centre of the carbon markets.
However, until 2012, the cost of the emissions trading scheme in Europe will be relatively painless, due to the over allocation of free units to industries that were included in the scheme. The EU ETS covers about 40% of European emissions and is limited to large industrials in certain sectors. In contrast the current New Zealand ETS includes all sectors and all gases in an economy wide approach will be much more costly, because every tonne of greenhouse gas emissions will carry a charge.
For Europe, it was always after 2012 where the rubber was expected to hit the road in terms of real costs being passed on to emitters.
It was expected that there would be resistance from industry once they had to actually pay for their emissions due to reduced free allocation of units, but now in the harsh light of an economic crisis industry is getting support from their governments to push back on tougher targets. The talk now is of up to 100% free allocation to industrials that are the most energy intensive and trade exposed to ensure they are shielded from the cost and can stay internationally competitive.
In the USA, the first mandatory cap and trade scheme includes the electricity generators of 10 States and is called the Regional Greenhouse Gas Initiative (RIGGI). It is starting out with a modest target which has resulted in a modest carbon price. Last time I checked the units were trading at US$4 onne, a far cry from the NZ$40-50 onne the EU price has reached this year. Analysts suggest the target for emission reductions in the RGGI is so modest that it is little more than business as usual for the participants.
If the end result is emissions trading schemes around the world that are no more than “smoke and mirrors”, then we have a high transaction cost approach (of most value to traders and brokers and bankers who enjoy the benefits of a money-go-round) with little in the way of emission reductions.
So where does that leave New Zealand, which under the previous government has just committed itself to the most ambitious and therefore the most expensive emissions trading scheme in the world? Hopefully the newly elected government will take notice that Europe appears to be in full retreat and take care to ensure that our environmental ambitions are better balanced against economic reality. The fact of the matter is that there is not a lot of low hanging fruit in NZ in terms of emissions abatement opportunities. With an emissions profile dominated by agricultural emissions, one of the highest percentages of renewable electricity in the world and a small industrial sector that is already close to “Worlds Best Practice” in emissions efficiency, domestic emission reductions will be relatively expensive to achieve.
The talk in the local market is that one of the oil companies in New Zealand is predicting they will be paying between $40-120 per tonne CO2 (up to $1 billion for one oil company alone), which will all flow through in petrol prices. It is hard to see how this will be politically sustainable in tough economic times. Having said that, the price of carbon has recently crashed from the heights of earlier in the year, but the volatility of the price of carbon means it could be anywhere by 2010 when the scheme takes effect for industry.
In Canada, Stephen Harper has just been re-elected in spite of reneging on Canada’s Kyoto Protocol commitment (which they have no intention of paying due to the high economic cost) and the opposition’s campaign, which included the introduction of a carbon tax, was clearly not a voter winner.
The new government needs to take a hard look at the high cost approach designed by the previous government and those of us in business are hopeful we will get a more consultative approach this time around. We need to avoid a situation where New Zealand is paying the highest price of carbon, with the least protection for trade exposed industry and agriculture, or we will see job losses, plant closures and investment moving to other countries.
We will also have achieved an environmental “own goal” if reduced production here is replaced by increased production in Asia, where the predominant source of energy is from coal fired electricity generators.
Large industrials in New Zealand are very positive about playing their part in the global efforts to reduce emissions, and many of them have been early movers, reducing their emissions to below 1990 levels. However, to continue to invest in New Zealand they need an approach to emissions trading which does not leave them at a competitive disadvantage internationally.