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 PRIME 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