Emission Trading Scheme Background

Is Emissions Trading the way to go?

The Green Party has never believed a full emissions trading scheme is a sensible way for New Zealand to go at this stage. We believe it will get bogged down in the politics of allocation and is hugely complex to administer and so won't have much effect on our emissions in the first Kyoto period. Our policy since 1993 was a carbon charge, recycled as income tax reductions on the bottom band of everyone's income.

Economists are increasingly agreeing with us. However from the end of 2005 it was clear that neither Labour nor National would contemplate a carbon charge. That led us to put out our alternative system in March, which was very well received. It proposed that only the large companies who bring fossil fuels into the economy should be required to engage with the trading market, and remit to government enough carbon credits to cover our liability under Kyoto in 2012, which otherwise will be worn by taxpayers. This would have been felt across the economy as a price on carbon, without the complex and fraught allocation process envisaged now. It would have generated revenue for government, rather than for speculators, to invest in helping people reduce emissions and adapt to higher energy prices.

However, the government seems to be embarking on a full scale "cap and trade" emissions trading framework so we have put these notes together to help media and the public judge the effectiveness of the policy when it comes out. We have not seen the Government's proposals.

They need to be judged on the twin principles of effectiveness for the climate, and fairness for all New Zealanders.

1. How well will the proposals protect the climate by reducing emissions?

   Trading carbon credits does nothing to reduce emissions. It is just a way to ensure that the reductions are made at least cost. The key to reducing emissions is the total allowable emissions, or cap which determines how many units there are to trade, and therefore how much they cost.

   New Zealand is already part of a cap and trade system internationally — it is called the Kyoto protocol and it sets our cap at the level of emissions we had in 1990. If we set a different cap from this, perhaps to try to keep the price down here, firms in New Zealand will not be able to engage with the international market and our units will not be Kyoto compliant. I refer to NZ carbon units as "NZ monopoly money" as they will not be recognized under Kyoto. A higher cap — ie more units to trade — will lead to less carbon reduction, bad for the climate and bad for the taxpayer in 2012.

   Other important questions are whether the cap will leak — how will emissions be verified and registered so there is no double counting? For example, if a wind farm sells credits to a coal burning plant so it can burn more coal, the wind farm can no longer claim to be carbon-neutral.

2. What will happen to the money?

   This is the key "fairness" question. The price of energy, particularly fuel, will go up - there is no other way to put a price on carbon and encourage the changes we need. The issue is, who gets that money?

   In the Greens' proposal it would have all gone into a ring fenced fund to be spent on helping people adapt to higher prices by reducing their emissions. It would have provided alternatives like much better public transport and incentives for investment in wood fuel instead of coal in industry. It could have insulated all our old houses.

   Just as people speculate in the currency market they will speculate in what they think the price of carbon is going to be. This puts some of the money in totally unproductive pockets. If more carbon permits are allocated to firms than they really need they will keep the value of this. Depending on how the units are allocated, there could be a huge wealth transfer from one section of society to another.

3. What are the key questions for business?

   Above all, business wants certainty. They have told me they are more concerned about policy certainty than price certainty. Business will mainly want to know:
   

   
   
   1. Will they be a "point of obligation" required to hold carbon permits and able to trade, or if they are small, will the cost of carbon just be passed on to them in energy prices?
      
   2. Who will they be able to trade with? Will they be linked to the overseas market or will there be very few choices?
      
   3. How onerous will the monitoring, verification and compliance processes be?
      
   4. If their competitors are located in countries with no price on carbon, and if they can't pass on the carbon price to their customers, what assistance will they get so they are not just put out of business? The Greens see no point in encouraging business to move overseas to escape the carbon price, but this is only a problem when they can't pass the cost on to their customers, who can then decide how much of that product they wish to buy and the higher cost.
      
   5. Will their sector be expected to bear all the cost, or will all sectors be involved? In particular, how much longer is the taxpayer going to continue to subsidise farming emissions or will all emitters face the price quite soon?
      
   6. Will there be a policy flip flop just as they have put in place systems to meet the new requirements, or is this it for the long term?
   
   
4. What are the key questions for households?
   1. What help will I get to adjust to higher energy prices? Will there be help to insulate my home, get a clean burning wood stove or a solar water heater? Will there be better public transport where I live, or safer facilities for cycling and walking for me and my kids, or easier access to ride sharing, so I can leave the car at home more?
      
   2. Will the cost to me as a taxpayer of meeting our Kyoto obligations in 2012 be reduced because of this scheme, or will I have to pay twice?
      
   3. Where do I go to get information about all this?
      
   4. Can I earn carbon credits by anything I do?
   
   
5. What are the key question for the forestry sector?
   
   
   
   1. If I planted forest after 1990 and this counts in our Kyoto budget, will I get any financial recognition for that?
      
   2. If I plant more forest now on land that qualifies under Kyoto, will I get credits to trade with?
      
   3. If I have a pre-1990 forest coming due for harvest, will there be any financial encouragement to replant or should I just sell it to a dairy farmer?
      
   4. Will the credits earned for NZ by the forestry sector as a whole be used to protect farming, especially fast growing and hugely profitable dairy farming, from any obligation to pay for their emissions?