Modified ETS recommended

Nick Smith said:

A joint report by economic consultants NZIER and Infometrics concludes that a modified emissions trading scheme is the best way forward for New Zealand on climate change policy.

“This report is a useful contribution to the important debate on how New Zealand meets its environmental goals to reduce greenhouse gas emissions at least cost to the economy,” Dr Smith said today in releasing the report.

The report was commissioned by the Ministry for the Environment and provided to the Emissions Trading Scheme Review Committee as part of its terms of reference.

“This report concludes that a modified emissions trading scheme is the best way forward. I am releasing this report to assist with informed public debate on climate change.

“The report highlights that the costs to New Zealand’s climate change policy are significantly greater if other countries do not put a price on carbon. This reinforces the Government’s policy of aligning our response more closely with other countries.

Yep any post-Kyoto arrangement must include all major emitters.

Anyway let us look at the actual report. They note:

There are a number of policy options available to New Zealand to pay for any international liability. The options are all on a continuum between the following two ‘extreme’ bounds:

(i) The government purchases all of the liability offshore using general taxation to raise the revenue required to do so. In this scenario, no carbon price is introduced in the New Zealand economy.

(ii) The government introduces a price for all greenhouse gases in all sectors, with no exclusions. In this scenario, emitters face the entire burden of the international liability.

They conclude:

Our modelling shows that if the rest of the world takes steps to price carbon, and technological change is induced by this pricing, then a broad-based domestic carbon pricing scheme is the least cost way to meet New Zealand’s international obligations. Without action by the rest of the world or technological change, the least cost option can include the free allocation of permits and exemptions for some industries and/or gases.

My version of this is they say we should have an ETS. If the rest of the world signs up to a price on carbon, then our ETS should cover all sectors. If however major emitters (such as China and the US) do not sign up, then some industries should be exempted from an ETS – agriculture being my guess as the most likely.

Indeed I am right. They say:

On balance, our recommendation in the short run is to introduce an ETS with free allocation to competitiveness-at-risk sectors, with agriculture excluded if measurement of its emissions is prohibitively expensive. Free allocation should be output-linked and phased out as our competitors adopt carbon pricing. If agriculture is initially excluded it should be transitioned into the ETS, with free allocation if required, as measurement becomes economic.

It will be interesting to see what the Select Committee recommend.