Carbon leakage

The Herald reports:

The transport and stationary energy sectors will now come into the scheme on July 1 next year, six months earlier and later respectively than under the existing law.

That will provide a local market in which owners of post-1990 forests can sell carbon credits should they wish.

But for the first 2 years, oil and power companies will now have to surrender only a one-tonne carbon unit for two tonnes of emissions. The taxpayer would pay the cost of the other one. Alternatively they could pay the Government a cash price of $25 a tonne.

Agriculture, which is responsible for half the country’s emissions, will still come into the scheme, but two years later, in 2015.

It will also get a more generous allocation of free units.

So will the smokestack industries – large industrial emitters like the Glenbrook steel mill, the Tiwai Point aluminium smelter and the Marsden Point oil refinery – whose international competitiveness would be jeopardised if they had to pay the full cost of their emissions.

I find what the Government has done is interesting. They have moved some sectors into the ETS faster than under Labour’s EST, while they have delayed other sectors. Why the difference?

Basically carbon leakage for trade exposed industries.

Moving the transport sector into the scheme earlier is relatively safe, as we’re not about to start filling our cars up in Australia with petrol.

But certain sectors, such as agriculture, are trade exposed and if one forced them to start paying the full cost of carbon too soon, they may lose market share to overseas producers who are not paying a price for carbon. And this can turn into a lose/lose for the environment and the economy. The environment suffers if we lose agricultural production to China (as per unit we are lower emitting), and our economy suffers also.

So when you read stories about how “polluters” are being subsidised, the reason is because we do not want our trade exposed industries to be losing market share to countries not charging for carbon. Now if you get a global agreement that brings in China, India etc then you get a different scenario.

I would have thought that having seen the massive increase in unemployment when our economic growth drops away, some groups would be less keen to advocate a scheme that would damage economic growth, and not actually benefit the environment.

Of course even this amended ETS will see some reduction in economic growth. But I’ve never regarded it as realistic to think we could be the only country in the OECD that doesn’t set a price for carbon and participate in an international agreement to reduce emissions.  We are far far too small to be able to get away with that, without facing some nasty consequences for trade access.