Climate change: Submission

Below is the draft of my submission on the Climate Change Response (Moderated Emissions Trading) Amendment Bill, which I'll be submitting tomorrow. If you want to make a submission - and all you have to do is say "I oppose the bill for these reasons..." - you can do it online here. Submissiosn are due by Tuesday, so be quick!

1. I oppose the Climate Change Response (Moderated Emissions Trading) Amendment Bill and ask that it not be passed.
2. The bill would substantially weaken the existing emissions trading scheme, reducing incentives to reduce emissions while providing large ongoing subsidies to climate polluters at enormous cost to the taxpayer. This is both financially and morally unsound. In addition, the new scheme for allocation lacks transparency.

   Transition phase

3. The bill would create a transition phase until 1 January 2013, in which polluters would have a reduced liability to surrender credits, while the price of carbon would be capped at NZ$25/ton.
4. The reduced liability is unsound for two reasons. Firstly, it means that polluters are not exposed to the full marginal cost of their activities. This means a significantly reduced incentive to reduce emissions. Secondly, it will significantly reduce the demand for units in the transitional phase, which will in turn reduce the price and hence the incentive for forest planting. Forests are the key to reducing our emissions in the short-medium term, and are vital if we are to meet even the government’s low 10% - 20% 2020 and 50% by 2050 targets. Planting rates are highly sensitive to price, and so it is important that the incentive for planting is as strong as possible. I note that the Minister for Climate Change, Nick Smith, assumes future planting rates of 50,000 hectares per year [PDF]. This will not happen under the modifications proposed.
5. The NZ$25/ton price cap is very close to the present market price of NZ$22/ton, and lower than the price at this time last year. There is a real chance that changes in carbon prices or in the exchange rate will push international prices above this level. If this happens, then it will create a perverse incentive for deforestation (as forest credit is able to be internationally traded, forest owners could sell their credits at the higher price, then deforest and pay only the cap, pocketing the difference) as well as resulting in a direct taxpayer subsidy for pollution.
6. The effect of these changes is to socialize risk and privatize profit. Polluters – or rather, their mostly foreign shareholders - will benefit from large subsidies. Ordinary taxpayers will carry the cost of those subsidies and bear the risk of fluctuations in the carbon price. This is unfair and inappropriate. Those who engage in polluting activities should bear the risks, not the people of New Zealand.

   Industry allocation

7. The bill revises industry allocations, shifting to a production-based allocation rather than one based on historic emissions, and reducing the rate at which those allocations are phased out. This will see free allocations extended until 2090 or so. I oppose these changes for a number of reasons:
8. The shift to production-based allocation explicitly allows emissions to continue to rise, and again insulates polluters from the full marginal cost of the next ton of carbon. This will mean higher emissions than if they had to pay that cost.
9. The slow phase-out for free allocation commits us to higher emissions for longer, and makes it far more difficult to meet the targets necessary to prevent dangerous levels of anthropogenic climate change.
10. Free allocation to industry is simply a subsidy from the taxpayer for pollution. This is morally inappropriate. It turns the principle of “polluter pays” on its head; instead we will be paying the polluters. Worse, the proposed allocation scheme outlined in new section 161A (separating polluters into moderately and highly emissions-intensive, with a higher rate of subsidy for the latter) explicitly rewards the least cost-effective polluters, those producing the least value per ton of carbon. This is, to put it politely, arse-backwards.
11. I oppose subsidies in the economy. The removal of agricultural subsidies was one of the few good policies of the Rogernomics era. Companies which are not profitable without subsidies are a net loss to society, and we are better off letting them go bankrupt. If the government feels it must protect jobs, then at the rates it is proposing – approximately $25,000 per job in the case of Solid Energy’s proposed lignite-to-urea plant in Southland – then I am sure it can find something to pay them to do which does not involve destroying the environment in the process.
12. The fiscal cost of these proposed subsidies – ballooning to $2 billion per year by 2030 – is fiscally unsustainable. Currently the government is panicking about “a decade of deficits”. This bill looks to make those deficits permanent, and at a time when the government will be struggling to pay for the increased healthcare and retirement costs of an aging population. New Zealanders should not have to suffer cuts to their healthcare and retirement entitlements to subsidize the profits of Rio Tinto, Methanex, and other polluters.

    Transparency

13. As a final note, the new scheme for making allocations is less transparent than the one it replaces. Under the existing law, draft allocation plans must be published and are subject to public feedback. This allows us to see and debate who gets what. The bill would replace this with a simple regulatory power, subject to narrow industry consultation.
14. This level of secrecy is unacceptable. Billions of dollars are on the line in these allocation decisions, meaning that there is a tremendous incentive for corruption. In cases like this, everything must be seen to be above board. Making them in secret will simply invite suspicion and result in a further loss of trust in our political system.
15. I do not wish to make an oral submission to the Select Committee.