Monday, August 17, 2009

Climate change: An illustration

How unfair is the government's plan to cap the price of carbon? Here's an illustration. Holcim has just been granted resource consent to build a major new cement plant in Oamaru. The plant would produce about 900,000 tons of cement a year. In the process, it is estimated to produce about a million tons of CO2 a year. So, for every dollar by which the cap is below the market price of carbon, we'll be giving Holcim's foreign owners about a million dollars a year. According to Treasury, the current price of carbon is around $22/ton. So, if the government caps the price at a sub-market $10 / ton, then Holcim will be getting $12 million a year in pure profit gouged out of kiwi taxpayers as an environmental subsidy.

This exercise can be repeated for every large industrial polluter. Methanex, New Zealand Refining, Contact Energy, Rio Tinto, New Zealand Steel... add it up, and we're looking at around $4 million per dollar for the industrial sector, $6 million per dollar for the manufacturing and construction sector, $1 million per dollar for oil refining, $2 million per dollar for the coal and gas industry's fugitive emissions, and $14 million per dollar for the oil companies. Per dollar. When you start multiplying it by the $10 - $15 per ton subsidy the major polluters want to continue polluting, then you're looking at $250 - $400 million a year - around the cost of running the court system - straight into the pockets of our major polluters' foreign owners.

In other words, we are looking at a major redistribution of wealth from the people of New Zealand to rich foreigners, in the form of a subsidy for pollution. And that simply is not fair. The only fair way of allocating the cost is for polluters to pay the full cost of their activities. And if that drives them out of business, then they were never really profitable in the first place.

(The above assumes a cap lower than current prices, but the same logic applies regardless of where the cap is set. If its needed, then by definition the market price is higher, which means we are artificially subsidising the profits of polluters by whatever the difference is. As carbon prices are expected to rise, any cap is likely to become the same sort of running sore on the government's books that production subsidies to farmers were up until they were done away with in the mid-80's).