Thursday, September 17, 2009

Climate change: Counting the cost

How much will National's proposal to reduce emissions by subsidising polluters to make more cost us? Labour's document dump [PDF] on its negotiations with the government includes a letter from Phil Goff (document 7, p. 14) which tells us. In a section titled "implications of National's proposals", it points out that the current world price of carbon is NZ$28 / ton - $3 above National's proposed $25/ton cap - and that it is expected to double to NZ$50 / ton if a deal is made at Copenhagen (and some estimates that it will go as high as $100 / ton - a number the government was happy to use to scare us about the costs of action). This has unpleasant consequences both for the effectiveness of policy and future budgets:

My advice is that
  • A $25 price cap will blunt the incentive to forestry to invest. Forestry provides the biggest and lowest cost early opportunity to reduce New Zealand net emissions. The cap will be costly for forestry and plantings will not go ahead, at least for another three years. Some forestry interests say they will hold these credits until the price cap comes off and they can get a better price. Already this season 8 million seedlings are about to be dumped due to uncertainty over the ETS policy and the price signal it will deliver.
  • The $25 cap will shift a huge cost onto taxpayers. The higher the world price goes, the greater the subsidy for heavy emitters and agriculture.
  • A $25 cap in a market with a carbon price of $50 means emitters retain the 90% free credits for emissions above 2005 levels (the level of assistance that they would receive under the scheme we put in place), plus a 50% discount on a $50 carbon price on any additional emission rights they need to purchase.
  • The $25 cap is the equivalent of going to a better than a 95% subsidy level in an industry without any output growth.
  • Agriculture could effectively pay nothing for the next 10 years. Meantime, nitrogen inhibitors and other practices to reduce emissions will be rolled out, providing windfall gains.
  • At present, the 90% subsidies to emitters in the current legislation are reduced by 8% in a straight line beginning four years after a sector enters the scheme. If National harmonises to a reduction rate of 3.6% provided for in the Australian scheme, the cost is about another $1 billion a year - but this doubles if prices are capped at $25 and the world price goes to $50.
  • If the carbon price rises to $50, the cost to Government could rise to $2 billion (the equivalent of two rounds of tax cuts or $20 per household per week).
At this stage I should point out that rather than "aligning with Australia", National reduced the reduction rate of its subsidies to 1.3% a year. This isn't costed, but its probably on the order of another billion a year. So even if prices don't rise, we're already looking at the worst-case fiscal scenario.

Goff points out that the proposed scheme continues to subsidise polluters to carry on with business as usual, while removing the incentive from the one sector which has real potential for emissions reductions: forestry. It's no wonder they are refusing to back it.

National's proposals are a disaster for the climate and this country. And you and I will be paying for it directly, through higher taxes, for years to come.