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Climate Change Leadership Forum reports

Response to Catherine Beard from Stephen Tindall on behalf of the Climate Change Leadership Forum

17 June 2008

Catherine Beard
Executive Director
Greenhouse Policy Coalition

Comments to the Climate Change Leadership Forum 28 May 2008

Dear Catherine

Thank you for your letter dated 23 May 2008, and also for your attendance at the Leadership Forum (the Forum) meeting on 28 May.  I would like to take to opportunity to respond to the points that you made in your letter.

The letter essentially argued for:

 

In addition to this, GPC argued that the:

Comment

Prior to addressing the points that you have raised in your letter, I would like to provide some background material on the Forum itself.  This is important, as the papers to the Forum, and material that comes from the Forum, needs to be seen in the right context.

The purpose of the Forum is to facilitate communication between the government and the broader community as policy decisions are taken on the proposed design of a New Zealand Emissions Trading Scheme (NZ ETS). The Forum provides an opportunity for community and business leaders to air their differing views on emissions trading and wider climate change policy as well as an opportunity to provide advice to help shape the design features of the NZ ETS.  The Forum is not a replacement for the Select Committee.

It operates in an open way with material that is provided to the Forum being published (lagged by one meeting).  Discussions at the Forum meetings have not been always focussed on reaching consensus – recognising the range of views around the table.  They have focussed on gaining a greater understanding of the issues, ensuring that Forum members are able to feed their ideas and viewpoints into the thinking of Ministers and officials, and where possible, reaching a consensus on issues.  I believe that the Forum has been successful in that regard.

Turning to your letter, the approach proposed by GPC is somewhat at odds with the ETS as outlined in the legislation – and is also at odds I suspect with the views of many of the members of the Forum.  The proposal approached is also at odds with the Forum’s directions – as expressed through the 10 key points.  A large degree of consensus was reached on these 10 key points at the Leadership Forum meeting of 17 April, notwithstanding the later and public comments that were made by Business New Zealand (and the misgivings that have been expressed by the Chamber of Commerce).

Under the GPC approach, trade-exposed businesses would pay little or no costs for their emissions or for the increases in growth from those emissions.  These costs would be borne by the taxpayer. 

While I cannot speak for the entire Forum, my view is that such an approach would be inequitable, and it would slow the adjustment of the New Zealand economy to a lower carbon footing.  This would neither be fair nor in New Zealand’s long-term interests.  It would not help us meet our international obligations.  I believe that the principle under the proposed ETS design of being generous to trade-exposed businesses to avoid economic regrets, while still ensuring that there is a cost of carbon at the margin of operations – is the right one.

Attached are some thoughts from officials on each of the specific points that you raise in your letter. 

Thank you again for your contribution.

Yours sincerely

Stephen Tindall
Chair
Climate Change Leadership Forum

Specific Points Raised by GPC

1. Wait till Australia makes decisions

One approach would be for New Zealand to hold off making decisions until the rules around the Australian ETS are clear.  Officials do not favour that approach.

As with all other policies, we should take decisions that are in New Zealand’s interests and are suitable for a New Zealand context.  We do not standardise other policy settings (e.g. our approaches to tax, benefits and labour laws are all different from Australia’s). 

Australia is in quite a different situation compared to New Zealand vis-à-vis its Kyoto commitment and also its emissions profile so a solution that is suitable from an Australian viewpoint will not necessarily be suitable from a New Zealand viewpoint (e.g. NZ has a strong imperative to bring its agricultural sector into an ETS given the prominence of agricultural emissions in our emissions profile; the case for inclusion of agriculture in Australia’s case is less pressing).

Having said all this, where we can gain symmetry of policy with Australia without compromising New Zealand’s interests then we should aim to achieve this.  In the longer run, there may well be benefits in linking our ETS with its Australian counterpart.  There are a range of benefits that linking would allow – and we should seek to facilitate the benefits associated with close development of policy where appropriate.

Related to this, it is important that we build appropriate review provisions into our ETS design.  This will allow us to consider important issues such as the relativity of NZ ETS design with an Australian ETS in the evolving New Zealand policy framework. 

2. Revive the Negotiated Greenhouse Agreement (NGA) process – an intensity-based approach

The 2005 review of climate change policy showed that NGAs were administratively burdensome and sent the wrong economic signal.  New Zealand’s business as usual emission profile is rising – and future international agreements are likely to be more stringent.  Reviving the NGA policy based on worlds best practice would be very close to a total exclusion for the relevant sectors from the scheme – passing all of the cost of Kyoto and its successors onto the domestic economy. 

The graph that is presented is misleading in two ways.  Firstly, the NGA process demonstrated only small contributions from firms and not the large contribution that the graph suggests.  Secondly, the graph omits the fact that (taxpayer-funded) total emissions are likely to rise under a NGA scenario (and the Kyoto cost that NZ faces is in terms of aggregate emissions, not the efficiency of their production).

Having said this, there is some benefit in consideration of an intensity-based approach within a total fixed cap.  The Forum’s 10 key messages on the NZ ETS makes this point clearly.

3. Phase-out should be contingent on what other countries are doing.

The government has recently indicated a change to the phase-out provisions.  As the Prime Minister noted in her speech at the time of the change of policy, this change in policy position was influenced by the considerations of the Forum.

It is important to note that the extended phase-out provisions are generous to trade-exposed businesses - significantly more so than the proposed EU model up to 2020 (EU policy is unclear after this date – although it is worth noting they have made clear that a move to 100% auctioning is their preferred long-term approach).  Ultimately, it is not in New Zealand’s interests to replicate imperfections in the policies of others (e.g. we don’t provide subsidies to agriculture even though many other countries do).

4. Price cap

The Forum has discussed the issue of whether or not there should be a price cap in the NZ ETS – and no consensus was reached on the matter.  Clearly, there are attractions from a (short-term) business viewpoint – but the downsides are not quite as obvious. 

Having a price cap merely passes any risks of changes in international carbon markets from the private sector to the taxpayer.  It does not reduce risks for the NZ economy.  Further, setting the price cap is problematic – it will always be arbitrary.  If it is too low then very few emission reductions will result, if too high then it will have no effect.  

The presence of a price cap would distort the operation of the market in what is fundamentally a market based solution.  There is a risk that it operates to set a price on emissions rather than seek the lowest cost of reductions to meet a cap.  On this issue therefore, one can argue both in favour of a price cap, and against a price cap.

5. Allocation of 90% of 2005 emissions too rigid

There is absolutely no compulsion for the distribution of free allocation to individual firms to be determined by the definition of the pool (90% of 2005 emissions).  As noted above, the total pool of free allocation is more generous than the proposed EU approach through to 2020 – and it represents a judgement on the appropriate contribution between taxpayers, consumers, workers and shareholders.

The Technical Advisory Groups are pivotal to the exercise of distributing the free allocation that is available.  Opportunities exist within these groups to provide greater incentives for newer, more efficient infrastructure if so desired.  As noted, an intensity-based obligation (without a cap) comes with significant downsides from both an equity and a broader economic viewpoint.

Note also that much of the discussion at the Forum has focussed on ensuring that the length of phase-out and review provisions are appropriate, rather than the proposed level of free allocation of 90% of 2005 emissions.

6. Don’t rule out AAUs

The Forum has had a number of discussions on the topic of whether (or not) to allow AAUs to be used for compliance purposes in the NZ ETS.  Again, this is a matter in which the Forum was not able to reach consensus – reflecting the difficulty around this issue.

Officials agree that totally ruling out AAUs would add cost to the compliance obligations of participants in the scheme.  However, there would be risks to the reputation of the NZ ETS, and also around future linking opportunities if unlimited access to AAUs is allowed.  A balance needs to be found here.

7.  Allocation for liquid fossil fuels (to trade-exposed firms)

The ETS is designed to change behaviours.  It is neither practical nor desirable to provide free allocation for every cost increase involved. 

Having said this, drawing boundaries around who will receive free allocation (and for what) will always be difficult – and no matter where the boundaries are drawn, there will be some who claim that inequities exist.  It is important not to over-complicate the scheme by trying to provide assistance for everything. 

This is the sort of issue that the Select Committee is likely to consider.

8. Need for better data and institutional arrangements

There is always a need for better data and efforts are underway to improve data – but one could always wait for better data prior to making a decision.  New Zealand has debated the introduction of a price on carbon for some years now; in officials’ view it would be more than unfortunate if we allowed this opportunity to slip through our fingers.

The GPC letter also suggests that the current scheme is open to politicisation and rent seeking behaviours.  Officials’ suspicions are that lobby groups will seek economic rents under any institutional set up – New Zealand’s history certainly suggests that rent-seeking behaviours will not reduce with different institutional arrangements. 

You may or may not be aware that Jonathan Ling of Fletcher Building raised the possibility of whether some element of independence can be incorporated into the reviews of the ETS.  Ensuring that reviews of the ETS are undertaken appropriately is critical – and there are arguments for a level of independence in this regard.

9. Govt should be prepared to allocate free units to NZ trade-exposed sectors (and not make windfall gains)

GPC (through points 1 and 7) would have the taxpayer providing free allocation well beyond the level of free units allocated to New Zealand.  It is hard to reconcile a view that the government should not make windfall gains with the points you are making above (under which businesses may well receive a windfall gain – as the government may well end up allocating more units than it receives).

In commitment period one (CP1), the government is very likely to run at a Kyoto deficit.  Further, any gains the government makes through to 2020 will be minimal – and indeed it is possible that the government may actually allocate more units for free than it receives post 2012 depending on the stringency of future international agreements. 

There is neither an international precedent for the government to allocate for free the number of units that it receives, nor a policy rationale.  This is not the way that the EU scheme is structured.  The Forum have suggested that any revenues gained by government through the ETS should be used effectively (see point 10 of the key points for details) – but did not argue that the government should be revenue neutral as a result of implementing the ETS.

10. Take heed of NZIER analysis

It is important to note that modelling is a guide only – and it is no more than a guide.  It is important to recognise that the case for any major policy intervention does not rest or fall on the results of economic modelling – although modelling can be a useful adjunct to the policy development process.

Having said this, the Forum did consider that the Infometrics and NZIER modelling was sufficiently important for it to be discussed at a sub-group of the Forum (Cluster B), as well as at the forum itself.  This group did not reach overwhelming conclusions but did note that the results of any modelling is highly dependent on the assumptions that are fed into the model.  The report of that Cluster to the Forum as a whole did not suggest to officials that New Zealand should reconsider the decision to introduce an ETS.