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03 February 2010

Winners and losers in the ETS


No other government did as well in Copenhagen as New Zealand. Unlike Barack Obama and the leaders of Western Europe, our negotiators returned from the climate change summit with major policy trophies in their bags. Was this because we had an all gases, all sectors ETS in place? If so, maybe it's time for Federated Farmers, the Greenhouse Policy Coalition, Business Roundtable and Greenpeace to eat crow.

In the run-up to the Copenhagen Climate Change Summit, a welter of lobby groups was telling the government that no legislation was better than imperfect legislation. Given that our negotiators needed the credentials that only ETS legislation could provide, maybe it's time for some of these lobbyists to eat crow. No other government did as well in Copenhagen as New Zealand.

Barack Obama and other western leaders came back empty handed. In contrast, environment minister Nick Smith, trade minister Tim Groser and their officials returned with two major trophies: support from 30 other countries for the NZ-initiated Global Research Alliance on agriculture greenhouse gases and tacit support for an agreement on forestry which addresses major NZ Kyoto Protocol concerns. And they did this without having to sign a massive cheque to anybody.

These initiatives are hugely important to New Zealand as the only developed country with an economy that's heavily reliant on a primary export sector that is also the main source of its emissions. Reducing emissions from livestock, allowing land-use flexibility and maintaining a market for forestry offsets will save the country billions.

The Global Research Alliance was largely a Groser initiative. The minister has a very good understanding of how consumer perceptions impact on the ability of NZ products to gain access to upmarket retail shelves around the world.

He's also aware that even if the governments of the world can't agree on a legally binding protocol to replace Kyoto, the economic imperative to reduce emissions won't go away. Affluent consumers want to buy ethical products and they already expect the Tescos, Waitroses and Home Depots of this world to include low-carbon footprints in their criteria for sourcing food, textiles and forest products.  

Without its own legislated ETS, without credible targets, the chances of New Zealand having a say in the shape of the world's climate change response post-2012 were zilch. Yet it was critical that we did. Not only are we uniquely reliant on our primary industries, no other country relies almost totally on plantation forests for its wood supply or on renewable energy for its electricity supplies.

Australia doesn't have the same worries. Unlike us, its main challenge - reducing its overwhelming reliance on fossil fuels for energy - is shared by most of the industrialised world.

The failure of many of our major lobby groups to recognise these fundamentals was reflected in their submissions to government, in some case right through until the final ETS legislation took shape. Some of these stances may have been based, like those of Federated Farmers, on sheer bloody-mindedness. Others appear to have been more cynical, dressing up vested interests with cloaks of hollow reason.

With an economy that relies on the 100% Pure image, either to attract tourists or as a platform for selling our food and fibre to high-end consumer markets, New Zealand has never had the option of being a slow adopter. National recognised this and since well before the 2008 election was saying, "we are committed to having a moderated ETS with realistic targets in place in time for Copenhagen".

Yet the Greenhouse Policy Coalition still felt it could credibly argue that “it is highly unlikely that any foreign consumer buys on the basis of a country’s domestic climate change policies rather than in respect of their views about a particular product.”

Farmers consistent during lobbying marathon

The first public consultation round – about whether New Zealand should ratify the Kyoto Protocol – was in late 2001. Ever since, lobby groups have been on a treadmill of submission, media release and letter writing, attempting to bend public policy their way.

Farmers as a group have been consistent. They’ve been intransigently opposed since day one. In his regular column in The Dominion Post, former environment minister Simon Upton said Federated Farmers “demagogic, destructive and illiterate source of commentary” was such that “no self-respecting political party could take them seriously”.

There are two strands of logic at the heart of the federation’s opposition . The first is that it’s unfair to get farmers to pay a tax on animal emissions before their competitors do. The second, essentially, is that farmers have a right to pollute until measures are developed to mitigate or prevent it at no cost to farmers.

The first argument is superficially attractive and was common to all primary sector lobby groups when the country was contemplating ratifying the Kyoto Protocol. However it ignores the importance that major retail chains in developed countries accord to environmental footprints when stocking their shelves.

It is one thing for our marketing people to rebut the inaccurate and superficial logic surrounding food miles. But as consumers around the world battle with carbon charges, it will be much harder to explain why New Zealand food exports – this country’s largest source of emissions – are largely exempt.

The second argument, which was argued more eloquently – but not necessarily more credibly – by Business NZ, is that the right to pollute is a property right, “That compensation is generally owed to all businesses who suffer a loss of value as a result of a new policy.”

Existing use rights are a feature of resource management law both in New Zealand and in other developed countries. But those rights fall far short of being absolute. Where these rights conflict with community or national interests, such as pollution of the commons, they are normally phased out, with no compensation paid.

Pulling the property rights card in this context undermines the debate we need to have about the lack of legal protection for real property rights in New Zealand. Yet, intriguingly, many other elements of BNZ’s submission on the ETS Amendment Bill in September were both constructive and well argued.

Overall, the tone contrasted with its submissions of earlier years and showed a much higher level of political sophistication than Federated Farmers. Sometime in 2008 Business NZ clearly decided the writing was on the wall and moved from a stance of outright opposition to the ETS, to one of trying to moderate the impact of the ETS on business when it became law.

Its 2007 argument had been that New Zealand should not adopt a price on carbon, “either through a carbon market mechanism or carbon charges, unless our major trading competitors, including all major developing countries, take a similar step.”

By 2009 it was arguing for the Labour Government’s ETS to be replaced with an uncapped intensity-based scheme to protect ‘at risk’ businesses. It wanted a slower phase-out of industry support and delayed sector commencement dates.

By and large the amended ETS delivers exactly that – on the face of it, an excellent outcome for Business NZ’s membership. In contrast, Federated Farmers got little of what it asked for.

Few successes for big business emitters

The Greenhouse Policy Coalition, which represents the large emitters, also strongly advocated for an intensity-based scheme for large trade-exposed energy users. This win is worth tens of millions of dollars for some of the coalition’s backers from the Major Electricity Users Group.

Otherwise, its policy successes are thin on the ground. Until the end it was arguing for the suspension of the ETS “until a better designed scheme can be created” and for the exclusion of agriculture “until agriculture around the world faces a price on carbon or the sector has options to reduce carbon dioxide emissions that are affordable and that can be widely deployed”.

The Business Roundtable can’t be said to have had many exclusive wins either. However its recommendation, that initial government action should be modest and ‘ramped up’ over time if technological breakthroughs make carbon reduction more affordable, mirrors much government thinking.

The Roundtable was opposed to the adoption of a climate change strategy until a post-2012 international agreement was reached and action taken by other countries, particularly Australia and the United States. Even then, it wanted a low revenue-neutral carbon tax with subsidies for carbon sinks for a transitional period … something it had opposed when Labour originally suggested a similar concept.

Beyond that, it argued for a price cap to provide greater carbon price certainty. Yet this would clearly disadvantage Kyoto forest owners and carbon-efficient firms in energy intensive sectors.

This apparent disjoint with its free market principles was counterbalanced by the Roundtable’s staunch defence of the owners of pre-1990 forests, who face a 100% tax on emissions (less token compensation) if they fail to replant following harvest. The contrast with farmers, who enjoy 100% grand parenting of their livestock emissions until 2015 and thereafter a 90% taxpayer subsidy on their post-2005 emissions growth, couldn’t be more marked.

Business NZ, the Greenhouse Policy Coalition and forest industry organisations all opposed the deforestation tax, or argued for offsetting, as did National in its 2008 election policy – subject to weasel words about cost implications. But most pre-1990 forest land is owned by large low profile organisations that can be easily disregarded by a government trying to boost its Kyoto ledger or avoid a credit downgrade. 

Only when low profile becomes high profile, do the politicians sit up and take notice. The Feds with their anti-fart tax campaign and the forest industry with its campaign to allow owners of Kyoto forests (planted post-1989) to participate in the ETS are the only cases where Labour was willing to contemplate major changes to its version of the ETS. Unlike other business groups, the NZ Business Council for Sustainable Development (NZBCSD), supported an ETS involving all gases and all sectors from the kick-off. As a result it has an impressive number of policy wins to its credit.

Its greatest success, however, was in moving many businesses from an attitude of denial and ‘do nothing’ to one of constructive engagement with something that was about to become a reality. It also helped build acceptance among businesses and the major political parties that an ETS would be more effective than a low level carbon tax in delivering the emission reductions required.

However, any hopes that it would achieve cut-through with the public appear to have been groundless. Since Kyoto became a buzzword, the TV news channels have refused to engage with the climate change debate at anything more than a bumper sticker level.

On both sides of the Tasman, the public supports the notion that big business should reduce its emissions, so long as the public doesn’t end up paying for it through increased prices. Clearly there is little understanding of how a carbon pricing mechanism works.

Farmers’ featherbed not as thick as it appears

Of all business and primary sector groups, the NZBCSD was the most gung ho about the inclusion of farming in an ETS. However, it went too far for Fonterra and some of its other corporate members when it released research that showed that a large majority of the public were unhappy with National’s ETS changes. These would make taxpayers pick up a bigger tab for emissions from trade-exposed energy intensive businesses and farmers.

These changes were widely criticised by the Left and by environmental groups led by Greenpeace, for weakening Labour’s ETS. Commentator Rod Oram went further, saying the changes were a “shambles” that made an “utter mockery” of the ETS.

They were wrong. The desperate last minute deal struck with the Maori Party to get the legislation through the House, certainly deserved those descriptors. But as for the substance of the amendments, the critics protest too much.

Meat, wool and dairy processors will pay significant emissions charges. Fonterra estimates this will cost them an extra $115 million a year by 2015, a cost that will be sheeted home to farmers, if the government sticks to its timetable.

The energy sector will be liable for 50% of its total GHG emissions between 2010 and 2012, and for 100% of its total emissions from 2013 onwards. After providing free credits for trade-exposed energy intensive industries, the government estimates that industry will need to buy 32 million NZ emissions units each year. At a conservative $25 a tonne, that’s $900 million a year – hardly an insignificant sum.

Whether this, along with emission charges on agriculture that begin in 2015, will be sufficient for New Zealand to meet its (conditional) target of a 10-20 per cent reduction in 1990 emission levels by 2020 remains to be seen.

As the Greenhouse Policy Coalition points out, “The high percentage of renewable electricity generation, the high percentage of agricultural emissions, and [with many] industrial emitters already near “world’s best practice” in energy efficiency, means mitigation options are very limited and will be high cost.” In its 2007 publication, Framework for a New Zealand Emissions Trading Scheme, the Ministry for the Environment said much the same thing.

In this context, Greenpeace’s call for a 40% reduction target (in 2008 it was calling for a 30% reduction) was akin to asking New Zealand to commit economic suicide. Clearly it couldn’t be achieved without a dramatic reduction in emissions from the country’s largest source of emissions, livestock farming. So let’s give them full marks for honesty – their recipe for low input, low intensity farming would undoubtedly result in a dramatic reduction in emissions. It would also mean the end of the dairy industry as we know it, while being the death knell for sheep farming (the biggest source of farm greenhouse gas emissions). 

The Sustainability Council has been pushing for farmers to take full responsibility for their emissions. Its case has been based on a belief that farming has a greater potential to reduce emissions than any other sector, simply through applying nitrogen inhibitors to pasture. In practice, many farmers have found these products do not live up to the hype, a conclusion that has been confirmed by independent fertiliser expert Dr Doug Edmeades. In a study released late last year he says inhibitors have been over-promoted and that many claims made about them are unsubstantiated.

The global warming potential of nitrous oxide is nearly 300 times that of CO2. So if inhibitors that work can be effectively deployed they may be something of a silver bullet for reducing the country’s carbon footprint. But the operative word is ‘if’.

Also, with no technology available yet for reducing methane emissions from livestock digestion, the government’s decision to ease agriculture’s entry into the ETS is commonsense. Getting farmers to pay significant sums for emissions before they have a practical means of reducing them would achieve nothing. Time is also needed to develop practical ways of making individual farms responsible for their emissions performance.

In the meantime, along with all other Kiwis, farmers will be paying their share of energy-related emission charges. Big fuel users, like arable farmers and greenhouse growers, will be hit in the pocket – unless of course these price signals reveal that some farming sectors do have the ability to reduce their emissions after all.

In the second half of 2010, the government is likely to fine-tune the ETS when domestic carbon trading begins and legal anomalies inevitably emerge.

Although nearly all business lobbyists have called for both major political parties to deliver policy consistency, the reality is that the ETS is not written on tablets of stone. Reshaping New Zealand into a low-carbon economy is one of the most fundamental economic changes we will see in our lifetimes. Expecting the democratic political process to get it right first time round, given the host of technical, economic and political unknowns, is unrealistic.

More ETS changes to come

The general public will also drive change. As ordinary Kiwis become aware of the costs to them of free emission credits to industry, they won’t tolerate feather-bedding where the technology exists to reduce emissions. So if and when proven methane and nitrous oxide reduction technologies come on stream, livestock farmers should expect to lose their free emissions more quickly than the ETS now provides for.

Ignored by Nick Smith has been the call from many lobby groups for an independent agency reporting directly to parliament to regulate the ETS. This call will become harder to resist, as awareness grows of the potential for graft and political favouritism to influence the allocation of ‘free’ carbon credits.

The government’s fixation with aligning the ETS with Australia’s Carbon Pollution Reduction Scheme will also come under increasing pressure. While the government is justified in wanting to prevent businesses from migrating to Australia in order to avoid higher carbon costs here, there appears to have been no analysis of the sectors where this leakage might occur.

While there is no logic in making our ETS different from Australia’s CPRS just for the sake of it, the New Zealand and Australian economies and emission profiles are like chalk and cheese. Labour’s Charles Chauvel points to Treasury’s conclusion that there is “no clear analytical basis” to align the ETS with the currently proposed CPRS, given New Zealand and Australia’s unique emissions profiles and industrial structures.

Even uncapped intensity-based allocations – one of the major changes introduced by National to align the ETS with Australia – may need to change if they fall foul of the emissions trading schemes of other countries. Parliamentary Commissioner for the Environment Jan Wright points out that under the Kerry-Boxer Bill being considered by the United States senate, credits from countries ‘not subject to [..] mandatory absolute tonnage limits’ do not qualify under their scheme. “This means that, by aligning with Australia on the lack of an allocation cap, New Zealand may rule out the United States as a possible market for New Zealand credits.”

Indeed, to maximise the credibility of our ETS the government should be focussing on what the US and Europe are doing.

The other area where there will be unceasing pressure for change is the treatment of pre-Kyoto forests. Unless the grossly unfair treatment of those who have invested in pre-1990 forests is remedied, it will reduce their ability and willingness to plant the new carbon forests the country so badly needs.

This is recognised in the clunky deal National negotiated with the Maori Party in which a handful of iwi won compensation for the massive contingent liabilities imposed on the Kyoto forests acquired as part of their Treaty settlements. The fortunate few have said they have an interest in seeing this treatment extended to all other pre-Kyoto forest owners. We’ll see.

Labour climate change minister David Parker deserves credit for laying an essential, albeit unsustainable, foundation for the ETS, said Simon Upton in The Dominion Post.

“Nick Smith had a much tougher task. Environment ministers in conservative governments have a much harder row to hoe. His is no small achievement … the ETS ensures that emissions will now be measured, recorded and verified. They will at the margin be reduced. But this is by no means the final shape of things to come.”

In early 2009 the Greenhouse Policy Coalition’s Catherine Beard said plaintively in a letter to Smith, “We are very concerned that the setting of an [emissions] target for New Zealand does not degenerate into who came up with the punchiest sounding slogan for the media.”

The same concern could be expressed about ETS policy in general. But for this to happen, it would be helpful if the Coalition and all lobby groups recognised the strategic importance of New Zealand to be perceived in world markets as an ethical producer of food, fibre and forest products and framed their advocacy accordingly.

It would also be helpful if the government was more effective at communicating its big picture policy objectives to the public. Although National was committed to having a moderated ETS with realistic targets in place in time for Copenhagen, its poor communications allowed doubts to be raised about its resolve.

The views expressed in this article are Trevor's own, not those of any of his clients

- Trevor Walton

What do you think?

Michael Cambridge
Hi Trevor, A very interesting summary. I have been a member of Federated Farmer, until recently, to try to get farmers to see the positive aspects of the ETS. If 650,000 hectares was planted on farm land since 1990, then another 650,000 could easily be planted if the price of carbon is right. I suggest that farmers in general would benefit more from a high price than a low price. There would be a great deal of interest in tree planting if CO2 hit $100 per tonne. It is quite funny watching some of them agonising over whether they should accept the credits they already qualify for. For one, it would increase his net income several times even though he is an Act supporter and adamant denier of climate change. Regards Michael

One difference I have with your "Govt wins in Copenhagen " article is that, in my view, the meeting was a (predictable) shambles and failed to produce anything tangible whatsoever. The US, for example, will not sign and will never sign. Lap-dog Australia will follow the US. Infra-Lapdog NZ will eventually follow Australia. In other words, my prediction is that - despite the fact that ETS is now NZ law - John Key will use the chaos in Aus/US to indefinitely postpone the obligations faced by our emitting sectors. I have been advising people of my views in the course of my business (my views are based on my own experience of COP1, and 40 years of reading the literature on the subject, but not on anything I could hold up in a court of law). Naturally, I would be more than happy if events were to prove me totally wrong. But if I am right, I wonder about the legal/social implications of all that genuine currency exchanged for meaningless carbon credits.

You may well be right about what the government does. Maybe not. I see some EU states are talking about imposing duties next year on imports that come from countries that don't have an ETS. I don't see that an internationally binding treaty is necessary anyway — a possibly more important driver will be what Maceys, Walmart, Homestore and the like do with their commitments to ecosourced procurement. Maybe the grey market will evolve into a new form of international eco-exchange, based on standards that are credible to producers, retailers, consumers and those governments who want to take part.

What do you think?
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