Winners and Losers in the ETS

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. These will hit big fuel users, like arable farmers and greenhouse growers, 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, was 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.

Trevor Walton is a public affairs consultant. The views expressed in this article are his own, not those of any of his clients