NZ ETS passes the Kyoto bill to our children

This guest post is by Simon Terry, Executive Director of the Sustainability Council and co author with Geoff Bertram of “The Carbon Challenge: New Zealand’s Emissions Trading Scheme” (published by Bridget Williams Books).

New Zealand’s failure to reduce emissions to its Kyoto Protocol target means the taxpayer still faces a $1.1 to $5.7 billion net liability after all the ETS charges have been paid. That is the bottom line after taking account of what the ETS will contribute to paying off the Kyoto bill and Treasury’s advice about how to price what is left.

Years of narrow accounting, which had given the impression that the government was at various times in credit under the Protocol, was finally abandoned in the May Budget – at least in part. It broke with the past by recording key deforestation liabilities on the books, thereby signalling the real cost of New Zealand’s 22% overshoot of its Kyoto target.

This Budget entry officially scotches the myth that the government faces no financial impacts under the Protocol because it can rely on offsetting credits from plantation forests. Those plantation forests are earning credits now, but the credits must be paid back when the trees are harvested in the 2020s. Using these credits to pay the Kyoto bill is the equivalent of putting the cost of these emissions on the plastic for the next generation to pick up.

The Budget’s inclusion of a contingent liability for harvesting forests that are earning credits today is an important step, but it covers only the five years of the ETS to 2012. What the Budget failed to show is that the next period from 2013 to 2020 will be even more costly. New Zealand is actively negotiating a new international commitment that it expects will involve a stricter emissions target, while official projections are for the nation’s emissions to keep rising and carbon prices to also go up.

During that period there will be an even larger volume of forest credits earned by New Zealand and a corresponding contingent liability for their harvesting, which the Budget still does not record. This is despite a Treasury statement a year ago that it “will be necessary to recognise” a contingent liability right out to 2020. While the detail of the international commitment New Zealand will take on remains to be agreed, based on pledges to date and the current ETS settings, there would again be a very significant taxpayer liability after all ETS charges are paid.

The ETS simply fails to collect enough revenue to cover expected international commitments.

The ETS simply fails to collect enough revenue to cover expected international commitments. During the first Kyoto period, after all the exemptions, rebates and compensation payments are allowed for, the Government will receive just 12 million emission units net under the ETS, with each unit accounting for a tonne of greenhouse gas emissions. Compared to the current estimate for the Kyoto liability of 69 megatonnes (Mt), the ETS will reduce this by only a sixth during the Kyoto period.

That means over 80% of the cost of dealing with today’s emissions is to be dumped on a future generation of taxpayers.

You can imagine the reaction if someone proposed that the government take out a loan to cover 80% of everyone’s power bills and that loan was not due for payment until the 2020s. Yet that is the direct equivalent of what is happening under the ETS during its first five year at least. Consumers may not be accustomed to facing a price on carbon, but newness is hardly a moral defence for passing the bill to our children. Unless Parliament votes to withdraw from Kyoto (and only Act supports this), it is basic that today’s polluters pay today’s emissions bill.

The remaining unpaid liability of $1.1 to $5.7 billion is calculated as set out below:

• The Budget lists, as a contingent liability, the need to cover 86.1 Mt of emissions resulting from harvesting forests that earn credits between 2008 and 2012. On the basis of the low carbon price of $20.29/tonne used in the Budget, it puts the gross liability for this at $1.747 billion.
• The deficit from the Kyoto agreement however is only 69 Mt and once ETS revenue equal to 12 Mt is accounted for, the shortfall of 57 Mt represents a net Kyoto liability of $1.1 billion. Yet the Treasury warned in July 2009 that carbon prices could go as high as $100/tonne, and so the net liability could be as much as $5.7 billion.
• During the next period from 2013 to 2020, the Treasury has projected a related contingent liability of roughly another 100 Mt. On that basis, the Budget should also show a further entry for this of about $2 billion at the $20/tonne carbon price.
• It is possible that certain forests that are earning credits today will never be cut down, but there is no scenario under current government policy in which forest owners do not need to be paid for the newly stored carbon in those forests.

For today’s polluters to fully meet the Kyoto liability, total ETS payments obviously need to rise a great deal. However, households and small businesses are paying their fair share of the Kyoto bill, and it is major industrials and pastoral farmers that receive the heavy discounts at the taxpayers’ expense.

These subsidies and other compensation arrangements dominate the ETS flows such that only one in five of each dollar charged under the ETS becomes available to the Government to pay off the Kyoto liability.

Households already bear half the total costs resulting from the ETS during its first five years (52%), while accounting for just a fifth of all emissions (19%). Together with small-medium industry, commerce and services, and transport operators, they would pay 90% of the costs resulting from the ETS during the first five years while being responsible for 30% of total emissions.

With a tighter international commitment to come and New Zealand’s gross emissions still rising, the scale of the subsidies to major industrials and pastoral farmers is set to deliver increasing fiscal stress that will build up pressures for change in addition to the inequity that will be increasingly observed. Other moves overseas will also tend to put pressure on the ETS, including carbon border taxes.

Fortunately, New Zealand is well endowed with low cost options for reducing its carbon footprint

Fortunately, New Zealand is well endowed with low cost options for reducing its carbon footprint, including agricultural efficiency measures that cut emissions and the planting of permanent forests to newly store carbon. Once the notion that doing nothing will be costless is abandoned, it is surprising how much progress can be made under even modest assumptions. There are a series of options that together could deliver a 40% net reduction on the business-as-usual emissions otherwise expected in 2020 – and at no economic cost if the effective carbon price is assumed to be $30/t or higher.

As it currently stands, the ETS will reduce gross emissions by less than 1% during its first five years – relative to what they would have been anyway. Emission actually keep growing, but at a slower rate. Much the same is true out to 2020 if the ETS settings are not changed. Getting the Kyoto accounts straight is the starting point for a major reworking of carbon pricing policy.

Note: The Budget estimates of contingent liabilities can be viewed at: http://www.treasury.govt.nz/budget/forecasts/befu2010/038.htm The Treasury document drawn on states with respect to the gross liability for both periods: “180 million forestry credits will be used … At a price of $100/unit, this contingent liability could be as much as $18 billion for the period 2008 – 2020”. See: 2020 Emissions Reduction Target: Further Analysis, T2009/1811, 31 July 2009, p.7. While the Treasury amended the government’s online accounts following this July document, it has not registered a contingent liability for harvesting on its own website that tracks the Kyoto “net position”.