Kyoto Bill Will Drive Carbon Price

Potential Scale of Kyoto Bill Will Drive Setting of a Price on Carbon

Media Statement - 11 December 2006

The Sustainability Council welcomes Government's indication that its favoured cross-sector mechanism for addressing greenhouse gas emissions is an emissions trading regime.

However, such a mechanism for setting a price on carbon across the economy will be needed well before the post-2012 period Government is proposing.

Government's proposal to limit any emissions trading to the energy supply sector prior to 2012 means only 23% of current emissions would be covered if this option were adopted.

Putting a price on carbon is the single most important tool for encouraging emission reductions, though it is not enough on its own. It is also needed early if climate change policy is to be robust to the potential scale of payments required under the Kyoto Protocol.

Based on the Government's most recent forecasts, emissions will exceed those of the 1990 Kyoto base year by 91 million tonnes (or 22%) and will cost the nation around $1,350 million for the five years from 2008 to 2012.

Offsetting that figure to an extent are credits for carbon absorbed by forests and these reduce net emissions to 41 million tonnes and a net bill of $600 million. This is the sum, listed in the Government's accounts, that is expected to be spent buying credits offshore to allow New Zealand to comply with its Kyoto obligations. Those credits become available through other countries making reductions in emissions or not using their full allocation.

However, the $1,350 million figure represents the transfers of wealth within New Zealand, from taxpayers to emitters, on the basis of policies currently approved. While it may well be in the nation's interest to pay transitional subsides to certain emitters (part of that sum), it is important to be clear about the total costs to taxpayers if the "polluter pays" principle is not followed.

Depending on which of the new measures are taken forward and how they are implemented, projected emissions will fall, as will the bill. However, net emissions would need to fall dramatically to avoid wealth transfer issues.

As Government is assuming a relatively low price on carbon of 7.5 Euro/tonne of CO2, even with lower emissions, the transfers of wealth could still be very significant. If the price averaged 20 Euro/tonne of CO2, the total projected transfers to emitters would go up from $1,350 to $3,600 million for the five year period (before factoring in the effect of new measures). Wealth transfers of this scale seem unlikely to be politically sustainable.

Climate change policy needs to be robust to a range of potential carbon prices. The potential scale of the Kyoto bill will be a major driver for adoption of a price on carbon across the economy much earlier than post 2012.

By signalling the cost that emitting activities give rise to, a price on carbon encourages alternative ways of achieving the same goals with fewer emissions. It immediately raises the incentives to: plant trees, install more energy efficient equipment, shift transport modes, and apply emission inhibitors to pastoral land.

The mechanism increasingly favoured for achieving a price on carbon is tradeable emission permits. The Sustainability Council has proposed that emission permits be given to citizens.

a.. Every person gets an entitlement, an equal share of the quality of emissions New Zealand issues permits for;

b.. Emitters at the top of the production chain purchase the entitlements from citizens;

c.. Consumers and most businesses then pay prices that embody the cost of those upstream firms acquiring permits - eg: a petrol price rise.

Government would hold back a percentage of the entitlements to fund investments in public projects to mitigate emissions and compensate footloose companies on a case by case basis.

A key benefit of giving entitlements to citizens is that it provides a way to price carbon that the public is likely to trust and so help build the mandate necessary for meaningful action on climate change.

ENDS

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