24 November 2009
Speech

ETS debate speech

Charles Chauvel, speech to second reading of Climate Change Response (Moderated Emission Trading) Amendment Bill, 24 November.

Mr Speaker, the Government has made a mockery of Parliament’s processes by the way it has dealt with this amendment. It is flawed on multiple levels. It will make us poorer, our economy weaker and our emissions increase. And the tragedy is that none of this needed to happen. We could instead have achieved something enduring through good faith discussions, but that is not something this Minister is capable of.

By the end of this week, every part of Parliament’s consideration of this Bill will have been rushed and inadequate - particularly given the immense economic, social and environmental outcomes at stake.

At the Finance and Expenditure Committee, submitters, experts and officials were all given impossibly abbreviated timeframes to contribute effectively. The Committee was given less than 2 months to scrutinise extremely substantial amendments and consider 379 written submissions. Oral submitters were given only 10 minutes to speak, if they could even do so at short notice. Our independent expert, Dr Suzi Kerr, was not able to provide information until the final day of deliberation. As such, her advice was not able to be incorporated into Department reports - which were likewise unable to be provided until the final couple of days of deliberation. The Parliamentary Council Office could provide only an untested draft of revision tracked amendments on the day of deliberation.

There was a fundamental lack of robust supporting information available to assist the Committee and submitters in evaluating the rationale for and associated costs and benefits of the amendments. The Bill was roundly and publicly condemned by Treasury. Treasury said that “the level and quality of analysis” available is just is not up to the significance of the proposals, and that the analysis does not provide “an adequate basis for informed decision-making”. Treasury is right. There is no analysis of what drives the key changes in the legislation. And throughout, the Minister has obstructed attempts to obtain background information that might assist the Committee or the public to assess the Bill. This includes key documents such as the Treasury long-term analysis of fiscal costs.

The Committee and submitters were also completely unable to scrutinise forthcoming amendments to the Bill that were foreshadowed prior to the 1st reading. These include those settled upon only yesterday, in exchange for the support of the Maori Party, apparently as the proxy for the Iwi Leadership Forum. The impacts, fiscal and otherwise, of these political backroom deals will never receive proper parliamentary scrutiny.

How can the process I have just described give anyone confidence in the end policy outcome? It simply cannot.
SUBSTANCE
Given the shambolic process that it has been subjected to, it is no surprise to find that this is a Bill that is fundamentally flawed. But the magnitude of the policy incoherence is breath-taking on many different levels. It will make New Zealanders poorer, our economy weaker, and our emissions higher.

The worst area of the Bill concerns the level, duration, and model of the allocation of units – in other words, the way that it gives emitters ongoing rights to pollute.

The bill puts in place an uncapped intensity based allocation model of allocation. This allows the overall level of allocation - and therefore emissions themselves - to actually increase – in other words, there is no “cap” in this “cap and trade: scheme. The lack of a cap obviates the whole point of an ETS, which is to reduce emissions over time at least cost. It should do this by allowing trading of permits under a cap, and then reducing the cap over time. If production in emissions intensive trade exposed activities increases by more than 1.3% per year, as it almost certainly will in some years, then absolute levels of allocation will actually increase. So, therefore, will emissions. The Parliamentary Commissioner for the Environment rightly advises that a cap is vital to create the right incentives, to reduce fiscal risk, and to create policy certainty for business. The intensity-based nature of the allocation model does not support emissions reductions appropriately, as it does not provide the incentive of the full emissions price at the margin.

The level and duration of allocation is overly generous and too slow. Both the Parliamentary Commissioner for the Environment and the Finance and Expenditure Committee’s independent expert, Dr Suzi Kerr, say this. The phase-out rate of 1.3% per year for at least 80 years defies any commonsense notion of a ‘transition’. And as with any protection or subsidy, future governments will find it very difficult to reduce previously promised levels of protection.

Allocation is costly – both fiscally and to the economy as a whole. Every carbon credit given away by the Government, rather than kept or sold, is a real cost to the taxpayer. This is because it enables polluters to pollute freely, while the cost of such emissions still needs to be picked up by the taxpayer in accordance with our international obligations. Treasury now estimates the overall fiscal cost of allocation to amount to $110 billion by 2050. And this could potentially increase dramatically, depending on the level of production chosen by allocation recipients, and the international carbon price. It is, however, unlikely to decrease.

The Bill also makes it difficult to alter levels of allocation, with additional 5 yearly delays following any changes recommended in 5 yearly reviews. If levels of allocation are no longer appropriate, they should be altered promptly. It is unfair to the taxpayer to do otherwise. Indeed, the Institute of Policy Studies sums it up. The bill is “designed more to tie future Governments” hands with red tape, rather than to enable flexible and effective policy”.

Also problematic is the proposed transitional period, which provides a half obligation and fixed $25/tonne price to the energy, transport and industrial processes sectors until the end of 2012. This shifts more than half the costs of emissions until 2012 from the polluter to the taxpayer – and reduces incentives for appropriate levels of emissions-reducing investment and behaviour.

A further concern is the delay of agriculture from 2013 to 2015. The Parliamentary Commissioner for the Environment notes that there is insufficient evidence to justify delaying the entry of agriculture into the ETS. This will keep the full costs of emissions with the taxpayer until 2015, and delays appropriate levels of emissions-reducing investment and behaviour in this sector.

So why are these changes being made? Reading through the Regulatory Impact Statement, it appears that the primary official reason is to prevent carbon ‘leakage’ – particularly to Australia. And there is not much more analysis than this. Just how much economic activity will move in the absence of this Bill? How many jobs would be lost? How do the value of these losses compare to the value of the subsidies provided? None of this most basic information is available.

Treasury itself concluded that there is “no clear analytical basis” to align with the currently proposed CPRS, given New Zealand and Australia’s unique emissions profiles and industrial structures. The fact that the CPRS is still only proposed and could be subject to further revision – assuming it passes at all after the Australian Liberal Party’s caucus meeting today - only adds to the incoherence of the harmonisation proposal.

Dr Suzi Kerr advises that free allocation should be phased out relatively quickly, irrespective of our competitors’ behaviours. This, she says, is for the same reasons that we do not subsidise our agriculture, even though the US and EU do. In her words, “the benefits to the protected activities are vastly outweighed by the costs to the economy as a whole”. She considers that the phase out of free allocation in the current Act at 8% ending at 2030 was probably already too slow on economic grounds. It is proposed to be replaced by a phase-out of allocation at 1.3% for at least 80 years!

This Bill would make highly undesirable changes in order to achieve objectives that the Treasury, the Parliamentary Commissioner for the Environment, a leading independent expert and others all tell us are without any clear analytical basis.

WHAT COULD HAVE BEEN
The tragedy here is that Parliament could instead be assembled today to debate a politically sustainable scheme. It is a matter of public record that early this year, Labour offered talks to National as to what amendments might be needed to reach enduring certainty over climate change policy.

When National walked out on negotiations in favour of advancing the amendments contained in the Bill, there were only 3 issues outstanding: (1) the entry date of agriculture, (2) the transitional period half obligation and fixed price, (3) and the allocation model, level and phase-out rate. We were prepared to compromise on these to achieve an enduring ETS. We would likely have agreed to a compromise agriculture entry date of 2014. We would likely have accepted the transitional price cap and half obligation. We would likely have accepted an intensity based allocation within a cap, subject to reasonable phase-out rules. All were less than ideal compromises. However we were prepared to make them in the interests of an enduring ETS.

We negotiated in good faith, and could see no reason for National not to do so, since it appeared that the only significant issue for them to compromise on was the issue of the cap on free allocation in agriculture. If they had done this, an enduring and effective ETS could have been achieved. Instead, we have a Bill that will make New Zealanders poorer, our economy weaker and our emissions higher.

If Parliament passes this Bill in anything like its current form, a priority for Labour will be its repeal and replacement with legislation providing for a robust ETS and a fit-for-purpose series of complementary measures.

Labour’s proposed changes to the bill;
Labour is putting forward the following amendments to the Climate Change Response (Moderated Emissions Trading) Amendment Bill to:

* Remove the 50% discount on emissions during the transitional period;

* Increase the price cap during transitional period to $100;

* Replace the phase-out of free allocation to existing and new industrial emitters with an 18-year phase-out, with assistance ending in 2030;

* Replace the existing phase-out of free allocation to agricultural emitters with a 17-year phase-out, with assistance ending in 2030;

* Return the entry date for agriculture to 2013;

* Remove references to proposed CPRS;

* Create complementary measures fund to provide funding for complementary measures to reduce greenhouse gas emissions;

* Adjust the review period for allocation from 5 to 3 years and ensure that changes come into force immediately;

* Alter the formula for the determination of allocations to industrial and agricultural emitters to impose a cap based on 2005 emissions

* Set national targets for the reduction of greenhouse gas emissions in both the medium and long-term;

* Establish an independent Advisory Committee on climate change;

* Increase accountability and transparency in the making of the public policy response to climate change;

* Require applicants for free allocation of carbon credits to agricultural or industrial emitters to declare any political donations made in the previous year;

Prohibit banking of non-forest units during the transitional period, by forbidding any New Zealand Units issued during that period being surrendered, converted or transferred after 31 December;

ENDS

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