4 May 2005
Media Release

The Business Council Welcomes the Announcement of the Carbon Tax as a first step towards a Cap and Trade regime

The New Zealand Business Council for Sustainable Development (the Business Council) has welcomed the announcement of the carbon tax for introduction in 2007 because it will enable business to plan early for its effects and make changes to reduce dependence on carbon based fuels.

Earlier this year the Business Council endorsed New Zealand’s ratification of the Kyoto Protocol which aims to achieve a global reduction of carbon emissions, particularly from burning fossil fuels. Climate change that results from greenhouse gas emissions could have potentially devastating effects on the New Zealand economy and environment which is highly climate dependent.

Under the Government’s climate change policy, industries eligible for Negotiated Greenhouse Agreements (NGAs) have been grouped and the general or major energy users group includes exporters and firms that compete with imports from overseas businesses that may not face similar emissions measures.

These companies require protection from increased energy costs. The Government addresses this to an extent through Negotiated Greenhouse Agreements for energy intense firms and its new package to drive efficiency and innovation within energy intensive small and medium size enterprises (SMEs).

Peter Neilson, Chief Executive welcomed the tax announcement ahead of time to enable business to prepare and consider their options: “We appreciate that by setting the carbon tax at the lower rate of $15 per tonne, the Government is easing in the tax burden on businesses. However whilst the larger energy users have already started the process of negotiating agreements, many others have not and it is important that they do so. Organisations below the scope of an NGA are going to be affected by the carbon tax and their concerns will need to be addressed. In looking at future options such as a Cap & Trade regime, the Business Council will consider how this might be resolved.”

The Business Council will proceed with its research project to see if a Cap and Trade mechanism could provide a transition path to a more business friendly emission trading alternative.

A Cap and Trade regime is based on the Government establishing a limit or “cap” on the level of emissions allowed and then permitting emitters to trade entitlements to emit up to the level of the cap.

By capping the total level of emissions that are allowed and then enabling emitters to trade in the rights to emit up to that level, the least cost means of living within the target can be achieved.

The Business Council understands that at this stage the Government is not persuaded that the international carbon market has sufficient depth to make a Cap and Trade regime feasible. Research undertaken by Motu for The Treasury indicates that a Cap and Trade regime is likely to be part of a superior option for New Zealand once an in depth international market for carbon has developed.

Neilson continued: “New Zealand’s overall climate change package needs to have a mix of regulatory measures and incentives for all businesses – from the largest energy-intensive factories to the smallest dairy shop – to make sure that everyone is playing their part. The Business Council is looking forward to working towards a more flexible market mechanism which encourages innovation and efficiency in energy use, both of which are essential for sustainable development.”

The Business Council is a coalition of 49 leading businesses united by a shared commitment to sustainable development. The Business Council mission is to provide business leadership as a catalyst for change toward sustainable development, and to promote eco- efficiency, innovation and responsible entrepreneurship.

ENDS

Definition of Cap and Trade Program and some global examples

There is a fundamental difference between trading in CO2 to the more traditional products sold on markets. What companies are selling is an absence or lack of CO2. In a cap and trade program, sources are allocated a fixed number of allowances. The maximum level of emissions that can be released from sources is set by the control authority (e.g., one ton). This level is the cap. All sources are required to have permits (i.e., allowances) to emit. Each permit specifies exactly how much the source is allowed to emit. The permits are freely transferable; they can be bought or sold. The control authority issues exactly the number of permits needed to produce the desired emission level.

Several governments have moved forward in designing domestic trading systems while international trading rules remain under development. The EU, United Kingdom and Denmark and some states in the USA are establishing domestic emissions trading programs. Some trading in these programs has already begun.

The Kyoto Protocol envisages global trading in greenhouse gas emissions from 2008. Such trading is likely to become an important risk management tool for firms.

For further information on the definition of cap and trade and emissions trading please visit: www.cpc-inc.org/resources/glossary.php

For background information on the Kyoto Protocol please visit www.unfccc.int/essential_background/feeling_the_heat/items/2918.php

United States
Cap-and-trade programs have been used in the United States for over 25 years to reduce several air pollutants (including sulphur dioxide SO2, which contributes to acid rain) and to lower the lead content of leaded gasoline. The largest example of this kind of system is the U.S. is the acid rain program, in which allowances of SO2 can be traded to comply with an emissions cap.

At the sub-national level, some states in America are working with industry, requiring reductions of carbon dioxide (CO2) emissions from power plants and allowing them to use trading as a means of compliance.

Several private-sector and nongovernmental organizations (NGOs) have developed initiatives to help build the market and to create and take advantage of trading opportunities. They include the Partnership for Climate Action (PCA) and the Chicago Climate Exchange (CCX).

More information can be found on these websites: www.environmentaldefense.org and www.chicagoclimatex.com

UK ETS
The UK emissions trading scheme is the world's first economy-wide greenhouse gas emissions trading scheme, which began in March 2002.
Thirty-one organisations ('direct participants' in the scheme) have voluntarily taken on emission reduction targets to reduce their emissions against 1998-2000 levels, delivering 11.88 million tonnes of additional carbon dioxide equivalent emission reductions over the life of the scheme (2002-2006).
The scheme is also open to the 6000 companies with Climate Change Agreements. These negotiated agreements between business and Government set energy-related targets. Companies meeting their targets will receive an 80% discount from the Climate Change Levy, a tax on the business use of energy. These companies can use the scheme either to buy allowances to meet their targets, or to sell any over-achievement of these targets. Anyone can open an account on the registry to buy and sell allowances.
More information can be found on this website: www.uketg.com

Europe
Policymakers within the EU relied extensively on the design of the US SO2 scheme when designing the rules and guidelines for the EU ETS. The EU has now established a cap-and-trade system to limit CO2 emissions from large industrial sources. The Emissions Trading System (ETS) came into effect on the 1st January 2005. The Scheme covers, electricity, oil refining, steel, cement, glass, ceramics, pulp and paper sectors.

It works like the US example. EU Member States decide on the maximum emissions from industry and allocate these to each installation (= cap). Plant operators have to show “allowances” for each unit of CO2 they emit each year. If they emit more than they have been allocated by the government, they have to reduce emissions or buy allowances from other installations that have a surplus (= the trading). If they fail to do so, they have to pay a hefty fine for each ton of emissions and then still buy the missing allowances.

More information can be found on www.dti.gov.uk/energy/sepn/euets.shtml

Australia
New South Wales is the only Australian state that already has a cap-and-trade scheme for greenhouse gas emissions up and running. New South Wales has a legal obligation to reduce their emissions intensity (on a per capita basis) and they can do this via emissions trading. They have devised their own cap and trade system which only applies to electricity retailers and it seems to be working very well for them.

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