'Small cost' in removing carbon subsidy from big emitters: NZIER

Removing the current subsidy for heavy emitters of greenhouse gases from the emissions trading scheme would impose "a small cost on the economy" and would be more heavily borne by the agricultural and extractive sectors, and lower income households, according to an analysis by the NZ Institute of Economic Research.

Released today as an input to the ETS review by Climate Change Minister Paula Bennett, the NZIER paper says if carbon were trading at $50 a tonne – in a so-called 'high-price' scenario – it would reduce total economic growth by 0.2% percent a year for a 1.1%  reduction in gross greenhouse gas (GHG) emissions.

If contributions from plantation forests locking up carbon dioxide in their wood are included, net emissions would fall 1.5%  under the $50 a tonne scenario. The independent economic consultancy warns its scenarios are "snapshots of before and after removing the transitional measures." They do not project "adjustment paths" that might be agreed to phase in the removal of the current measures to make heavy GHG emitters cover the full cost of their emissions.

The ETS currently requires heavy emitting industries, including transport and industrial fossil fuels, to cover the cost of one in every two tonnes of carbon emitted, with a cap on the price of carbon at $25 a tonne. The cap has been meaningless to date as the price of carbon has been well below that level since the scheme's inception and was well below $1 a tonne when the scheme still allowed polluters to buy carbon credits from the international carbon market, which was flooded for a time with credits of often doubtful credibility.

The ETS now only allows trade in New Zealand units and the price has been edging toward $10 a tonne since the announcement of the ETS review late last year, as it is expected to recommend the removal of the one-for-two transitional subsidy. New Zealand emitters are expected eventually to regain access to foreign carbon markets.

"Gross domestic product ... fall(s) by 0.1% or around $267 million under the medium market price of $25 a tonne," NZIER says. "This equates to about eight hours' worth of GDP in 2020.

"Real wages fall, leading to a subsequent reduction in household consumption and import volumes."

It notes that the $25 a tonne restriction could be acting as a cap on the market price of NZUs by 2020 "if the supply conditions tighten and NZU prices increase.

"Removing the fixed price would impose a cost on the economy," the study says. A further 0.1% percent cut to GDP would occur if the carbon price rose to $50 a tonne, equating to  $539 million in 2020.

Because farmers pay for carbon embedded in petrol and diesel, "on-farm activities and supporting agricultural goods and service sectors are negatively affected, driven in large part by lower demand from the downstream energy-intensive food processing sectors (primarily meat and dairy processing) that see their costs increase with the removal of the one-for-two obligation.

"Other energy-intensive industries such as waste, road transport and mining are also negatively affected," although none experiences significant impacts if carbon were to be  $25 a tonne while tourism and hospitality would benefit through a lower exchange and average real wages.

Household spending impacts would be greater for low-income than higher-income households as the study assumes the revenue from the ETS is partially redistributed as tax cuts, which are worth more to higher-income earners, and because higher-income households tend to spend a greater proportion of their total income on services, which tend to be less emissions-intensive.

Impacts on Maori businesses and households are not specifically modelled, although Maori interests in renewable electricity generation, such as power plants using geothermal steam, and forestry would be likely to offset impacts on other agricultural interests and low-income households, NZIER suggests.

Submissions on the proposals to end the one-for-two obligation and the $25 per tonne price cap are due by February 19.

Mrs Bennett also today published two other documents: a Canterbury University School of Forestry study modelling impacts on the forestry sector of reforms to the ETS, and an evaluation of the ETS against its short, medium and long-term outcomes prepared by the Ministry for the Environment.

(BusinessDesk)