Brian Fallow: Carbon cost will only get bigger

Page 1 of 2 View as a single page 5:00AM Thursday May 08, 2008
By Brian Fallow

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Of the two concessions to greenhouse gas emitters that the Government has just doled out, one is modest and defensible and the other is large and highly debatable.

The decision to defer the inclusion of transport fuels in the scheme until 2011 is understandable.

Car and truck owners have already been getting a loud and clear price signal from the international oil markets to go easy on petrol and diesel use. Adding a few more decibels to that signal with a further impost over the next two years would not accomplish much.

And it takes a little bit of pressure off inflation and inflation expectations in the short term (while deferring it to the medium term).

Fair enough.

But the concession to large industrial emitters and, crucially, to the farm sector which was slipstreamed in behind that announcement is a different matter.

The decision to push back by five years both the start date and the end date of the process of winding back the grandfathering of the trade-exposed sectors, to 2018 and 2030 respectively, will have a much bigger fiscal cost.

Or to put the same point more bluntly, it represents a much bigger subsidy.

New Zealand, like the rest of the developed world, is bound to face a much tougher emissions reduction target under whatever regime replaces Kyoto, which ends in 2012.

The gap between the volume of emissions which farmers and smokestack emitters are answerable for and their share of what the country as a whole is answerable for (and it will be the lion's share) will be all the greater as a result of this concession.

And world carbon prices are liable to be a lot higher too.

There are no grandfathering provisions for power companies in the scheme from 2010, or oil companies from 2011. It is assumed they will have no trouble passing on their carbon costs to their captive customers.

But the trade-exposed sectors will get a free allocation equivalent to 90 per cent of their emissions in 2005.

Winding back that shield will not now start until 2018 and won't be completed until 2030. Why the special treatment?

One reason is compensation for stranded capital, the money invested in physical plant or land before there was any thought of a price on carbon.

But that argument has got a finite shelf life. After all it is already 11 years since the Kyoto conference and six years since New Zealand ratified the Kyoto Protocol. By 2018 it will be 21 and 16 years respectively.

This is not an out-of-the-blue change like the tsunami of economic reform which hit in the 1980s.

The other reason to grandfather is to provide a degree of shelter for firms whose competitiveness is at risk. These are enterprises which have to compete in international or domestic markets with competitors which will not face a cost of a carbon.