The commitment by the Rudd and Key governments to explore harmonisation of the two countries' emissions trading regimes has important implications for our Emissions Trading Scheme (ETS).
The new trans-Tasman Officials Group on harmonising the two schemes, which is due to report back before the end of May, is likely to have at least as much (and probably more) impact on the ultimate make- up of the ETS as the special select committee chaired by Peter Dunne.
The desire for harmonisation reflects the realities of New Zealand and Australia's economic interdependence and the wish to avoid distorting the relative competitiveness of domestic industry. The objective is not minimising cost; rather the driver is ensuring the burden is evenly distributed throughout an economic region that is increasingly operatingas a single market.
That said, minimising the costs of compliance (some will say watering down the scheme) in the short to medium-term will be the likely outcome. The need for the Rudd government to seek support from the opposition conservative Coalition will likely come at the price of a delay in the start date and probably also further concessions in support offered to business.
The temporary drop in emissions because of the global economic downturn, and the general aversion to increasing business costs in today's economic environment, makes it politically easier to justify this.
Ross Garnaut, author of the Australian Climate Change Review, has stated publicly the economic crisis has brought Australia at least two years "breathing space".
The core principles of the two schemes are already similar. Both are broadly "all sectors, all gases" emissions trading schemes (with agriculture being slow-tracked to allow the resolution of technical difficulties on calculation and mitigation of emissions). Both would be similarly integrated into the global carbon market based on the Kyoto Protocol. And both will provide assistance to trade-exposed industries.
But there are some important differences.
Australia envisages a price cap for the first five years of A$40 (NZ$49.37) a tonne, rising at 5 per cent in real terms each year. Australian emitters will be prevented in the first five years from selling Australian units overseas. In contrast, New Zealand's ETS allows units to be converted to Kyoto credits and traded on the international market. Further, there is no price cap, although the Government's ability to sell additional units in the New Zealand ETS acts as a safety valve.
These differences risk separation of carbon prices in Australia and New Zealand. If mutual recognition of each other's domestic units is the goal, there will likely have to be some movement in policy on the se points to minimise arbitrage opportunities. With New Zealand units trading about $20 a tonne (and likely to remain low), a $40 price cap in the short term is probably easy to accept.
On present timing, New Zealand would have forestry, energy and industry in the New Zealand ETS before the Australian Carbon Pollution Reduction Scheme comes into effect with transport scheduled to come in on January 1, 2011, and waste and agriculture on January 1, 2013. Australia has not gone for a phased sectoral approach. Its plan, as drafted, is all sectors will be included from the end of 2010, except agriculture.
Our Minister of Climate Change Issues, Dr Nick Smith, has signalled the timeframes set down in the ETS need to be carefully considered. It is increasingly accepted here there will be delays. Politics in Australia make this a likely outcome there, too. Most likely New Zealand will either align implementation dates with Australia or have a "soft start" to the ETS under which firms are required only to report their emissions rather than to pay for them, at least until their Australian counterparts incur costs.
Australia has no sunset clause on its free allocation of credits to competitive industries at risk and envisages reducing assistance at the rate of 1.3 per cent a year. It will keep its assistance package under continuous review. The ETS, by contrast, has a provisional phase-out date for support to trade-exposed industry of 2029, although this is not set instone.
Again, compromise would seem possible. Pressure will come to match Australian support for trade-exposed industries in level and duration even if the design of the programmes differs.
Overall, avoiding unfair competition effects arising from the scheme's impact will most likely lead to a lowest common denominator, with the political and economic realities meaning more industry assistance rather than less.
Most of the key details of scheme design identified in the working group's terms of reference will be covered by regulation. So collaborating with our mates might not impede the passage in New Zealand of the principal amending legislation by late September this year.