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Climate change – where to from here?

17 March 2009

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National’s new climate change legislation is being developed in a fast-moving and unpredictable environment.

What began in the second half of last year as a financial crisis on Wall Street has morphed into a global economic recession which is likely to be of significant size and duration. Barack Obama’s Presidency has brought a sharp change in stance to the White House. And, on 2 March, Australian Prime Minister Kevin Rudd and New Zealand Prime Minister John Key jointly committed to “the desirability of harmonising to the greatest extent possible the emissions reductions regimes of both countries”.

This Counsel considers some of the influences at play as New Zealand re-evaluates its climate change policy and speculates upon some potential areas of policy reform.

Timetable

National promised to have the new law passed within nine months of taking office and, at the time of writing, that was still the intention. However the decision to harmonise with Australia may mean that the timetable has to be extended.  Harmonisation will bring a new level of complexity to an already complex policy area, especially as it is far from certain that the Rudd Government will be able to get its Carbon Pollution Reduction Scheme (CPRS) through the Senate. 

Rudd’s objective was to have the legislation passed by 30 June, 2009 so that Australia has a concrete platform for engagement in the run up to the UN Climate Change Conference in Copenhagen in November but this deadline already looks impossible.

Greater clarity regarding the political climate in Australia may emerge after Nick Smith’s meetings in Canberra this week with his Australian counterparts: the Minister for Climate Change and Water, Penny Wong, and the Australian Minister for the Environment, Peter Garrett.

The New Zealand Climate Change Special Committee, (the Dunne Committee) has received 277 written submissions and will begin on Thursday (19 March) hearing oral evidence from invited submitters. The Committee was not given a specific reporting back time by the House but will be mindful that, because the ETS is still in force even as it is being reviewed, the policy uncertainty is causing real problems to business and needs to be resolved.

Although the Committee’s Terms of Reference are wide-ranging, the Committee Chairman, Peter Dunne, has signalled a relatively narrow review rather than a swooping return to first principles. He has said that he is not interested in hearing from people wanting to relitigate the science of climate change nor from “extreme environmentalists” and that he is looking for “practical comments” about how to improve the ETS.

Waltzing with Matilda

The policy chasm between Australia and New Zealand could not have been wider in the Clark/Howard days: a government here committed to making New Zealand a world leader on climate change and a government there which chose to stay with George Bush out in the ‘Kyoto cold’. But the policies of the Key and Rudd administrations are much more capable of alignment.

All the indications are that the policy trend will be toward deferring and diluting the cost impacts of the ETS. That was already National’s instinct, and it will be reinforced by the world economic contraction and by linkage to the CPRS should the CPRS become a reality. 

Australia was already on a slower timetable than New Zealand and Rudd has now extended it by a further six months – from mid 2010 to the end of 2010. Even before Rudd did this, Nick Smith was indicating that the shorter timeframes set down in the ETS would need to be “carefully considered".

On current timing, New Zealand would have the forestry, energy and industry sectors in the ETS before the CPRS comes into effect. (Transport is scheduled to come in on 1 January 2011 and waste and agriculture on 1 January 2013.) 

The reduction targets the two Governments have set themselves are broadly similar: a 60 per cent drop in emissions from 1990 levels by 2050 for the Rudd Government, 50 per cent for the Key Government. The Rudd Government’s preliminary target of achieving a reduction from 1990 of at least 4 per cent by 2020 has been mocked by some commentators but is based on forecast population growth of 45 per cent and would require a 31 per cent cut in emissions per head.

Policy process in Australia

The Victoria bush fires gave Australia a recent terrifying reminder of how vulnerable it is to climate change. This vulnerability is well understood. Economic modelling for the Garnaut Climate Change Review established that on a business as usual basis, Australia will sustain the following effects by the end of this century:

  • A 92 per cent decline in irrigated agricultural production in the Murray-Darling Basin
  • Catastrophic destruction to the Great Barrier Reef
  • The elimination of all snow-based tourism
  • An up to 35 per cent increase in the cost of supplying urban water, and
  • Over 4000 additional heat-related deaths a year in Queensland.

With the Greens taking a purist line, Rudd will probably have to look to the conservative Coalition for a majority. That now looks a much harder ask because the Coalition Leader, Malcolm Turnbull, who before supported introduction of a carbon reduction scheme, has recently toughened his position in an attempt to bolster his leadership against a threat from the Right of his party. 

Coalition support, if it is available, will come at a price.  Motorists, low income households and around 60 per cent of middle income households are already being offered full compensation for any costs incurred in the first few years of the scheme so any further concessions are likely to be in the support offered to business.

Rudd is already under significant pressure from the major business lobby groups with the influential Australian Industry Group calling for the implementation date for the CPRS to be set back two years to 2012.

Impact of the recession

Ross Garnaut has softened the ground for a deferment or “soft start” to the CPRS by stating publicly that the economic crisis had brought Australia at least two years “breathing space”. Given his status in the climate change debate, it is inconceivable that he would make this statement without the Prime Minister’s prior knowledge and acquiescence.

The slowdown in economic activity has led to a drop in emissions and a consequential accumulation of surplus credits. But the more significant and enduring effect of the recession will be if it intensifies the search for – and government-sponsored investment in – low carbon alternative technologies.  Nicholas Stern, former UK Secretary of the Treasury and author of The Economics of Climate Change, discussed this possibility in a video interview with the McKinsey Quarterly:

We need to have a reflationary package which lays the foundation for future growth. And if we look into the future, it’s actually quite exciting. Because what we see is the biggest technological opportunity that we’ve had for a very long time: as big as the railways, as big as electricity, as big as the motorcar, and, most recently, information technology. It’s the opportunity to go for low-carbon growth.
And we understand, roughly speaking, what technologies are needed. Some of them will be very quick—like insulating houses, promoting energy efficiency—and that will put unemployed construction workers back into work now, this year. Others will be bringing forward infrastructure investment, which takes a little longer. Others, like R&D, have a still further lead time. But we have to put these kinds of packages together.

The Key Government has shifted the emphasis in New Zealand’s carbon mitigation strategies. It has canned the thermal moratorium, the biofuels obligation, the “ban” on traditional light bulbs and the $1 billion home insulation fund the Greens negotiated with Labour for non-state houses. It has, however, signalled more money in this year’s Budget for the Centre for Agriculture Greenhouse Gas Research and plans to exempt electric cars from road user charges.

The broader international dimension

It is unthinkable that no agreement will emerge to replace Kyoto. That would simply represent too big a failure to be allowed, especially given the United States’ new willingness to enter the fold. 

But the signs do not look good for a treaty which will actually deliver. As already discussed, the recession has created an excuse for inaction or slower action. 

A meeting between the G8 leaders and the leaders of the eight fastest growing pollution emitting nations to achieve consensus on a ‘50 by 2050’ target failed when China, India, Brazil, Mexico and South Africa rejected the idea on the grounds that the wealthier countries had created most of the environmental mess to now so should take a lead role in cleaning it up.

These difficulties are to be expected. Nothing on this scale has been attempted before. An effective and binding Climate Change Protocol will deeply affect all aspects of life and all people within the signatory territories. And every country has a special case, a special circumstance, which warrants special treatment.

  • New Zealand needs more appropriate LULUCF (Land Use, Land Use Change and Forestry) Rules which recognise that we are among the most efficient food producers in the world and that forcing production from here to producers who have a larger carbon foot print will not only be ruinous for the New Zealand economy but also counter-productive for the global environment and
  • Australia wants emissions targets calculated on a per capita basis to reflect its rapidly growing population.  But China will never agree to that because it is presenting its one child policy as integral to its emissions reduction strategy.

The significance of these complexities is that unless a strong international framework can be agreed, the slippage which has characterised the first Kyoto commitment period will continue.

Key areas of differences between the ETS and the CPRS

Nick Smith has identified four main differences between the two schemes:

  1. New Zealand is exposed to the international price of carbon while Australia is proposing a price cap for the first five years of A$40 a tonne, rising at 5 per cent real each year 
  2. New Zealand can trade any excess/shortage of credits on the international market. Under the CPRS, emitters will be able to import eligible Kyoto units but will be prevented in the first five years from selling Australian units overseas. The exception, noted in the CPRS White Paper, would be “if Australia was to enter a bilateral linking arrangement with another country (say, New Zealand)” in which case, permits could be traded between the jurisdictions with fewer than five years’ notice where it was unlikely to lead to a significant change in carbon prices
  3. Timing of the phase-ins. Australia has not gone for a phased sectoral approach. The plan as presently drafted is that all sectors will be in from the start except for agriculture, the inclusion of which is considered not practicable at this stage because the calculation of emissions is complex. A work programme is being set up this year toward a decision in 2013 about bringing the agricultural sector in from 2015, and
  4. Australia has no sunset clause on its assistance for competitive industries at risk and envisages a much less aggressive abatement regime of 1.3 per cent a year. It will keep its assistance package under continuous review. Reviews will be held at least every five years and will assess, among other things, the extent to which Australia’s major trading partners and competitors have introduced carbon constraints. The ETS by contrast has a provisional phase-out date for support to trade-exposed industry of 2029, although this is not set in stone.

The Australian EITE (Emissions-Intensive Trade-Exposed) scheme in brief

  • Allocation of free permits is based on an individual entity’s previous year’s level of production
  • Free allocations of credits are at two different rates, depending on the emissions intensity levels of the activity
  • Permits are provided at 90 per cent for activities which generate at least 2000 tonnes per A$1 million in revenue and at 60 per cent for those which generate between 1000 and 2000 tonnes
  • Emissions calculations include indirect emissions identified with electricity generation and with the extraction and production of natural gas
  • Initial rates of assistance will be reduced by a carbon productivity contribution of 1.3 per cent per annum and
  • New entrant or brownfields expansions are entitled to the same rate of EITE support as existing entities.

Possible directions for ETS reform

As in other areas of the Single Economic Market (SEM) work programme, harmonisation with Australia does not mean absolute alignment. The two climate change responses will continue to have points of difference reflecting differences in the two economies and in their emissions profiles.But there is leadership at Prime Ministerial level to harmonise the two regimes where possible. And given the high degree of economic integration across the Tasman, there will be strong commercial arguments to align the timing and the transitional support provided to the trade-exposed sector. Both policies are still evolving so the position is extremely fluid. Possible directions for ETS reform, however, include:

  • Introducing a price cap to align policy with Australi
  • Either aligning implementation with Australia or having 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 start to incur costs an
  • An undertaking to match Australian support for trade-exposed industries in terms of level and duration even if the design of the programmes differs

Our thanks to Patricia Herbert for writing this edition of Counsel.

Footnotes

  1. Nick Smith to the ETS review, 5 March, SCN Select Committee News.
  2. The Australian, Rudd tested over economy emissions, March 2 2009
  3. Connecting climate change and economic recovery
  4. CPRS White Paper, page 125. Ibid

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