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Brief Counsel

ETS negotiations now deadly serious

02 September 2009

The Government will need skill, sensitivity and application if it is to get an agreed Emissions Trading Scheme (ETS) to take to the Copenhagen Climate Change Conference in December. 

But, although it is a big ask, it is by no means impossible.  And the Select Committee report has helped to define the parameters for the negotiations – particularly with Labour.

This Brief Counsel looks at where ETS policy may be heading.

The Select Committee Review

It is tempting to dismiss the Select Committee Review of the Emissions Trading Scheme (the Review) as a cynical waste of time.  Tempting because the Committee’s report was inconclusive and festooned with minority reports from Labour, the Greens, Act and the Māori Party.  Tempting because Act, after insisting upon the inquiry as a condition of coalition, rarely attended the meetings.  Tempting because when the Committee began its final meeting, it had yet to discuss any of the proposed recommendations.

Despite all of this, the report provides some clear signals regarding where National would like to take the ETS.  However, the Government does not yet have a majority for its legislation.  It needs the support of Act, the Māori Party or Labour to get it over the line.

Its preference is for a deal with Labour as the other major party because this will offer the most policy stability.  Second choice would be the Māori Party with Act a distant third.  To have to rely on Act’s vote would be politically embarrassing and would compromise the scheme’s credibility.

Policy shifts and directions

The objectives Climate Change Minister Nick Smith identified from the Review are:

  • to make the ETS workable with a realistic timeframe
  • to recalibrate the ETS in line with the “drastic turnaround in economic circumstance” since the scheme was conceived, and
  • to realign the ETS where possible to harmonise with Australia.

The movements signalled in the report reflect all three of these themes.  They are:

  • the omission of any date for inclusion of agriculture in the ETS (the current law has entry at January 2013)
  • consideration of a time-limited price cap on carbon to avoid price shocks while firms become familiar with how the market works, and 
  • a possible shift to an intensity-based allocation system. 

Clearly, the effect of each of these changes will be to dilute and or to defer the price signals in the scheme.  To that extent, they will be difficult for either Labour or the Māori Party to swallow but politics is not a game of straight lines or simple equations.

Labour’s stance

It generally pays to be sceptical about offers of bi-partisan co-operation, especially between National and Labour.  But Labour is sincere about the need to respond to the climate change challenge and is aware that policy instability in this area is destabilising to the economy and damaging to New Zealand’s international reputation.

Also Climate Change Spokesman Charles Chauvel’s public reaffirmation of Labour’s offer in front of an influential trans-Tasman audience at the Climate Change and Business Conference in Melbourne last week suggests that the offer is genuine.

Labour used its minority report to sketch out its position in relation to National’s three proposed changes.  Labour will:

  • consider deferring the entry of the stationary energy and industrial processes sectors from 1 January to 1 July 2010
  • consider a price cap but only “if absolutely necessary to achieve consensus”, only for one year, only for emissions rather than removals and only if there is appropriate protection for forestry, and
  • consider an intensity-based allocation system within a fixed pool of units.  The report canvasses a capped and an uncapped option.  Labour would prefer the status quo which is for grand-parented allocations within a set cap but says that, “if there is insistence on a different allocation model”, it could go with an intensity-based approach provided it was capped.

Labour wants the entry date for agriculture to remain at 1 January 2013. 

These represent significant concessions but there is clearly still a big distance between Labour and National which can probably be bridged only if there is movement from each side – and that will not be easy.  National has its farming constituency to consider and Labour its Green-leaning environmentalists. 

The Māori Party

On paper, the Māori Party looks further away from National than Labour is but its attempt to pull its minority paper from the committee report before publication is a sign that it is talking seriously with the Government.

The Māori Party would prefer a carbon tax to an ETS and does not think the existing scheme goes far enough to reduce New Zealand’s carbon emissions. 

However the concentration of iwi interests in the primary sectors, particularly forestry, and of Māori among low income earners may – ironically – create the scope for the Māori Party to support National, subject to provisions to ensure that the burden to Māori from the ETS is not disproportionate to the population at large. 

Act

Act staunchly opposed every key recommendation relating to the ETS in the report but stated a preference among the allocation alternatives for the trade-exposed sector for an intensity-based system without a cap. 

The other changes National wants would also be seen by Act as improvements to the extent that they weaken the scheme.  However it would be difficult for Act to support National given Act’s in principle opposition to the ETS as unnecessary and ill-conceived.

Where to from here?

National would like to have the new law passed before Copenhagen but this may prove impossible, even with a truncated select committee process.  Next best, and still acceptable, would be to have a bill in the House and to have the votes to take that bill through to enactment.

If no consensus can be achieved, there will be a need to amend the existing ETS before 1 January 2010 when the stationary energy and industry sectors are scheduled to come into the scheme.

The political negotiations will be conducted in private and may be protracted.  Unless and until they reach a successful conclusion, the debilitating effects of the policy and business uncertainty will persist.

Chapman Tripp will continue to follow developments and to provide advice on them as they occur.

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

For further information, please contact our climate change team: Frank McLaughlin, Andy Nicholls, Linda Clark, Chris Bougen and Teresa Weeks.