ETS a balancing act

The Emissions Trading Scheme (ETS) is complex, confusing and difficult to get agreement on, but as New Zealand prepares for its impact from July 1 Climate Change Minister Nick Smith is confident the right balance has been struck. CHRIS ORMOND of NZPA reports.

The ETS is a typical can't-please-everyone piece of legislation, but the complexity and wide-reaching impacts of it mean every political party and lobby group has at some stage wanted to play a part in shaping it.

"It's as tough as it gets," Climate Change Minister Nick Smith says of the portfolio. "It's an inordinate magnitude harder than anything else I have held in the 10-plus portfolios over my 20-year political career."

Even in the final days before it starts biting consumers by pushing up the price of fuel and power some niggling factions are still calling for it to be deferred.

The ETS begins to address an international agreement under the Kyoto Protocol for developed countries to reduce the amount of polluting greenhouse gases going into the atmosphere -- something United Nations scientists say is leading to global warming and more extreme weather patterns.

Simply put, it requires businesses to pay for their emissions by buying carbon credits off those which have cut emissions or can store carbon, such as foresters.

From there it gets complex, with subsidies available in the form of free carbon credit allocations for trade-exposed businesses and benefits to foresters with post-1989 plantings, but extra costs will be passed onto consumers at the petrol pump or through power bills.

The ETS was developed for New Zealand under Labour when it was in power, but when National won the election in 2008 it amended it with input from the Maori Party and United Future and it became what some have labelled a "watered down" version.

It starts tentatively and then puts more onus on businesses from 2013 and includes agriculture emissions two years later -- subject to reviews -- but Australia, the United States and other developed countries are yet to implement their own schemes and the heavier burdens are unlikely to be applied here until such trading partners head in the same direction as New Zealand.

On the political front, Labour is disappointed National tampered with its scheme and claims more trade-exposed businesses will be subsidised at the expense of taxpayers, and the Greens, who slightly reluctantly supported the ETS under Labour, have taken a similar stance.

They would prefer a straight tax on emissions, a more ambitious emissions reduction target looking ahead to 2020 and stronger measures to encourage a move to low carbon production in what is becoming an increasingly carbon-constrained world.

On the other hand the ACT Party is sceptical about man-made global warming and is annoyed the ETS is being enacted here when Australia has put its one on hold indefinitely. The only winners are the post-1989 foresters who are already in the ETS building up credits and will get the windfalls, the party says. National points out that as part of Kyoto negotiations the New Zealand government had to agree to pass credits on to those foresters.

Then there are the environmentalist groups and the likes of the Business Roundtable, whose views are also at opposite ends of the spectrum.

Dr Smith has been travelling around the country trying to get people to understand the ETS and says he has been enjoying the challenge.

He did the same last year, hosting meetings about what long-range emissions reductions targets New Zealand should go for as international negotiations took place for the post Kyoto period beyond 2012. Most were concerned the Government wasn't going far enough, he says.

"But now the cost is starting to bite I'm getting a lot more people out who are worried about how this is going to impact on the New Zealand economy, and that very much straddles the tension the Government is grappling with."

It has been a case of the need to be clean and green verses cost pressures -- accelerated by the recession -- and how it is going to impact on budgets of businesses and families. "I'm confident we've got the balance pretty right," he says.

In the end, the level of protest at both ends of the spectrum has been even, and Dr Smith says middle New Zealand is prepared to accept some of the cost for its country's responsibilities with climate change.

ACT and Federated Farmers have been on National's case, saying farmers, who can use a lot of fuel and electricity, will be stung by the increased costs now, let alone over the next few years when their obligations are set to increase.

MAF has put the extra cost of the ETS from July 1 for the average dairy farm at $3335 a year, and $1183 for the average sheep and beef farm.

But Dr Smith says farmers are being asked to pay no more than other New Zealanders. "The farming sector is not being picked out on their own. It would be extraordinary for the Government to say, 'well farmers are not going to have to pay for the electricity and fuel cost impact of the ETS'." The European Union has been ambitious with its ETS, and outside that continent Dr Smith has been accused of sending New Zealand out ahead of the pack with its scheme.

He's not worried about those accusations and says New Zealand has a responsibility to address its increasing emissions.

"The one part that worries me is that the only area where New Zealand is looking horribly like it's leading the world is in increased emissions. Our increase has been about double what the United States' has been since the 1990 baseline," he says.

The US has spent billions on policies around climate change and, despite misconceptions, Australia is also spending vast amounts -- with costs being incurred by consumers there, Dr Smith says.

"But all the work being done internationally confirms that an emissions trading scheme is the way in which you can get the most gains for the least cost. The political challenge is that it's also the most complex."

Greens co-leader Russel Norman says the party accepts there is a limited case for businesses put at a competitive disadvantage by the ETS to be assisted in some form, but insists stronger incentives are needed to force New Zealand to become energy smart.

His party's policies on increasing energy efficiencies and reducing pollution are wide-ranging, but Dr Norman says the point is that New Zealand and the developed world face a situation where under Kyoto it will become too prohibitive to keep emitting at current levels. If New Zealand starts seriously addressing the problem now, he says, it will be in a stronger position than other countries when the pressure really comes on to reduce emissions. He also makes the point that certainty is needed so businesses can start making long-term energy efficient investment decisions, meaning New Zealand needs to stick to its commitments.

Labour's ETS spokesman Charles Chauvel says under National's "intensity" model, if businesses can show they are finding ways to operate more efficiently -- even if that involves an overall increase in emissions -- they won't be obliged to buy credits to cover them.

Mr Chauvel has also been concerned about the cost of subsidising a significantly increased number of businesses eligible for free credits under National's scheme.

Dr Smith says arguments around allocations are extremely complex, but the initial ETS model had the potential to discriminate against smaller companies in the same market. It could also act as a disincentive to expansion.

The pros and cons go on and on, but Dr Smith says the ETS has already had a positive effect in the vital areas of forestry and energy generation.

Following an intense period of deforestation there is now a swing towards afforestation which will help New Zealand achieve its Kyoto commitments, and power generation projects on the radars of energy companies now involve harnessing renewable sources rather than polluting ones.

"The ETS is playing a really important role in switching investment decisions that are for the good long-term future of New Zealand," Dr Smith says.