The US and some EU countries are indicating that border taxes may be used to defend their local producers against imports from countries that have ‘soft’ climate change regimes.  The ETS that the government bulldozed through Parliament under urgency last week takes ‘soft’ to a whole new level; we’re talking marshmallows here!

While border taxes would be quite tricky to impose without contravening WTO rules about trade restrictions, and may not present a danger to us in the short term, we can’t be too sanguine about the longer term.

A much more urgent risk is that we are perceived as a country not making serious attempts to reduce our carbon emission, which will give our competitors an opportunity to turn market preferences away from our export products and services.

Given that we now have an ETS with no effective cap on emissions, and that does little to provide regulatory or financial incentives for our major polluters to change their ways and reduce pollution, we have handed our trade competitors a very handy club to beat us with!

Fortunately we do have some smart business people who understand the opportunities for genuinely ‘green’ or sustainable products or services that appeal to the growing number of socially and environmentally conscious consumers (the LOHAS  segment).

What a shame though, that any success they have in securing a share of this affluent, high value market will be despite the actions of the government, rather than being supported by it!

Probably the most vexing issue is the Minister’s cynical use of a flawed NZIER/Infometrics report, which he commissioned, in order to inform his 2020 emissions reduction target, a use for which the report itself claims it cannot be used:

To be clear, this report investigates the impact of changes in New Zealand’s AAUs under the framework of an international agreement whereby New Zealand takes responsibility for any emissions above a given amount. This is not the same as investigating different domestic emissions targets and should not be interpreted as such.

How were the terms of reference for this report developed, and who developed them? The seriousness of the flaws has prompted significant debate in economic circles, with a damning analysis by economist Geoff Bertram:

Economic models are, unfortunately, rather like fast cars, alcohol and tobacco: their consumption has significant external effects which makes them lethal to the public interest in the hands of addicts and children.

Is this a veiled reference to Smith? He goes on:

To retain the idea of “Business As Usual” as a world in which New Zealand has no emission commitment is a basic analytical error unless the assumption is made that withdrawal from Kyoto is feasible and likely.

When Mr Bertram re-runs the same models with the assumption that New Zealand is in fact part of the Kyoto Protocol, (i.e. reality), he concludes that the picture for New Zealand is much improved, and surprise, surprise:

Pushing technical change in agriculture would really yield a big gain in emission reduction at low cost to the economy.

I could go on, but there are other issues with the Minister’s analysis, like the complete pretension that forestry has no role to play in our carbon reduction scenarios.

The 2020 Cabinet Paper that Minister Smith sent to his colleagues claimed that:

Estimates of the economic impact of the different 2020 target scenarios do not include the impacts on forestry, due to difficulties in modelling this.

However, an OIA by NoRightTurn found yet another government forestry report, aside from the one we Greens used for our Getting There analysis, showing that forestry is one of the biggest and one of the cheapest options for New Zealand going forward.

Why is the Minister deliberately playing this down? Why the proposal to cap the price of carbon, which will kill any chance of the market (and forestry) to save our necks, while making the taxpayer subsidise all of New Zealand’s foreign owned big emitters?

Gareth over at Hot Topic discusses the vexing issue of hiding the facts on forestry in great detail so I won’t say more.

Another issue is that of alignment with Australia. While pleading our uniqueness, the Minister repeatedly refers to the need for alignment with an Aussie ETS that doesn’t even exist. The Australian ETS legislation was shot down in flames last week for a second time, and the likelihood of it being resurrected before Copenhagen are slim to none.

How can the Minister continue to claim alignment and that he’ll have a modified NZ ETS before Copenhagen in December? It’s not possible and Smith is deluding himself and the public if he thinks he can do it. There is speculation here at home that National cannot even get the numbers to amend our ETS. Does he think we’re stupid?

Meanwhile, the scientific head of the IPCC calls the Smith’s position “disappointing, inadequate and unambitious“. Smith’s response? To write him and

to explain how New Zealand’s high proportion of farm emissions means it is a developed country with a developing country’s emissions profile.

This was was not well understood, he said.

“I don’t think in his comments he has comprehended the scale of the challenge that New Zealand has in reducing emissions,” Dr Smith told Newsroom.

In other words, to write and whinge like a petulant two year old with special pleading.

I could go on, but this post is far too long as it is. Back to my original question. Is Nick Smith incompetent, negligent, or something else? Is it time he was replaced with someone who will do a proper, bottom up analysis of new Zealand’s options?

The NZIER report states the obvious – that the ETS will cost money. What a shock that keen insight is and a great contribution to the debate. We’ve all known since the Stern report roughly how much doing our bit would cost and the NZIER report added nothing to that knowledge. It’s a baldface pitch to let all businesses off the hook for their emissions and force the taxpayer to foot the bill for their mess. Hot Topic has a good post on the NZIER report so I won’t spend any more time on it. His post says pretty much all I would say anyway. It’s good.

Then there was the Cawthorne Report, commissioned by the Emissions Trading Group to scope out the environmental impacts of the ETS and recommend what further research is needed to understand said impacts. The key message from this as far as I am concerned is that agriculture comes in far too late and that this is a significant missed opportunity. The other recommendations are important and worth considering. Most seem obvious on inspection but thank god someone bothered to ask the questions!

Then there was the Sustainability Council’s report, which I must say pulled no punches concerning who the major benefactors are going to be under the ETS as currently designed. I’m two-thirds of the way through it and it is definitely worth the read. Are there any reporters reading this? You need to read this report! I have personally invested a great deal of time getting to know and understand the vagaries of the ETS, and I still learned a great deal from this report. There is so much to quote, I will have to contain myself. Please forgive the excessive quoting!

The ETS has so little effect on emission levels partly because of the proposed exemptions and corporate-welfare arrangements. Two-thirds of all emissions are exempted through delayed or absent coverage, on top of which rebates are to be granted to selected sectors.

The scheme can be expected to gather in $5.1 billion during CP1, though net proceeds are just under $4.4 billion. Assessing the impact in cash terms alone, losers under the ETS pay out net about $4.4 billion to the winners. Large industrial emitters pay $0.2 billion and agriculture pays $0.2 billion, while $4 billion is paid by road users, households, and small and medium businesses. Those last three groups make 91% of the net payments but account for only 34% of the nation’s emissions.

Beyond cash costs and gains lies the question of the extent to which each sector is being overtaxed or undertaxed, relative to an equitable allocation of the burden. If notional “fair shares� are based on the widely-accepted “Polluter Pays Principle�, then the implicit cross-subsidies resulting from sectors not paying in proportion to their emissions can be calculated. These implicit subsidies arise from a combination of exemptions from the ETS and the gifting of NZUs.

The economically efficient way to meet New Zealand’s Kyoto commitments is to set up incentives that bring forward the required emission reductions at least cost. The ETS does not set up a mechanism for least cost abatement during CP1. It exempts entirely the sector with the largest amount of cost-competitive abatement potential (agriculture) while bringing in first, and taxing the most heavily, the sector exhibiting probably the least ability to abate during this period (transport).

The Government’s arguments for adding extra complexity and opacity to this basic design are unconvincing. The chief attribute delivered by creation of the NZU is the ability to obscure the provision of off balance sheet subsidies to favoured sectors. Take away the blanket subsidies and the rationale for the NZU vanishes.

Both National and Labour Governments have taken important stands internationally that commit New Zealand: signing the Framework Convention on Climate Change in 1992, agreeing to a Kyoto target in 1997, and ratifying the Protocol in 2002. Both major parties have accepted that a “price on carbon� is an essential feature of any serious climate change response package. However, attempts to introduce such a price via a carbon tax or similar instrument have repeatedly been abandoned in the face of strong lobbying by major emitters and their supporters. When the Protocol came into force in January 2008, New Zealand still had no comprehensive set of climate-change policies in place – only a blueprint proposal for one.

The New Zealand Government’s failure to make progress towards emission reduction during the 1990s, and in particular the abandonment of tentative moves towards even a minimal carbon tax, reflected the vulnerability of the Government and MfE to regulatory capture by large industry, whose lobbying successfully diverted policy away from economic instruments and emission-reduction targets and into the safe but ineffective backwater of “voluntary agreements�.

So, in a nutshell, despite the NZIER’s pleading for a full taxpayer subsidy of all of New Zealand’s dirty industries, it appears from the Sustainability Council’s report that in fact a full 66% of NZ’s dirty industries are already due to be subsidised by the taxpayer under the current regime.

What are they complaining about???