Posted 19 September 2012
The Coalition has made a submission to the NZ Parliament's Finance & Expenditure Select Committee on the Climate Change Response (Emissions Trading and Other Matters Bill) currently before the House. The submission was presented this week by the Coalition's hon. chairman, Hon Barry Brill, assisted by hon. secretary, Terry Dunleavy.
`The New Zealand Climate Science Coalition
Hon Chairman: Barry Brill OBE, JP, LL.M, M.Com Law
PO Box 399,
10 September 2012
Finance and Expenditure Committee
Climate Change Response (Emissions Trading and Other Matters) Amendment Bill
I present this submission as chairman of the above organisation, which is comprised of New Zealand scientists and members of other professions concerned with either the science or policy of “climate change” (as defined in the Act). Personally, I have lengthy and wide experience in energy policy matters.
I wish to appear before the committee in support of these submissions.
We generally support the purposes of the Bill, particularly the removal of the expiry date of the transitional provisions and introduction of off-setting in the forestry sector.
However, we have grave reservations regarding the mutation of the scheme into a taxing instrument, and certain other matters. We make the following specific submissions:
To avoid over-accumulation of Kyoto Units, the obligation to surrender NZUs should be suspended until the 2015 review.
The requirement to back NZUs with international carbon credits should not be repealed;
If the removal of the ‘backing’ requirement is to proceed, auction sales should be recognised as a new tax, with details spelled out in this Bill (rather than left to regulations).
The power to impose import restrictions by regulation should be repealed.
The proposed increase in the Global Warming Potential (GWP) of methane should be deferred until 2015, and researched meantime.
Following expiry of Kyoto1, the issue and surrender of NZUs ought not to be recorded as money in the Government’s financial accounts.
The 2009 economic modelling of the macroeconomic effects of the ETS should be updated on the basis of current realities and expectations.
It should no longer be assumed that New Zealand is “in transition to a low-carbon economy” or that future legally binding international emissions-reduction obligations are probable.
The Scheme of the Act
1. The primary purpose of the Climate Change Response Act 2002 is described in s 3: “To enable New Zealand to meets its international obligations under the Convention and the Protocol”. These are references to the UN Framework Convention on Climate Change (1992) and the Kyoto Protocol (1997).
2. In the first instance, the ETS was essentially a device whereby carbon credits from the forestry sector are funded by the energy sector, and then transferred to the Crown. By December 2012, this process will have largely satisfied the Government’s negotiated debt (of approximately $1.7 billion) to forest owners in respect of post-1990 carbon credits.
3. All NZUs under the ETS are issued free of charge by direction of the Finance Minister. They acquire a value, on the secondary market, only because they are legal tender for satisfying surrender obligations created by the Act. The Crown uses the surrendered NZUs to acquire an equal number of Kyoto Units (KUs) for the purpose of meeting its Protocol obligations.
4. The commitment period under the Protocol is due to expire permanently on 31/12/2012. COP17 of the Convention (at Durban) agreed to defer all Convention actions with legal force until 2020. Accordingly, the ETS serves little purpose during the next 8 years.
5. In anticipation of a second and larger Kyoto commitment period, the Act provides for surrender of NZUs to double on 01/01/2013. As this is no longer necessary, the Amendment Bill appropriately defers this action indefinitely, but with a review in 2015 –when the Durban Platform envisages that the terms of a new international agreement may be clarified.
6. Deferring the increase in surrender obligations is not enough. During 2013-15, the ETS is expected to yield Units well in excess of the Government’s international obligations, with the surplus valued at $140 million (or much more if carbon values recover).
7. There are five available solutions to the expected over-accumulation:
(i) suspend the ETS until 2015 or later;
(ii) decrease the ‘transitional’ surrender obligation to say 5:1(from 2:1);
(iii)convert the NZUs into government revenue (repeal backing by KUs);
(iv) trade the accumulated KUs on the international carbon market;
(v) accumulate and hold the KUs, against future obligations.
8. Each solution would serve a particular policy objective:
(i) boosts prospects of economic recovery and resilience; reduces CPI and interest;
(ii) as above, but reduced; (may also offer an unquantifiable reputational benefit);
(iii) increases fiscal surplus and the size of government; reduces reputation;
(iv) promotes the rapid development of international carbon markets;
(v) offers larger but unquantifiable reputational benefits;
9. The Amendment Bill opts for solution (iii). The Government opposes (v) as there can be no certainty that any future obligations will materialise, and suggests (iv) might not be well-perceived internationally. The Cabinet papers (released under the Official Information Act) do not address solutions (i) or (ii) or the economic benefits of either.
Cap ‘n Tax
10. Successive Ministers have offered assurances that the ETS is not a ‘greenwash’ tax but an international “fair share” obligation – from which the government gains no revenue. The proposed ‘cap and auction’ amendment converts the government’s role from regulator to beneficiary. A compulsory purchase scheme in which the government retains the proceeds, is indisputably a new tax.
11. We have a number of serious objections to this new energy tax:
• It is wrong in principle. If the Government’s burden reduces unexpectedly, the benefit of that reduction should be passed on the private sector which is funding that burden.
• An environmental measure ought not to be stealthily converted into a government tax instrument.
• At a time of depressed consumer demand and high unemployment, the removal of ETS costs, which would reverberate rapidy throughout the economy, would accelerate economic recovery. It would also improve New Zealand’s competiveness, encourage investment and boost the Government’s economic growth objectives.
• An energy impost is a highly inefficient tax with large multipliers. It is also very regressive and will do most harm to exporters and those on fixed incomes.
12. There are real constitutional issues in Parliament delegating wide taxation powers to regulations. If limits are not clearly spelled out in the legislation, the media and the public will rightly assume the worst, while intervention by the Courts will be a constant possibility.
13. We submit that the best available option is to suspend the requirement to surrender NZUs until at least 2015.
14. If this submission is not accepted, we submit that the Bill should include a full description of the auction process and consequent money flows, including the intention to preserve international pricing. Only administrative detail should be left to regulations.
Impact on Global emissions
15. KUs bought directly from the international market are also legal tender for the Act’s obligations. The Protocol’s Clean Development Mechanism holds that abatement has an equal global value wherever it is achieved, so free international flows maximise the benign influence of any abatement spend. All recycled NZUs auctioned by the Government constitute a dollar-for-dollar reduction in overseas abatement investment – and are thereby a direct detraction from the international effort to reduce global emissions.
16. The amendments presume that ETS surpluses are better diverted to the Crown accounts than invested in global abatement projects. While this view has some merit, it will not boost our reputation internationally.
17. All new taxes are unpopular. But, in the English-speaking world (USA, Canada, Australia, UK  ) Cap ‘n Trade schemes have come to be seen as a ‘political third rail’ and are now supported only by centre-left and green parties. This ideological divide was not apparent in 2009.
18. The Australian Labour-Green government is currently distributing A$14.9 billion to households (about A$1700 per household) as ‘compensation’ for the costs of the carbon tax, as well as large sums to the business and farming sectors. The new tax has produced a net loss to government revenue of A$4.1 billion. Despite this largesse, the carbon tax remains a major political liability. Its prospects of survival beyond 2014 are very slim.
19. New Zealanders have received no compensation to date for the burdens of the ETS. The tradeable goods sector should also be compensated. The Government has differentiated it from Australia on the basis that the ETS was not a new tax. That argument will no longer hold if the KU backing is removed and auctions introduced.
20. The April consultation paper proposed a ban on all or some imports of carbon units as well as a cap on domestic unit volumes. It further suggested that the $25 price cap be removed in 2015. These combined provisions would have pushed the current unit price of about $8 to a level above $25 over the next three years.
21. Although the Cabinet papers speak of implementing the recommendations of the Caygill Panel, they omit to mention the Panel’s view  that “it is in New Zealand’s interests for the ETS to be as open as possible.”
22. We are encouraged by the Minister’s announcement that import restrictions are not intended and that auction prices should reflect international carbon values  .
23. It is disconcerting, however, to note that the existing Amendment Bill does nothing to restrain existing executive discretion to apply import-limiting regulations. The Minister contemplates using those powers as necessary to boost the proportion of units that are auctioned  . Such actions have the potential to destroy the free market and the ongoing existence of this threat creates uncertainty and may lead to hoarding.
24. We submit that the power to regulate import restrictions should be repealed. If any such far-reaching change to the Scheme is proposed in future, it should be effected by Parliament.
25. A particular concern is the Bill’s proposal to increase the statutory Global Warmng Potential of methane to the 25 times figure arrived at by the IPCC’s AR4 in 2007. A reading of the 4AR section in Chapter 2 “GWPs and Other Metrics” makes clear that huge uncertainties remain and there is unresolved debate as to whether the GWP method itself should persist.
26. The threats inherent in this issue are by no means limited to the agricultural sector. This single-figure amendment imposes an uplift of 8% on any future emissions obligations New Zealand may incur. Over time, this number could conceivably cost the country many billions of dollars.
27. No other country is as vulnerable as New Zealand to an increase in this GWP figure, and we have a uniquely strong incentive to check the mathematics and science underpinning this figure. The RIS, Cabinet papers and other sources give no indication that any serious resources have ever been committed to this task.
28. Since 2007, a number of serious issues regarding the reliability of the 4AR number have been raised. It is based on wrong timing; the CH4/CO2 comparison is wrongly based on weight rather than volume or atmospheric concentrations; the indirect effect (25%) is based on a wrong assumption that hydroxyl ions are scarce and ozone will increase.
29. If it would be useful to committee members, we will be happy to supply references and details of some of the many scientific papers which have cast doubt on the methane GWP figure during the past five years.
30. Nothing valuable is to be gained by rushing to amend the number now, rather than deferring the issue to 2015. The IPCC Fifth Assessment will readdress the issue and its new findings will be published in 2014. Meantime, a specific New Zealand project to evaluate the correct figure should be delegated to either the Global Research Alliance on Agricultural Greenhouse Gases or to VUW’s Climate Change Research Institute.
31. We submit that the proposed amendment to methane GWP should be deferred until the 2015 review.
32. Because the Kyoto liability appears on the Crown’s balance sheet, all acquisitions of carbon units are currently shown as fiscal gains. This practice should cease as from year end, with the Auditor-General consulted to ensure that the 2012 amendments remove the arcane accounting fictions which now prevail.
33. The Emissions Trading Scheme (ETS) was incorporated into the Climate Change Response Act (CCRA) in 2008 and amended in 2009. Both versions were legislated under Parliamentary urgency following truncated select committee hearings. No quantified cost-benefit study or acceptable RIS was presented on either occasion. In 2005, five minority reports emerged from the Select Committee, all with differing figures. Similar confusion and acrimony can be expected this year.
34. The 2011 modelling mentioned in the Cabinet paper  is driven by the now unrealistic assumption that New Zealand will be bound by a Kyoto-style legal obligation to reduce emissions to 15% below 1990 levels by 2020  . The models look at world carbon prices of $100 per tonne. These are opposite assumptions to those of the recent Cabinet papers – which address the risk of future international units being valueless. MfE officials expressly declined the option of having the ETS modelled as a domestic tax.
35. The ad hoc Select Committee of 2009 (chaired by Hon Peter Dunne) was unable to satisfy its mandate to produce a quantified cost-benefit study for a New Zealand ETS. Instead, the then Minister tabled the results of economic modelling. That exercise was based on numerous assumptions which are now known to be wrong. In particular, it assumed there would be a large and liquid international carbon market, fuelled by the trading schemes adopted by our principal trading partners.
36. We submit that this Committee should request the Minister to arrange an update of the 2009 economic modelling, based on current expectations.
37. New Zealand has received external kudos for legislating the world’s most draconian ETS, and this might have helped the successful Durban negotiation of improved forestry provisions. Our ambitious 2020 targets were awarded a bronze medal at Copenhagen (despite the existence of strong conditions which are now virtually incapable of attainment). We have surely earned the right to slip back in the field during the 8-year hiatus before the next treaty is planned to come into force.
38. We should take advantage of the pending 8-year lull to clarify the many issues surrounding biological emissions. Will the world include agricultural targets in future treaties? Can this be reconciled with the need to double food production? Are farmer-level taxing points feasible? Will the Global Research Alliance find practical solutions?
39. A key assumption of the Cabinet paper is that New Zealand is (or should be) “in transition to a low-carbon economy”. This pre-Copenhagen jargon forecasting the country’s ineluctable future trajectory needs to be subjected to rigorous scrutiny. Governments are notorious for ‘picking winners’ on the basis of their self-assumed powers to accurately predict the future, but such efforts seldom produce happy outcomes.
40. A very important factor in considering the proposed amendments is the timing and degree of probability of any future international instrument to which New Zealand will be legally bound. The fact that this issue was kicked so far into the future at the Durban COP suggests a low confidence level on the part of major powers. Several other auguries also suggest pessimism:
a. the lack of significant atmospheric global warming over the past 10 years; and the expectations regarding the possible cooling effects of solar cycles;
b. the 21st century measured reductions in sea-level-rise, ocean-heat-content,sea-surface-temperatures, and aggregate sea-ice and glacier melt;
c. the game-changing discovery of vast reserves of shale gas (and oil), banishing the spectre of 'Peak Oil’;
d. the sharp reduction, worldwide, in public concern regarding catastrophic human-caused climate change; and the progressive break-down of the previous political consensus;
e. the steadily-declining level of ambition seen since COP15, including the reduction of the Protocol coverage to only 15% of global emissions; the failure to agree upon a second commitment period under the Protocol;
f. the evident collapse of carbon prices, and widespread criticism of the EU scheme;
41. We submit that this Bill should not be based on any assumption that a future binding international regime is inevitable, with just the timing and details uncertain. The cliche that New Zealand is “in transition to a low-carbon economy” should be abandoned.
B E Brill OBE
 The EU ETS was legislated in a different world in 2004, affected the entire trading bloc, covered a narrow section of industry, gave Europe a competitive advantage and was rendered harmless by over-allocations. Prices moved to zero in 2007 and are currently down to E4 per tonne.
 Final Report: paragraph 303
 Cabinet Paper “Final Decisions” paragraph 43: “*The proposals were not designed to increase the price of NZUs within the ETS.* My strong view is that this price should continue to reflect the international price”.
 Supra, paragraph 48.
 Paragraph 49 footnote 5
 1.2.1 of “Macroeconomic Impacts of NZ ETS” by NZIER/Infometrics. Final report 9/3/2011.