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 full text of our submission appears below:
`The New Zealand Climate Science Coalition
Hon Chairman: Barry Brill OBE, JP,
LL.M, M.Com Law
and Expenditure Committee
Climate Change Response (Emissions
Trading and Other Matters) Amendment Bill
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.
wish to appear before the committee in support of these submissions.
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.
we have grave reservations regarding the mutation of the scheme into a taxing
instrument, and certain other matters. We make the following specific
To avoid over-accumulation of Kyoto
Units, the obligation to surrender NZUs should be suspended until the 2015
The requirement to back NZUs with
international carbon credits should not
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by regulation should be repealed.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
Following expiry of Kyoto1, the issue
and surrender of NZUs ought not to be recorded as money in the Government’s
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
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
(i) suspend the ETS until 2015 or later;
decrease the ‘transitional’
surrender obligation to say 5:1(from 2:1);
the NZUs into government revenue (repeal backing by KUs);
trade the accumulated KUs on
the international carbon market;
accumulate and hold the KUs,
against future obligations.
8. Each solution would serve a particular policy objective:
boosts prospects of economic
recovery and resilience; reduces CPI and interest;
as above, but reduced; (may
also offer an unquantifiable reputational benefit);
increases fiscal surplus and the size of government; reduces reputation;
promotes the rapid development of international carbon
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
Cap ‘n Tax
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.
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
• 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
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
We submit that the best
available option is to suspend the requirement to surrender NZUs until at least
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
Impact on Global emissions
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
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
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
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.
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.
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.
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.”
We are encouraged by the Minister’s announcement that import
restrictions are not intended and that auction prices should reflect
international carbon values.
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
Such actions have the potential to destroy the free market and the ongoing
existence of this threat creates uncertainty and may lead to hoarding.
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.
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.
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.
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.
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.
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.
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.
We submit that the proposed
amendment to methane GWP should be deferred until the 2015 review.
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.
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.
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.
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.
We submit that this Committee
should request the Minister to arrange an update of the 2009 economic
modelling, based on current expectations.
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
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?
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.
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
of significant atmospheric global warming over the past 10 years; and the expectations regarding the possible cooling effects of solar cycles;
century measured reductions in sea-level-rise,
ocean-heat-content,sea-surface-temperatures, and aggregate sea-ice and glacier
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;
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;
evident collapse of carbon prices, and widespread criticism of the EU scheme;
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