Govt abandons fiscal responsibility pledge with ETS changes

The National Party's pre-election pledge to keep amendments to the emissions trading scheme fiscally neutral has been blown out of the water.

BUSINESSDESK: The National Party's pre-election pledge to keep amendments to the emissions trading scheme fiscally neutral has been blown out of the water by the changes proposed in the Climate Change (Emissions Trading and Other Matters) Amendment Bill.

New Zealand Sustainability Council executive director Simon Terry has released new calculations, based on data released under the Official Information Act, to show New Zealand will not only add greatly to its carbon emissions deficit by 2020, but is on track for a massive blowout by 2050.

The outlook, if realised, has the potential to cost future generations of taxpayers billions of dollars and is exacerbated by the indefinite extension of transitional arrangements that shield large emitters from their carbon costs and gives no date for including the agriculture sector in the scheme.

New Zealand has pledged to lower its greenhouse gas emissions by 50% from 1990 levels by 2050, but instead could be more than 140% above that level on current trends, with New Zealand's carbon liability rising dramatically late this decade.

"During the 2020s, an average of more than $2 billion a year would need to be paid to overseas parties in order for New Zealand to meet the obligations its targets require" based on a carbon price of $25 a tonne, Mr Terry says.

For the first four years of the Kyoto Protocol, 2008-12, New Zealand is 51 million tonnes in deficit, worth $1.3 billion at the $25 a tonne upper limit imposed under the ETS transitional arrangements, with around 80% of that liability to be transferred as a bill to future taxpayers, he says.

"If the legislation is changed and the new concessionary arrangements are not terminated before 2020, the consolidated taxpayer position will be minus 94 million tonnes," the Carbon Budget Deficit report says. "That is a sacrifice by the taxpayer of $2.3 billion, or more at $25 a tonne."

If carbon were $100 a tonne, that liability could blow out to $9.4 billion, although the study acknowledges higher carbon prices would spur reductions in carbon emissions in a way not true of current rock-bottom carbon prices, which are affected by a glut of carbon credits from the European Union's ETS.

New Zealand allows emitters to purchase offsetting carbon reduction units from offshore in any quantity. Other countries with an ETS tend to impose upper limits for foreign credits, believing this will make local units more valuable and spur local action to combat climate change.

For the moment, however, there is no binding international agreement beyond the end of this year, allowing the government and its advisers to claim there is no quantifiable liability into the future.

A Treasury paper released for the study says: "It is assumed the ETS has no fiscal impact on debt or cashflows, as the net cash impact from the ETS and international obligations highly uncertain."

As a result of these dynamics, Mr Terry says "it will be all too easy to under-provision for the 2020s harvesting liability and suddenly be caught with a huge bill. The stage is set for a boiled frog syndrome – a debt bomb slowly building up that the accounts provide inadequate warning of until it is too late".

"Governments with short-term objectives could treat ETS debt like funny money and prioritise other spending over paying it off, hoping that it will not seriously any affect until the 2020s."

Mr Terry has produced similar analysis in the past, drawing sceptical responses from supporters of the government's approach to the ETS, which presumes New Zealand should move no faster than major trading partners to combat climate change, since to do so would risk export competitiveness.

However, the latest analysis further demonstrates the fact that officials are forecasting fiscally neutral outcomes by making very large, undisclosed assumptions about the role of carbon-sequestering forest planting in reducing New Zealand's ETS liabilities.

However, Mr Terry says too few foresters are joining the ETS and too few are assuming the future liabilities the government had hoped would rest with them. The most recent proposed changes to the ETS are having a further chilling effect on investment in so-called "carbon farming".

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