Bluegreens

"Our National Interests and the ETS"

Hon Dr Nick Smith
Minister for Climate Change Issues

Introduction

I have been fortunate to have held many portfolios during my 20 year Parliamentary career but none get close to the complexity and difficulty posed by climate change and the ETS. Few issues spark as much passion or divergence of views as climate change.  There is debate over the science, the economics and over the international politics of who should do what and when. It’s not something you can explain in a 30 second sound bite.

Today, I want to set out why it's in New Zealand's interests on 1 July for your Government to be introducing the transport, electricity and industrial sectors into our moderated emissions trading scheme. It was inevitable that implementing the next phase of the ETS on 1 July would come with its share of contention.  This is the same challenge faced by every country in the world that has, or is, putting a price on emissions.

The Science

First, can I give you the Government’s view on the science. We don’t claim a consensus or a perfect scientific understanding of the earth’s climate system.  But we are satisfied that enough is known to be of concern and that action is justified to curb our growth in emissions. This is about sound risk management.  New Zealanders expect governments to prudently manage risk of phenomena like earthquakes. We all pay EQC levies even though we may not need the billions that have been collected. We see managing the risk of climate change in a similar context.

The global problem is that mankind is burning fossil fuels and clearing forests at increasing rates, and this is changing the chemical composition of the atmosphere. CO2 levels are up 35% on pre-industrial levels already. As developing countries industrialise, these levels are set to be double by 2050 and double again by 2100.

To put our fossil fuel emissions in perspective, every New Zealander emits an average nine tonnes per person per year.  Nine tonnes of CO2 is three times the volume of this auditorium.  That's each year, and is for every one of us.  And the science tells us that the CO2 will be around in the atmosphere for thousands of years. It would be a brave person who would say we can carry on indefinitely doing this and expect it to have no effect on the atmosphere or climate.  The considered science tells us it's a problem.

The International Politics

The international politics of this issue is as hard as the science. Two stark facts dominate the global debate. 80% of the increase to date has been caused by developed countries that make up only 20% of the population. This is why there is such a rigid position from developing countries that we must move first to curb our emissions. They say: “You caused the problem, you're wealthier, you need to take the lead”.  It's on this basis that Kyoto was stitched together. But there is an equally compelling statistic on the future.  More than 80% of the increase in emissions this century will come from developing countries.  That's why countries such as China, India and Brazil are pivotal to the post-Kyoto framework.

The Global Research Alliance

That's also why the Global Research Alliance on agricultural emissions initiated by New Zealand is so important.  It is a tribute to the work of the Prime Minister, Tim Groser and David Carter that so many countries have come on board.  This is an area where it makes sense for New Zealand to take a global leadership role on climate change. There are multi-billion dollar research budgets going into alternative transport, electricity and industrial technologies, but far too little in the agriculture emissions space. There is a massive problem as to how the world is going to feed an additional three billion people by 2050 without further increases in greenhouse gas emissions into the atmosphere. Apart from Labour, the Global Research Alliance enjoys broad public and political support.

The Domestic Politics

The ETS is more challenging.  People question the merits of a market tool and their eyes glaze over at the notion of trading in something as nebulous as carbon credits.  Others are unconvinced that we should do anything unless the rest of the world is also acting, and are particularly nervous following the political problems in Australia of them making progress. We have Labour and the Greens arguing our ETS is too soft, too slow, and too generous to business.  ACT has an intriguing take on the ETS.

ACT has championed the cause of the Kyoto forest owners.  They argue that carbon credits are a "property right", "belonging to those who planted them" and must not be "confiscated".  That's fair enough, but paying these out is set to cost about $1.6 billion over the Kyoto period until 2013. It's odd then for ACT to argue the carbon debits that rest with emitters under Kyoto through to 2013 don't belong to them and must be paid for entirely by the taxpayer. This is the 'socialise your losses, capitalise your gains' ETS.  It is a recipe for a Greek-style fiscal tragedy.  

New Zealand's Interests

The question we must answer in proceeding with the ETS on 1 July is why it makes sense for New Zealand. There are good strategic reasons for an ETS as a small trading nation that has branded itself as clean and green.  Just read The Economist's editorial in March highlighting the risk of a backlash over our "100% Pure" brand and our significant increase in emissions. We must be aware of the power of well-heeled consumers who are our most profitable customers.  The food miles argument is the forerunner to a bigger debate.  Doing our bit now to curb emissions growth puts us in the right space long term to protect our brand and market access. 

The world is set on a path to constraining emissions.  At some point we are going to have to adapt to this.  The sooner New Zealand starts that process, the easier the transition will be.  And the most efficient way to make that transition is through an ETS.

Renewable Energy

Take the electricity sector.  It's been the source of our greatest percentage increase in emissions – up 120% since 1990.  New power plants have a life of at least 30 or 40 years. It's in New Zealand's interests that we invest in renewables in preference to new thermal generation, and the ETS is the best tool to deliver this. Labour failed abysmally in this area.  Two thirds of the new generation capacity built during the last decade was gas and diesel, and the use of coal more than doubled.  The ETS is shifting investments.  More than three-quarters of the new consents lodged since we became Government are for renewable wind, geothermal, hydro and marine generation projects.

Forestry Incentives

The price signals are equally crucial for the forest sector.  New Zealand lost 30,000 hectares of trees in Labour's last four years in office, more than in any period since records began in the 1930s.  Their confusing and shifting policies on the ETS contributed to this.  Again, like electricity these are long-term investments that need certainty. In 2009, the deforestation stopped and there was a small gain in forest area of 500 hectares.  Forester's intentions indicate increased plantings of 4700 hectares this year, 5700 hectares next year, and still more of 7700 hectares in 2012.  This confidence will be lost if we blink on the ETS, yet these plantings are crucial to New Zealand's long-term climate change targets.

Honouring Our Commitments

Proceeding with the ETS is also about honouring our word to voters, to investors and to the international community. We campaigned quite explicitly on a policy of proceeding with a moderated ETS in 2010. We've halved the cost to businesses and consumers.  We've slowed the pace, deferring sector entry dates.  We've removed the disincentives for businesses to grow and ensured that small and medium businesses are not discriminated against in the allocations to trade exposed businesses. We’ve put regular reviews in the law in 2011 and regularly thereafter so we can reassess our approach relative to international progress and the latest science.

It's also important we honour our word to foresters.  Both National and Labour Government's exhorted them to plant trees with the promise they would receive the benefit of the carbon credits.

New Zealand's emissions are up 23% on 1990 levels and the only reason we don't face a whopping great Kyoto deficit is these plantings.  Investment confidence requires we honour our word.

The ETS is also crucial to meeting our Kyoto target.  Without the scheme, we would exceed it by 11 million tonnes.  As a small trading nation, we more than most rely on countries honouring their international commitments.  Regardless of whether you like Kyoto or not, it is in New Zealand's interests that we honour those commitments.

Alternative to an ETS

We could meet our Kyoto commitments with other policies. You could regulate and tell citizens what sort of light bulbs they must use, how much water they can have in their shower, what sort of cars they can buy and tell business what sort of power plants they must build. An ETS encourages emissions reductions without reverting to a Nanny State.

ETS Is Not A Tax

An ETS is also quite different from a carbon tax which would generate billions of dollars in revenue for the Government.  The ETS involves payments from polluters to those who reduce emissions mainly foresters. The difference is highlighted by the fact that post-1989 foresters will receive $1600 million in carbon credits in the Kyoto period to 2013 whereas the cost to business and consumers will be $900 million – leaving about $700 million during the Kyoto period to be met by the Government. Far from the ETS scheme being a tax in disguise it will actually cost the Government money. 

Australian's Still Face Kyoto Costs

Recent events in Australia where they have not been able to get their ETS through their Senate has people wrongly assuming there will be no cost for Australian businesses and consumers.  The Rudd Government has committed another $5.1 billion to clean energy initiatives. This money, of course, has to come out of the pocket of Australian consumers and businesses. They are also taking a regulatory approach that requires all power companies to invest heavily in converting to renewable electricity. The cost per unit of power of these requirements is actually greater than the cost of the New Zealand ETS.

The crucial point here is that countries face a Kyoto cost either as taxpayers or as emitters, and all of the economic advice is that it is more efficient and cost effective to put the cost on those who can do something about how much they emit. 

New Zealand Is Not Leading The World

A common complaint with our policy is that the ETS is now leading the world.  This is completely untrue. 29 of the 38 countries with Kyoto commitments have an ETS.  That's more than three quarters - the bulk who are in the EU. The EU scheme covers 43% of their emissions, as compared to 23% of ours.  Theirs has been imposing costs on businesses and consumers since 2005 – ours starts in 2010. It's worth noting that the EU's per capita emissions are about half ours and are 9% below 1990 levels as compared to our 23% increase.  The truth is we are closer to leading the developed world in increasing our emissions than in reducing them.

Progress internationally on climate change is continuing to advance. President Obama stated on Friday his ambition to have the Senate pass their cap and trade scheme, already approved in the House, by years end. Already in the US there are state schemes operating.  The 10 north-eastern states are already part of a cap and trade scheme, and a further 13 have schemes at various stages of development.  Four Canadian provinces have similar schemes.  Japan too has announced plans to make progress on the same sort of approach. 

The claim of New Zealand leading the world would be true if we were insisting on implementing an all gases, all sectors scheme on 1 July.  We're not.  The scheme only provides for a half-obligation.  Our plans to move to a full obligation in 2013 and to include additional sectors are conditional on progress being made internationally. We've got reviews of the ETS in our legislation scheduled for 2011 and regularly thereafter.  A key test will be in ensuring New Zealand does not carry an unfair burden of the cost of constraining emissions and that our approach takes the least cost way of meeting our international obligations.

National Has Halved ETS Costs

Our Government has halved the costs to businesses and consumers of Labour’s ETS, with an increase of about 3.5 cents a litre on fuel and 5% on the price of power. These cost impacts need to be kept in context. The cost to an average dairy farm of the fuel, power and processing impacts of the ETS is 0.5% of returns. The ETS will impose less cost on the average farmer than a 0.1% increase in interest rates.

Opportunities To Offset ETS Costs

The obvious way a farmer could offset the cost of the ETS for the average farm is to plant on unproductive areas of the farm in forest.  An area of only 6 hectares would offset the 1 July 2010 electricity and power costs of the ETS by generating $4000 per year over 30 years in carbon credits.

There are many new technologies available to reduce on farm energy costs. For example, the installation of heat pump technology in the dairy shed can deliver more than $2000 a year in savings in electricity. Studies of irrigation also show thousands of dollars of savings from modest efficiency improvements in systems.

We've got a big job ahead over the next two months in communicating to households not just the cost of the ETS, but the opportunities to make energy efficiencies and savings. For instance just correcting the tyre pressure on the average car can save $130 per year. Changing driving habits for the average motorist can save $300 a year. The Government is helping to offset the ETS cost for a household by providing an $1800 home insulation grant and a $1000 grant for solar hot water systems. These would each save an average household $400 a year in energy costs, greatly exceeding the ETS costs of a $165 per home.

Business Needs Steady, Consistent Approach

One of the reasons our emissions growth compares so poorly to other countries is that for two decades public policy has been all over the paddock. We in National proposed a carbon tax in 1994, but then switched to work on an ETS in 1999. Labour proposed a carbon tax in 2004, and then switched to a very ambitious ETS in 2006. We campaigned and have delivered on a much more moderate and realistic ETS.  It's no surprise Business New Zealand and the newspaper editorials from Auckland, Wellington, Christchurch and Dunedin are saying stay the course.  Businesses and the economy need a steady and consistent approach, and that's what your Government is delivering.

Conclusion

We Kiwis value our clean green brand and want to be part of the solution, and not the problem, on climate change. We don't want to lead the world in emissions growth anymore than leading the world in emissions cuts. We know we need to be planting more trees.  We know we should be building more renewable power stations. And we know we should be investing more in energy efficiency. Doing nothing is not an option. Our very moderate ETS is the sensible way for a National government to make progress.

ENDS

You can find a copy of the Minister's presentation on the ETS to the Central North Island Regional Conference here: http://www.bluegreens.org.nz/uploads/NickSmithETSpresentation.pdf