Hon David Parker - 7/08/2007
- Address to Buddle Findlay sustainability
seminar
6pm, 7 August, Buddle Findlay, L17, State
Insurance Tower, Wellington
1. Pleasantries
It’s a pleasure to be here to deliver the
third seminar in the Buddle Findlay sustainability
seminar series.
2. Introduction
Sustainability and climate change. Two terms
that I’m sure you are all very familiar with.
Terms that the entire population is becoming
increasingly concerned about. They are more
than just buzz words. They represent real
and tangible challenges that societies around
the world must strive to overcome if they
wish to sustain their way of life for generations
to come.
To facilitate this transformation, governments
around the world have begun to implement policies
and regulations which encourage sustainable
actions and discourage unsustainable behaviour.
For this government, sustainability is a
core priority. We aspire to achieve sustainability
across the four pillars of our economy, society,
environment and culture.
At the launch of this seminar series, Prime
Minister Helen Clark outlined the suite of
policies that this government has introduced,
or is considering, to meet the sustainability
challenge. These approaches include price-based
tools, incentives to change behaviours, direct
regulation and educational programmes.
But today, I am here to talk about what we
are doing about one aspect of the sustainability
challenge - climate change. In particular
I have been asked to speak about emissions
trading.
I will begin by giving you a brief overview
of emissions trading and how it works. From
there I will explain the rationale for price-based
measures and will explain some of the differences
between emissions trading and a carbon tax.
I will then touch on some of the main design
issues that are being worked through, to give
you a feeling for how an emissions trading
scheme could work. Although I must stress
that Cabinet is yet to make final decisions.
3. What is Emissions Trading?
First, a little background: what is emissions
trading?
Emissions trading is a flexible market-based
mechanism for reducing greenhouse gas emissions.
It’s flexible because it allows participants
to find the cheapest way to meet their emission
reduction targets.
A ‘cap and trade’ model is one kind of emissions
trading scheme.
Under the ’cap and trade‘ model, participants
within the scheme must match their emissions
with tradeable emissions units. The number
of units that are initially allocated into
the market is limited – hence the term ‘cap’.
The trade part comes from the requirement
for participants to get their emissions units
from somewhere. Participants may purchase
these units from the government, from other
participants or from offshore. They may acquire
some free and have to buy some, or have to
buy them all.
Those who can reduce emissions for less than
the market price of emissions are likely to
do so and may sell any surplus emission rights.
The price of emissions gets passed down the
supply chain and flows throughout the economy.
This creates an incentive for producers to
reduce their emissions and for consumers to
increase demand for lower emission products.
A ’cap and trade‘ scheme requires several
key features:
There must be a functioning and liquid emissions
trading market
There must be established methodologies for
monitoring, reporting and verification of
emissions
There must be an effective penalty regime
for non-compliance; and
The scheme must be flexible enough to adapt
to future changes in the international climate
change policy framework.
4. Rationale for Implementing a NZ ETS
So why is the government looking at emissions
trading or in fact any price-based method
to reduce greenhouse gas emissions?
There is a growing international consensus,
based on robust scientific and economic analysis,
that market-based approaches are an important
part of the response to the very real threat
of climate change.
A greenhouse gas emissions trading scheme
has been up and running in the European Union
since the beginning of 2005, and there are
also proposals for greenhouse gas emissions
trading in Australia and the US. In fact the
Kyoto Protocol itself is a global (cap and
trade) emissions trading scheme.
New Zealand ratified the Kyoto Protocol in
2002 as part of its commitment to supporting
international efforts to mitigate climate
change. Under the Kyoto Protocol, New Zealand
will become liable for its emissions come
January 2008.
There are good reasons for taxpayers to shoulder
some of that cost. There is also good reason
for those who create emissions, and who benefit
from them economically, to face some of the
cost. Price-based mechanisms achieve this.
And the bulk of the New Zealand public supports
this notion. During the recent round of consultation
on climate change policy, submitters were
overwhelmingly in support of implementing
a price-based measure in New Zealand.
Reducing greenhouse gas emissions does come
with a price tag – but this price tag is manageable
and emissions trading can help minimise that
cost.
As part of the Government’s 2005 Review of
Climate Change, various scenarios of the impact
of greenhouse gas pricing were modelled.
One, which priced carbon at 13 New Zealand
dollars a tonne, predicted that GDP would
increase by 0.04 percent less in the period
to 2010 relative to the projected business
as usual figure. In other words, the impact
on projected growth is not one percent, not
one-tenth of a percent, but only 4 one-hundredths
of one percent. This means that while emissions
trading might reduce growth a fraction, we
will still be wealthier as a nation than we
are now.
Another scenario illustrated that at a price
of 51 New Zealand dollars per tonne, GDP would
decrease by 0.24 percent relative to business
as usual over five years. So even with substantially
inflated emission prices, it would only shave
growth by a small fraction.
This is because most of the impact of an
emissions trading scheme is to redistribute
costs and resources within the economy. Changing
the relative cost of high-emissions products
and services will create an incentive for
changes in behaviour to reduce emissions.
We should also bear in mind the cost of doing
nothing to limit climate change. Research
has shown that the benefits of early action
to prevent climate change considerably outweigh
the costs. If greenhouse emissions in our
atmosphere continue to increase there could
be a very big price tag indeed, both economically
and environmentally.
5. Tax vs. emissions trading?
There are two main price-based measures for
reducing greenhouse gas emissions: emissions
trading or an emissions tax.
The key difference between an emissions trading
scheme and a tax is that a tax sets the price
emitters have to pay per unit of emissions,
and has only an indirect effect on the volume
of emissions. In contrast, a trading scheme
sets the volume of emissions, and leaves the
market to determine the price of emission
units.
From an environmental perspective, an instrument
that regulates the volume of emissions is
preferred.
Emissions trading offers several significant
advantages over a greenhouse gas tax:
Emissions trading is more flexible than a
tax. It recognises that emissions reductions
can occur more cheaply in some sectors than
others by giving all participants equal access
to least-cost emission reduction opportunities
Emissions trading allows resources to be
shifted around the economy, and around the
world, to where the least cost reduction in
emissions can take place
Emissions trading allows the price to adjust
automatically whereas tax prices need to be
manually adjusted
Emissions trading has emerged as the preferred
approach internationally
Emissions trading provides the flexibility
to adapt to changing international and domestic
circumstances
Emissions trading creates new business opportunities
for New Zealand, such as the development of
trading infrastructure and new mechanisms
for engaging with foreign markets, and incentives
to invest in new technologies and renewable
energy
The recent consultation process also revealed
growing (although not universal) support among
the general public and the business community
for the concept of emissions trading, as a
preferred approach relative to a tax.
6. Latest thinking: possible design features
of a NZ ETS
Agreeing to progress the design of an emissions
trading scheme is, however, only the first
step. The design and implementation of a trading
scheme will need to take into account the
unique characteristics of any country.
As many of you will know, since April this
year there has been a dedicated cross-departmental
Greenhouse Gas Emissions Trading Group (ETG)
based at Treasury investigating the details
of how a broad-based emissions trading scheme
could work in New Zealand.
The team at the Treasury has been working
hard over the past few months to work through
the design issues. This is a big task, but
we are not starting from scratch. We are drawing
from a tremendous amount of work done in New
Zealand and elsewhere on climate change and
on the design of emissions trading schemes.
No final decisions have been made at this
stage but some of the issues that we are considering
include:
The coverage of an emissions trading scheme
How it could be phased in for different sectors
How to allocate permits
Whether to link the scheme internationally
Where in a sector’s supply chain it would
be applied
How to design the scheme so that it can adapt
to any changes in future international climate
change agreements
How an emissions trading scheme would work
in with other existing and proposed climate
change policies
And we are also working through administrative
details such compliance, enforcement and operation
of an emission unit register.
I will now briefly touch on the first four
of those issues: coverage; phasing different
sectors into a scheme; allocating permits;
and linking the scheme internationally.
Coverage
In terms of the coverage of an emissions trading
scheme, we have already indicated that we
are pursuing a design that will be economy-wide,
over time, and include all sectors and all
gases. There may be some minor exceptions
and again I note that no final decisions have
been made at this stage.
One of the primary reasons for wanting a
broad coverage is that emissions reductions
can occur at the lowest cost when there are
many participants and many units for trade
in an emissions trading scheme. This is because
the broader an emissions trading scheme is,
the greater opportunities there will be for
those seeking out the most cost effective
options for offsetting their emissions.
Exempting one sector of the economy simply
raises the cost faced by other sectors and
the economy as a whole.
Broad coverage also ensures that the all
sectors play their part in reducing greenhouse
gas emissions. It is the fairest approach.
Virtually all submissions that commented
on coverage in the recent consultation period
emphasised the need to include as many sectors
as possible in the long term in a New Zealand
emissions trading scheme, for equity reasons,
to encourage liquidity in the market and to
enable least-cost reductions.
A phased approach
Some sectors are able to participate earlier
than others due to technical and administrative
capabilities. Different sectors also have
different capacities to respond to emissions
pricing including their ability to pass on
costs, and measure and reduce emissions. A
phased approach for entry into an emissions
trading scheme could take into account our
unusual emissions profile and the particular
challenges in our country for reducing emissions.
International emissions trading schemes such
as the European Union scheme have also adopted
a phased approach. The European Commission
has indicated that it wishes to include all
sectors and gases over time.
Allocation
How to allocate permits is a particularly
complex design decision and will always be
an important issue for participants.
Allocation decisions require balancing the
competing objectives of efficiency, equity
and administrative ease.
Linking
Other important design features include what,
if any, restriction there should be on buying
and selling overseas.
This is one of a number of issues that requires
careful consideration.
7. Process
I now want to take a little time to discuss
what the process is from here.
Over the next month or so Cabinet will decide
whether to proceed further with a New Zealand
emissions trading scheme. that requires Cabinet
to consider some initial in-principle core
design features.
Following those decisions, the government
will engage with stakeholders to gain feedback
and input on core design features.
After considering public feedback, Cabinet
will make decisions on the core design features
of a New Zealand emissions trading scheme
before legislation is introduced. Select committee
processes would follow, and provide an opportunity
for the public to make formal submissions
on the scheme.
Decisions around allocation of units, and
timing of entry of sectors could be made later.
The Government will also continue to work
with stakeholders as the international climate
change policy framework evolves.
Other climate change measures are equally
important.
A few examples of complementary policies
include the biofuels sales obligation and
the contestable marine energy deployment fund,
funding for (agricultural) methane-related
research, measures to improve energy efficiency
in homes and in the vehicle fleet, and renewable
energy policies that fall within the New Zealand
Energy Strategy.
Final decisions on many of these policies
are expected in the next few months.
8. Conclusions
I look forward to working with many of you
over the next few weeks and months as climate
change and other sustainability policies evolve.
Together we can maximise the opportunities
arising from our transition to a more sustainable
economy.