It’s time to accept the ETS and make it work for us

Federated Farmers is continuing its campaign against the ETS and I think that’s a mistake.The interview on Checkpoint (at 18:09) with Federated Farmers President Don Nicolson did their cause little good.

He’s correct that only the biological component of agriculture are exempt, at least for now. But any other cost increases in the likes of power and fuel will fall on everyone, not just farmers.

Until recently I might have agreed with continuing to campaign against the ETS but for some time I’ve been thinking it’s time to stop fighting it and make it work for us.

This was confirmed at the National Party’s Mainland conference at the weekend.

The ETS has been the hot – no pun intended – issue at regional conferences. In acknowledgement of that  Minister for Climate Change Issues Nick Smith changed his speech from water issues to deliver a speech entitled Our national interests and the ETS.

He started by acknowledging the debate over the science, econmics and international politics of who should do what, when. Then explained why New Zealand was going to introduce transport, electricity and industrial sectors into the modified ETS.

 He started with 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.

Then came the 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.

 And then there’s domestic politics:

 Labour’s scheme would have doubled costs, required the early entry of agriculture and given less support for industry.

 We have Labour and the Greens arguing our ETS is too soft, too slow, and too generous to business. . . 

 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.

 Why is starting soon in our interests?

 The sooner we start, the easier the transition will be; it will protect our green brand and market access and encourage afforestation and renewable energy.

 While Labour was in power 56% of new energy generation built was thermal, only 44% was renewable. Since National came to power 80% of consent applications have been for renewable energy.

 The price signals the ETS sends are crucial for foresters.

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.

National campaigned amending the ETS in 2009 and introducing it this year. 

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.

 National promised foresters would receive credits for trees planted since 1989 and the country signed and ratified the Kyoto protocol. Without an ETS we’d miss our reduction  target by 11 million tonnes.

 There are alternative measures to meet our commitments:

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.

All advice New Zealand has received says that  the Australian approach would cost more and achieve less. 

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. In the EU emission s are 10 tonne per capita and here they’re 18 tonnes. The EU’s emissions have dropped 9% since 1999, ours have increased by 24%. (I accept that a good deal of our increase is from agriculture, most of the production of which is exported). The EU scheme started five years ago and covers 43% of emissions, ours which is due to start in July covers only 23%.

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 the costs Labour’s scheme would have imposed:

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.

And there are opportunities for farmers to make savings.

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.

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.

Households could also become more energy efficient and make savings from that:

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.

One reason our emissions have increased in the past two decades is mixed messages and an inconsistent approach.

Businesses and the economy need a steady and consistent approach, and that’s what your Government is delivering.

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.

A PDF of the power point slides is here. The ODT and Oamaru Mail reported on the speech and Stephen Franks posted on a similar speech delivered to the Central North Island conference and gives his views.

The whole speech follows the break.

 

“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.

2

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

3

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.

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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

5

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. Korea has a

scheme in place. 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.

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

6

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