Nick Smith tells two stories

The government’s made a liar out of Dr Smith in recent weeks. Is his lopsided mask slipping, or is he just a casualty, like the rest of us, of his more cynical conservative colleagues?

My question is to the Minister for Climate Change Issues, and asks: Does he stand by all of his statements?

“Erratic” is a favourite media word for Nick Smith, capable of embracing a multitude of sins. Whatever the explanation may be, the man who so loves to profess himself genuine is proving quite unreliable in practice. Perhaps he finds himself alone at the Cabinet table—a victim, like all of the rest of us, of this cynical, conservative government, which is destroying his credibility.

The Climate Change Response (Moderated Emissions Trading) Amendment will be reported back to the House soon. It varies from the explanations Smith used to justify a cautious 2020 emissions reduction target; there are also large discrepancies between what the Bill says it does, and what it actually does. By any measure, including the government’s own, the legislation is a failure.

It deserves closer attention than it’s getting. It should be regarded as publicly interesting, and in the public interest: it goes to the veracity of a senior Minister; the character of the government (specifically, its claims to be fiscally responsible and politically moderate); and Treasury’s warnings last week about the unsustainability of our national fiscal position in the medium to long term.

However, first, a couple of other brief examples. Smith delivered a speech to the National Party Bluegreens conference last month in which, according to Colin James, he seemed to herald the dawn of new era, by talking of “marrying” rather than “balancing” the environment and the economy. The following week, when he issued a press release about the conference, it omitted any such interesting detail; nor did it append the speech, as is normal practice. Nor can the speech be found on the Bluegreens website, although other environment policy speeches are posted there. It looks as if Smith was massaging his friendly audience—saying things that may well be true as regards his personal aspirations, but that lack his Cabinet colleagues’ backing.

As canvassed by Tim Watkin here on Pundit, in his capacity as ACC Minister, Smith offered personal assurances that he was not backing competition in the work account, and that this was not a priority of the government. A close reading of the text of the assurances proves them true; however, that hasn’t stopped the government heading down a different road.

Under the moderated emissions trading scheme (ETS), in the transition to 2013, polluters will surrender one unit for every two tonnes of emissions, and have a $25 fixed price option for buying units from the Crown. Charged with subsidising big business polluters, Smith has repeatedly said that this is not true; it will cost the taxpayer nothing, because the allocation to industry comes from the government’s pool of free Kyoto units.

Compare this with the story told in August, when Smith was rejecting what he described as a “big bold” 2020 emissions reduction target of -40% on 1990 levels. He rejected it because, according to most projections, the ETS would achieve only a 2% or so reduction on business-as-usual emissions; the capacity for any other domestic emissions reductions was also (according to Smith) small. Purchasing credits offshore to make up the ensuing deficit, at a carbon price of $200 per tonne, would cost us each $60 a week. That was unacceptable, given this government’s concern for households’ wellbeing.

Without working through the detail, if one accepts the assumptions on which Smith relied in August, little about the above scenario changes under the government’s new -15% target and the revised ETS. How are we suddenly flush with credit?

One possible answer is that, as I signalled here on Pundit in August, the target was a red herring. Provided it doesn’t damage our brand, or prospects of global agreement at Copenhagen, setting an achievable target is fiscally prudent. If we then—surprise surprise—found ourselves with surplus units, the government may choose to sell them, or allocate to industry, generating income or economic growth to the benefit of us all. Cabinet was advised of this possibility: It is possible that as a result of any future international climate change agreement New Zealand will have a net surplus of emission units. In this instance costs would represent a reduction of this surplus”.

However, that is still a cost. The Cabinet paper seeking policy approvals for the Bill, and the regulatory impact statement (RIS) introduced to the House on the front of it, spell out the size of the costs: approximately $415 million before 31 December 2012, rising to over $2 billion by 2030. There are risks of greater cost, if the international carbon price rises above the low numbers used in the projections ($25 pre-2013 and $50 beyond—compare the $200 figure Smith defended as realistic in August), or if firms shielded from true cost of carbon increase their emissions or relocate to New Zealand. The size of these risks could not be quantified. Treasury expressly warned that the analysis in the RIS was deficient, an inadequate basis for policy decision-making.

Furthermore, the Kyoto surplus on which Smith is relying during the pre-2013 transitional period is forestry-based, mortgaged to the future felling of the trees. It is money in the bank to cover future debt. Given that the price of purchasing replacement credits is expected to rise, giving them away now is dumb economic practice.

The truth of the fiscal position is reflected in the fact that the Bill has been referred to the Finance and Expenditure Committee, not either of the other alternatives: Local Government and Environment, or Emissions Trading Scheme Review.

Remembering Smith’s concern for households, the paper that went to Cabinet noted that, while the projected increase in petrol and electricity prices would be halved, the difference will be where the costs fall in the economy. The household fund envisaged by the previous government to promote household energy efficiency and conservation measures is “no longer necessary”; it is repealed. As Jeanette Fitzsimons noted in her first reading speech, households who have done the responsible thing will be hardest hit: “It is a slap in the face for every New Zealander who has bought a smaller car, moved closer to work so they can cycle or catch the bus, put in a solar water heater, or bought an efficient wood stove. They expected a return on that investment, and it has just been halved.”

The government is now trumpeting the importance of jobs. The Parliamentary Commissioner for the Environment wondered how much, on average, this would cost per job. According to one estimate last week, using Rio Tinto as the example, the answer is $225,000.

As titled, the Bill professes to be a climate change response. As a climate change response measure, it is useless: it will barely reduce emissions, and may support their increase.

As a policy and economic measure, it is a failure too. While purporting to reduce competitiveness impacts, provide greater certainty for economic growth, and a smoother transition period, the Bill does none of these things. It will make us less competitive by delaying decarbonisation and risking trade sanctions, and the future less certain because it is not politically or economically durable. It fails the affordability test, by exposing us all, including future generations of taxpayers, to greater cost and unquantifiable fiscal risk for the next 80 years. Flexibility to respond to evolving understanding of climate change is undermined by the political and administrative difficulty of renegotiating these undertakings, once passed.

Deeply cynical, and politically cowardly though it may be, the government will pass this legislation. Like superannuation, the rising prison population, and so much else, it is not sustainable, in any sense, but those hard choices will be deferred for a later day, a different government.

Select committee submissions on the Bill are available online here. This post draws, in particular, on submissions from the Institute of Policy Studies / New Zealand Climate Change Research Institute, the Parliamentary Commissioner for the Environment, and the Sustainability Council.