The ETS: a lemon nobody will buy

Nick Smith’s on the road again, selling his emissions trading scheme to a hostile public. It’s a green lemon: the less voters understand it, the better it will be for the government

Environment Minister Nick Smith is defending his emissions trading scheme (ETS), which commences for energy and industrial sectors on 1 July. He’s holding 20-plus public meetings nationwide, dropping pamphlets, doing the media.

He risks voters learning to understand the scheme too well, and forgetting their initial complaints, in the face of the far larger offence that is the truth of the matter: they're paying for pretty much everything, not just a few bucks' petrol and power.

Let’s start with the bad news. Prices of electricity, transport fuel, and stuff made using electricity and transport fuel (ie, everything) will rise.

The good news is that somebody, praise Jesus, on television finally figured out that prices were meant to go up. That’s the point of a price signal. The ETS is a market incentive, to clean up polluters’ act, and make energy efficiency economic.

It’s driven by New Zealand’s Kyoto obligation. Under that protocol, New Zealand will be billed for its emissions over 1990 levels; alternatively, credits, from cutting greenhouse gas emissions or planting trees, could be sold. The ETS is supposed to make polluters, not taxpayers, pay.

Nick Smith is on the road because voters are cross about the price signal: they see it as a tax; and they don’t understand the ETS or the need for it. Farmers and some business lobbies either want the scheme scrapped, or say it is not doing enough to protect them. The Green and Labour parties say it is too watered down.

Smith is comforted by this, seeing it as proof of balance. But National’s worried about the voters.

In fact, the price signal is pretty muffled. This was deliberate: the government wanted to halve the impact on voters, relative to Labour’s former scheme.

Farmers are wholly protected except for incidental electricity and fuel costs, until 2015, when they might (or might not — Smith’s equivocating) be brought into the scheme. Other industry polluters are cushioned by a $25 per tonne cap on the price of carbon; the ‘half obligation’ that allocates two tonnes for the price of one; and a 90 percent free credit for trade-exposed businesses, phased out at 1.3 percent per year, so that today’s taxpayers will be subsidising for a lifetime.

On Q&A last Sunday, Smith said: “my view is that if you dont want to have a nanny state, if you want to have a strong market economy, the ETS is the most sensible way in which to respond to the challenge of climate change”.

It’s a small wavery signpost, pointing markets and investors to the way of the future. But it’s not a strong market mechanism, because the government has weakened it.

Guyon Espiner, interviewing Smith, pointed to doubts about whether the price signal is working: Mercury Energy, the retail arm of Mighty River Power, which generates 90 percent of its energy from renewable sources, is putting its prices up. Smith responded in kind, with an example of his own: Genesis, our biggest thermal generator, is not planning immediate price increases.

Responding to charges of the ETS being a tax, Smith reminded the Dom Post’s Vernon Small that it is costing the country, actually. “NZ Inc is plus $250m, the Government is at minus $700m,” he said. Even if the country is in Kyoto credit, the government will be dollars down, because of its assistance to business and credits to forest owners.

Talking to Stephen Parker on The Nation, Smith was even more explicit: “People have got this idea and even in the introduction to your programme you talked about the ETS being at tax, it’s not, the government doesnt make any money from it, in fact the government’s gonna lose money”.

He said rather than being taxed, people are paying to plant a tree — a pleasing, bucolic image. The right sort of trees, though? Native carbon sinks, or the forestry industry? Not sure: DOC is exploring carbon sink opportunities, but Smith has said that the vast bulk — probably 98 per cent — of the money paid by consumers is going to go to foresters”.

The household fund Labour would have used to promote household energy efficiency and conservation measures was repealed. And by halving the price signal, National has doubled the payback time on investments (home insulation, solar, fuel-efficient vehicles) made by voters who are trying to do the right thing.

Smith might go better on his travels if the money-go-round was much more obviously geared to supporting voters in behaviour change — investing in public and alternative transport, say, and stepping out boldly on fuel and electricity efficiency measures — to protect them from any and all future price increases, rather than just halving the existing ones.

Smith trumpeted certainty. “In the history of climate change policy in New Zealand … we’ve been all over the paddock, and thats why this government’s going to keep that consistent course” he said, to Espiner. Yes. He sounded quite all over the paddock himself, to be fair — which I guess is consistent.

There’s no cross-party accord; there will be five-yearly reviews, starting in 2011; agriculture might be exempt; it’s all subject to international developments.

I’m not one that says that this quite moderate ETS is going to result in big reductions in emissions,” Smith said. Ultimately New Zealand's going to need to go through a revolution, not dissimilar to that we went through from 1900 to 1950 in moving from steam and coal to the internal combustion engine”.

So the forestry fall-back is transitional. But if voters were really switched on, they’d challenge the government for being lily-livered, and bleeding them white. That’s hyperbole, for now, until the international cost of credits rises, and reduction targets become more stringent — hence, the importance of reviews.

But assuming a post-Kyoto agreement is reached, for so long as New Zealand staves off the revolution, it will continue to have to buy credits and pay for them one way or another. Planting a tree is the same thing: a lost opportunity cost, of what we might otherwise have been able to earn, from reducing emissions and selling the credit.

Smith is suffering the usual fate of a man trying to please everyone. The political capital the government thought it would save by being moderate and centrist is going up in smoke. But we trawled all over these same issues, as the legislation was being reviewed and amended. No one can say he wasn’t warned.