ETS: It’s Time for a Review

Friday, May 7, 2010

Speech to the Mid-Canterbury Federated Farmers Annual General Meeting, Ashburton Trust Events Centre, Christchurch, 7 May 2010.

Key points:

- Electricity increases by 5% and petrol by 4¢/litre from July 1; double again in 2013

- All farmers face ETS costs from July 1 this year

- David Carter’s 2.5 cents/kg milk solids cost figure does not show the whole picture

- Justifications for ETS advanced in November 2009 no longer hold

- Nick Smith’s $1.1 billion cost in 2010 figure is misleading

- Nick Smith’s $350 million revenue in 2010 figure ignores windfall profits to state owned electricity generators worth millions.

Speech:

Ladies and gentlemen, thank you for the invitation to speak to your annual general meeting this afternoon on the subject of our emissions trading scheme.

Speaking to a Federated Farmers audience is always an honour.

I had a great time addressing the Marlborough Federated Farmers AGM in Blenheim yesterday.

The fact that the Government intends to proceed with our emissions trading scheme, despite none of our major trading partners having an ETS of their own, is a major concern to the overwhelming majority of New Zealanders.

It is a particular concern to you as farmers.

Earlier this week I undertook a two day tour through the Waikato and Taranaki regions. I was stunned by the turnout to my seven meetings and the reaction I received from shopkeepers and pedestrians on the streets in these towns as well as in Blenheim yesterday.

I also detected major concerns by rank and file National Party members, some of whom have told me that they have already resigned from the National Party over this issue and many more who have told me that they intend to do so if the ETS is implemented on July 1.

Since the ETS was passed into law in November last year much has changed.
In light of these changes it is time to take a step back and to take stock of the scheme.

It is time to remind ourselves why the legislation was passed in the first place and to ask whether it still makes sense to proceed with it.

History of the ETS

Immediately prior to the last election the previous Labour Government passed a draconian emissions trading scheme that put massive, punitive costs on all sectors of the economy.

It would have seen literally $100 billion taken out of the economy in taxes in the period to 2050.

At the last election the National Party campaigned to amend the ETS. ACT campaigned to scrap the ETS. As you know, National got 58 MPs whereas ACT only got five MPs.

ACT entered into a Confidence and Supply Agreement with National. Pursuant to this agreement, a Select Committee was established to review the ETS. This committee heard submissions throughout the first half of last year.
ACT was very disappointed with the process.

We had an undertaking from the National Party that there would be a proper cost benefit analysis of New Zealand’s entry into the Emissions Trading Scheme. This did not happen.

Throughout that period the ACT Party advised the Government that it would provide the five votes needed to delay the implementation of the ETS.

You can imagine our surprise then when the National Party ignored our offer of help and did a deal with the Maori Party, which saw the Maori Parity vote for National’s amendment of the ETS and the Government to agree to make 40,000 hectares of DoC estate available to five iwi, with the largest allocation being some 30,000 hectares to Ngai Tahu.

In addition the Government incorporated a ‘principles of the Treaty of Waitangi’ clause into the ETS despite previously acknowledging that they did not know what those principles were.

Profound Impact on Economy

The ETS that emerged from that process will have a profound impact on our economy, raising prices across the board and costing jobs.

Climate Change Issues Minister Nick Smith himself has said “this legislation is probably the most significant change and reform, of a financial nature, since the introduction of GST” – and just to be clear, he meant GST per se, not the 2.5 percentage point increase that may be implemented later this year.

The ETS is designed to increase the price of energy.

Treasury forecast that the scheme will result in a five percent rise in the price of electricity and a four cents per litre rise in the cost of petrol from July 1, double again in 2013.

In addition the ETS will also tax emissions from certain industrial processes and from agriculture. These increases will flow through every segment of our economy and affect every New Zealander.

Cost to Farmers & Exporters

Meat and Wool New Zealand has calculated that the ETS tax cost for the average dairy farmer will be just over $10,000 per annum.

Now you may have heard Prime Minister John Key say that agriculture doesn’t come into the ETS until 2015. That is correct, but only technically.

Farmers don’t have to account and pay for the methane given off by their animals when they burp or the nitrous oxide from fertiliser until that time.
However, for the average dairy farmer these costs represent less than a quarter of their total ETS bill.

By far the largest costs faced by a dairy farmer are the higher costs of the petrol and electricity consumed on the farm, and of the costs incurred by the dairy factory – these costs start on July 1 this year.

In fact Meat and Wool New Zealand calculate that the total cost of the ETS by 2015 at $25 per ton will be seven cents per kilogram of milk solids.

David Carter, speaking to the DairyNZ Farmers’ Forum in Hamilton yesterday, disputed this figure. Quoting MAF he said the cost to farmers would only be 2.5 cents per kilogram of milk solids. In his words ‘Not a cost you will welcome, but it’s hardly a cost that will drive you off the land.’ I could not disagree more.

I believe the 2.5 cents per kilogram does not represent the full picture. Most likely it refers only to the cost of methane and nitrous oxide emissions and not to emissions from electricity and energy.

Just a short while ago Federated Farmers was predicting an average profit per dairy farmer this year of 25 cents per kg of milk solids.

While this has increased with the recent announcement by Fonterra of an increase in the payout, a cost of seven cents per kilogram of milk solids still represents over ten percent of the average dairy farmer’s profit.

Can you imagine the David Carter asking the teacher unions to take a ten percent pay cut?

For struggling beef farmers, who receive less today for their animals than they did twenty years ago, it is even worse.

If you only take one thing from this afternoon’s meeting, please understand that you will be paying for the ETS from July 1 this year. Do not be fooled by any amount of National Party spin that farmers will not have to pay until 2015.

However, it is not just farmers who will be feeling the pinch. Still struggling to recover from the recession, businesses across the board will be hit hard as they are saddled with higher production and transport costs.
Domestically business will try to pass costs onto consumers as much as they can. That means prices will rise for many of the daily staples that are produced here and not imported. Not only will we be paying more for electricity and petrol, but also for bread, butter and milk.

Internationally, however, our businesses cannot pass on their costs.

In a competitive world market, exporters receive the world price for their product.

Foreign consumers do not care if Fonterra’s production costs have increased, they will simply buy from someone else.

The world price for milk is the world price; farmers get what is left over after processing costs.

Some firms will be able to absorb these costs, others will not. They will either close down or shift production overseas.

I have spoken to several firms for whom this is the reality they face. The Government recognises as much.

In a Ministry for the Environment report published in December last year, to which Nick Smith wrote the foreword, the following statement appears:
Many New Zealand-based firms operate in markets in which prices are set internationally. This includes both firms that are exporting and those that produce goods that compete against imports. For these ‘trade-exposed’ firms, an increase in the costs of production in New Zealand as a result of the NZ ETS will make them less competitive relative to firms in other countries that are not facing an increase in their production costs.

The same report also warns that:
If these other countries do not place controls on emissions, this may cause emissions leakage: New Zealand emissions fall, but there is no reduction in global emissions since production has simply shifted abroad. The lost business activity may not return to New Zealand in future, even when emissions pricing is more widespread internationally.

In other words, once someone has invested in a farm in Uruguay, they will not uproot their investment and transfer it to New Zealand if Uruguay also implements an ETS some time in the future. The capital and the competitive benefits it brings will remain abroad.

Sadly, that means for some New Zealanders, not only will they be facing higher electricity, petrol, bread, butter and milk prices, but they will also be out of a job.

The ETS will impose real costs on the economy; it will affect real people.

Original Justification for the Scheme

Why then, implement this scheme?

Well, the ETS is one of the Government’s responses to the hypothesis that human activity contributes to ‘climate change’ or ‘global warming’.
It is, to quote Nick Smith about ‘ensuring that New Zealand does its fair share to combat climate change.’

The idea was that by imposing a cost on greenhouse gasses, we would emit less of them, either by reducing consumption generally or by investing in new technology and carbon sinks such as forests.

With countries working together emissions would drop sufficiently world wide to avoid potentially harmful climate change. The costs would be justified by the benefit to the environment.

That at least was the idea.

The International Political Climate Has Changed

For better or worse, the international political environment has changed greatly since then.

Australia, the country on whose draft scheme ours was modelled has just scraped any plans to introduce an ETS until at least 2013. Prime Minister Kevin Rudd buried it last week.

If John Key had any last remaining doubts that he had made a mistake by implementing this legislation it must surely have disappeared last Tuesday with this announcement.

The United States is nowhere near passing a scheme. Politicians there have more pressing things to deal with.

And in any event, President Obama spent whatever political capital he had pushing through his recent healthcare reforms.

The Copenhagen Climate talks broke down without deciding on a successor agreement to the Kyoto Protocol.

Most commentators no longer expect any agreement that might give rise to an ongoing financial obligation by New Zealand beyond 2012.

President Sarkozy of France had to scrap a planned petrol tax rise recently because of fierce regional opposition.

There are signs that German Chancellor Angela Merkel is wavering in her commitment to lead world climate change efforts.

And, ‘climategate’ and other UN IPCC irregularities have increased public scepticism of the human induced global warming theory.

Time to Re-evaluate

It is ACT’s contention, that in light of these changes it is imperative to re-evaluate the New Zealand scheme.

It is time to ask whether it makes sense to continue with the ETS.

The answer, quite simply, is ‘no’. Even assuming John Key and Nick Smith have got the science right, the New Zealand ETS has no chance of achieving its raison d’être.

The scheme was meant to represent our contribution to global climate change mitigation efforts.

There is no global effort to be part of; and, by going it alone we will not make an iota of difference to the world climate.

Whether we like it or not, we are too small to affect world climate on our own.

We produce only 0.2 percent of total greenhouse gas emissions. Even if we shot every cow and sheep in the country and stopped using cars and heating our houses we would still not affect world climate.

In the words of the Prime Minister’s Chief Science Advisor Professor Sir Peter Gluckman: ‘anything we do as a nation will in itself have little impact on the climate – our impact will be symbolic, moral and political.’
If we go ahead with the scheme, in ten, twenty or thirty years the climate will not be any better off. However, we will be poorer.

Nick Smith’s Misleading Statements Rebutted

Unfortunately, it seems John Key and Nick Smith are not prepared to re-evaluate the situation, let alone to delay if not scrap the ETS.

Instead of stepping back to take a cool, rational stocktake of the situation, Nick Smith is, day after day, issuing misleading, contradictory and inconsistent justifications for continuing full steam ahead.

These statements do nothing to inform public debate; they only serve to confuse.

In a press release last week Nick Smith said ‘It is also not correct that the ETS is a tax. This completely ignores the carbon credits flowing to forest owners.’

Fact: for all practical purposes the ETS is a tax on our economy. The fact foresters get a subsidy is irrelevant. Any other argument is semantic.
Nick Smith said his ETS is less severe than Labour’s: ‘National’s changes have more than halved the costs to businesses and households.”

Fact: while this may be correct, comparisons with what Labour would have done are totally irrelevant.

Nick Smith could scrap or delay the ETS. He is choosing not to do so. No comparison with Labour will change this. What matters is what Nick Smith and the Government choose to do, not what Labour would have done.

Nick Smith says “Claims that New Zealand is the first in the world to have an ETS is incorrect. Three quarters of countries facing Kyoto commitments, 29 out of 38, already have an ETS.”

Fact: all of those 29 countries operate under the European Union ETS.
This is an ETS for a whole trading block rather than for an individual country.

It is not even remotely comparable to ours. It does not impose the same costs on European producers as ours does on New Zealand businesses and farmers.

In addition, over 80 percent of European trade is internal and less than 20 percent is exported outside the European Union. In New Zealand’s case none of our major trading partners have an ETS.

Nick Smith says the Government has ‘provided generous allocations for trade-exposed industries.’

Fact: he is imposing a cost on businesses and consumers that would not exist otherwise. There is absolutely nothing generous about that.

Nick Smith says the ETS ‘provides a clear financial incentive to plant trees and not deforest’.

Fact: he fails to mention that it was the Kyoto/ETS debacle that triggered the mass-deforestation in the first place.

If the Government moves to delay the implementation of our ETS there is nothing to stop it leaving the disincentive for deforesting pre-1990 forests in place until the end of first Kyoto Commitment Period on December 31, 2012.
We can then review that if we enter into binding commitments beyond January 1, 2013, which at the moment looks extremely unlikely.

Nick Smith says we need to implement the ETS on July 1 to give businesses the certainty and necessary ‘incentives to invest in forestry, renewable energy and more efficient technology’.

Fact: the type of investment he is talking about requires long term certainty.

There is no such certainty. He has already signaled that it is likely he will not proceed with the ETS in its current form after his review next year: ‘We have scheduled a review in 2011 and will not be proceeding with full obligations and additional sectors unless progress is made by New Zealand’s trading partners.’

Nick Smith says in the first year of the scheme ‘forest owners are budgeted to receive $1100 million in credits as compared to the $350 million in costs to businesses and households for emissions.’

Fact: this statement is misleading on several fronts. First, it implies the yearly cost is $1.1 billion versus income of only $350 million.

Fact: the $1.1 billion does not represent the carbon liability incurred by the Government in 2010. Rather, it is a composite figure that includes a proportion of the liabilities attributable to 2008, 2009 and 2010.

In addition Nick Smith’s own advisors told me last Thursday that approximately $420 million of this $1.1 billion related to pre-1990 forests (ie: 16.9 million tons out of a total of 44.3 million tons of carbon).

In short, contrasting the $1.1 billion with the yearly revenue figure of $350 million is pointless. I am happy to discuss further nuances of the $1.1 billion figure with anyone who is interested afterwards.

Second, the sentence implies the Government will only generate $350 million from the scheme.

Fact: Nick Smith’s own officials have confirmed to me in that same meeting that this figure ignores the windfall profits the Government will make from state owned electricity generators.

Because of the way the New Zealand electricity market works the wholesale price is the same for all the generators and is set by the cost of the most expensive one.

Currently, 80 percent of the time the most expensive generator is Genesis’ coal and gas fired Huntly power station. From July 1, Genesis will have to pay for its emissions of carbon dioxide from that coal and gas.

So for example, if Genesis was able to offer electricity at ten cents per unit before the ETS, it will now have to factor in the cost of carbon credits, say an extra cent per unit. This higher price of eleven cents now becomes the market, or equilibrium, price that all generators will receive.

State owned companies such as Meridian that generate electricity from renewable sources such as hydro and wind will have the benefit of the higher price, while they incur no extra costs for carbon emissions.

They will be making hundreds of millions in extra profits – all of which will either flow to the Government as dividends or be retained within those companies for future investment thus increasing the value of the company to the Government.

Finally, Nick Smith was careful only to quote the revenue figure for stage one of the ETS. Once stage two kicks off in 2013 and the carbon price doubles from $12.50 per unit to $25 per unit we can expect the revenue figure to double.

It will increase further still when gasses such as methane and nitrous oxide are added to the scheme down the track.

Nick Smith said ‘I have been contacted by a number of businesses who are making substantial investments or have entered into significant contracts that would be severely disadvantaged by change.’

Fact: this is not surprising; of course those with a vested interest in the scheme are keen to see it continue. I would expect Contact Energy and Trust Power, who will be huge beneficiaries of the ETS, to be lobbying Nick Smith and the Government to proceed with the scheme.

Equally, owners of post-1990 forests who stand to make massive windfall gains from this will be doing the same.

Also, Nick Smith fails to mention all those businesses that will be harmed by the ETS.

Moreover, he is confusing a potential argument for compensation with a justification for continuing with the ETS. If businesses have invested in reliance on the scheme, then it may be justified to talk about compensating them. But, that in any event is a sunk cost. It has been incurred and we cannot change it. It in no way forms a justification for imposing new costs on businesses and consumers. That will just do more harm to our economy.

Nick Smith claims it is too late to scrap the ETS now.

Fact: with ACT’s support National can put the House into urgency and delay the scheme. Indeed, National and the Maori party used urgency to pass the ETS in the first place.

When passing the ETS into law last year, Nick Smith said of Labour’s old scheme that it ‘was a branding statement by a dying Government wanting to make gestures about saving the planet, with little regard to whether they would work or impact on consumers, on jobs, and on investment.’

It seems things have come full circle. While the National Government certainly is not a dying Government at the moment, the description of blind advocacy for the ETS is certainly apt and National needs to be very careful it does not cost them the next election.

Nick Smith was correct when he said ‘this legislation is probably the most significant change and reform, of a financial nature, since the introduction of GST.’ Unfortunately, unlike GST, the ETS will be a change for the worst.
Given the changes in the international political climate over the last few months, National owes it to New Zealanders to stop issuing misleading statements about the ETS, to step back and take stock of whether it makes sense to proceed with the scheme.

Finally, if you are not prepared to sit back and see National take its core supporters for granted, I urge you to write to John Key, Nick Smith and the whole National cabinet calling for the Government to match Australia by delaying our ETS until at least 2013.

The Government is under growing pressure on this issue. Every voice counts.
Thank you very much for your time.