Climate Change (Emissions Trading and Renewable Preference) Bill

Transcription

1 Submission to the Finance and Expenditure Select Committee with respect to: Climate Change (Emissions Trading and Renewable Preference) Bill February 2008 Sustainability Council

2 Contents 1 Goals to be realised only In the long term 1 2 Polluter Pays Principle 1 3 The Agriculture Sector Exemption 2 4 Treatment of Other Sectors 4 5 Allocation of Credits for Sequestration 6 6 Other Issues 7 The Sustainability Council The Sustainability Council of New Zealand is an incorporated charitable trust founded on Its overall objective is to assist the evolution of a sustainable New Zealand. One of the Council s concerns is the potential effect on the environment, economy and society of greenhouse gas induced climate change. It welcomes the opportunity to contribute through this submission to improving the policy and emerging regulatory regime addressing climate change. The Sustainability Council wishes to be heard in support of this submission. The submission is made in confidence until heard by the committee. Contact: Simon Terry Executive Director Sustainability Council P.O. Box 24304, Wellington Tel: , Fax: council@sustainabilitynz.org

3 1. Goals to be realised only In the long term There is much to praise in the aims and objectives set out for the ETS, the establishment of which is the essential purpose of the Bill. In particular, the explanatory notes include the following objectives: Linkage with international markets Adaptability to a range of future international agreements Economic flexibility Inclusion of sources of sequestration Equity An economy-wide price signal; Coverage of all sectors, all gases; Least cost abatement While the first group of goals is readily secured by the ETS from the outset, a critical problem with the scheme is that the second set of goals are all heavily qualified with the caveat that they will be achieved in the long term. On the currently proposed plans, the ETS does not deliver on these in any reasonable timeframe. Such is the degree of compromise on these latter goals, and their relative importance, that it calls into question fundamental aspects of the scheme. 2. Polluter Pays Principle As the explanatory notes state: effective international action on climate change where all nations play their part is crucial for New Zealand s long-term economic, social and environmental wellbeing. Currently, the leading international instrument is the Kyoto Protocol to the UNFCC and New Zealand has ratified this, and taken on consequent obligations. New Zealand s gross emissions have grown relentlessly since the 1990 base year and are currently 25% above its Kyoto target. By the time the nation must pay for excess emissions (between 2008 and 2012 the first commitment period or CP1), they are projected to be around 30% above the Kyoto target. As acknowledged in the explanatory notes, targets for periods beyond CP1 are expected to be more stringent. Reform is required to both effectively signal the cost of emissions, thus promoting abatement, and to allocate the costs associated with emissions that are not abated. To be most effective and durable, climate change solutions need to be based on sound principles. With respect to pricing, there is a need to adhere to the polluter pays principle the New Zealand Government first committed to under the Rio Declaration in Climate Change minister David Parker has explained that this principle is important to emissions pricing so as to internalise emissions. 1 It needs to be applied to sectors such that all sources of emissions covered under the Kyoto Protocol are 1 RNZ Morning Report, 11 December The Minister was referring to the proposals at this time for the pricing of emissions from the stationary energy sector. Sustainability Council 1

4 priced. This is a baseline principle required for both economic efficiency and avoidance of undue wealth transfers. 3. The Agriculture Sector Exemption Agriculture accounts for 49% of New Zealand s total greenhouse gas emissions. The sector is also expected to generate over 40% of the growth in emissions above 1990 levels. Nearly all of that increase has resulted from dairy industry growth, with a good part of it caused by conversion of forested land to dairy a true lose-lose in climate change terms. A 2004 Memorandum of Understanding (MOU) between Government and the major agriculture established the basis for an exemption of agriculture from charges on all livestock emissions prior to 2012 on the basis that: There are currently no proven, practical and cost-effective farm practices and technologies to reduce agricultural emissions whether by improving production efficiency for ruminant animals or otherwise. The Crown has decided, therefore, that it will bear the cost of the agricultural sector's non-carbon dioxide emissions. 2 Whether or not it was true in 2004 that there were no proven and cost-effective abatement options, it is not true now, and the MOU has a specific provision for the Government to exit the agreement on the basis of changed circumstances. Further, other terms specified in the agreement have not been met by the agriculture sector in particular the degree of voluntary emissions reduction it committed to. A third of livestock emissions are nitrous oxide, N 2 O, and these can be substantially reduced very cost-effectively. Research on how to cut the other two thirds of emissions that is methane is at an earlier stage so the costs of abatement are less well understood, though there are clear prospects there as well. There are a series of proven options for abating nitrous oxide emissions. In particular, the use of nitrification inhibitors on dairy land presents an opportunity of significant scale. By assisting to retain nutrients in the soil, inhibitors increase pasture growth by 10% to 15% or more. These gains, and the savings resulting from less fertiliser use, mean that it is generally profitable to use inhibitors before even taking account of the value of reduced N 2 O emissions and reduced nitrate runoff. In a June 2007 report entitled A Convenient Untruth, the Sustainability Council estimated in that if inhibitors were applied to all dairy land throughout CP1, total emissions over the five years would fall by 18.5 million tonnes of CO 2 equivalent (Mt) in the base case, and less if inhibitors proved less effective than expected overall with an estimate of 14 Mt if their primary effectiveness were significantly reduced. 3 A subsequent study undertaken by Landcare Research for MAF used similar assumptions about the primary effectiveness of inhibitors, but was based on different baseline emission projections and was conservative with respect to certain other 2 3 Memorandum of Understanding between the Crown and agriculture sector parties, announced 5 February 2004, clauses 1.2 and 1.3. Sustainability Council, A Convenient Untruth, June 2007, p 17. Sustainability Council 2

5 parameters. 4 It implied a total saving potential of about 14 Mt during CP1 from the application of inhibitors to all dairy land. There is a range of other options for reducing N 2 O emissions that are in various stages of research with respect to effectiveness and cost. While many interact with each others potential to reduce emissions, there is no difficulty in principle with combining a number of techniques for use on dairy farms in particular. These include: 5 Standoff pads : By ensuring that cattle spend three quarters of their time on such pads during winter months, N 2 O emissions can be reduced by 10% at no cost penalty to the farmer. Supplementary Maize Feed: Feeding cattle a diet less rich in nitrogen is another option. Using maize silage as supplementary feed reduces primary N 2 O emissions by 22% although the overall effectiveness is less due to looses in soil carbon arising from growing the maize. This technique s costeffectiveness varies depending on maize prices. Improved Soil Carbon: Managing pasture land in a way that builds up nutrients can result in a significant increase in soil carbon, and thus sequester carbon from the atmosphere as well as enhance milk production and animal welfare. Improving soil drainage: As wet conditions promote release of N 2 O, improved drainage and less soil compaction reduce emissions. Study to date suggests reductions in the range of 7% to 10%. On the basis of these proven and emerging potentials for abatement, it is clear that there are very substantial opportunities for mitigation, even just considering nitrous oxide potentials. While those for methane are generally less advanced, there is considerable scope for optimism that a number of techniques will also prove to be cost-effective. New Zealand s net balance of emissions relative to its Kyoto Protocol obligations is a deficit of 45.5 Mt. Relative to this, the potential contribution from inhibitors alone is a third or more of that total. If the ETS exempts the agriculture sector in CP1, as proposed, New Zealand will not get the benefit of the emission reductions available from agriculture. It also means that others sectors of the community pay more, regardless of how the burden for the Kyoto bill is spread. 4 5 Landcare Research, AgReserach, and Lincoln University, Developing Revised Emission Factors for Nitrous Oxides Emissions from Agricultural Pastures Treated with Nitrification Inhibitors, F.M. Kelliher, T.J. Clough and H. Clark, September For further details, unless otherwise stated, see: Sustainability Council, A Convenient Untruth, June Sustainability Council 3

6 The complete exemption of agriculture during CP1 is contrary to a fair distribution of the burden. The agriculture sector s share of the nation s gross emissions above 1990 levels has a value of around $1.5 billion at the current price for carbon credits of about $30/t. There are certainly technical issues to be worked through surrounding the implementation of charges on agricultural emissions but none poses an insurmountable problem to early introduction. Those concerning: measurement, IPCC validation, and affordability in particular are addressed in A Convenient Untruth. Welfare and transitional assistance issues are discussed in the following section. Recommend Changes The following changes to the Bill are recommended in consequence: a) The entry date for the agriculture sector, set out in Schedule 3 Part 5, is advanced to one that applies as soon as practicable this to apply to all subparts. b) Any allocation plan for agriculture during CP1 shall require the sector to cover, in total and net, at least its pro rata share of the expected gross emissions in excess of New Zealand s total in Additional requirements would be set subject to a national strategy set for long-term mitigation and adaptation (discussed below). This requires amendment to section 71 in particular. 4. Treatment of Other Sectors While other emitting sectors of the economy are brought in during CP1, there is a disproportionate rebating of charges to the industrial process and stationary energy sectors. While the transport and electricity sectors are fully charged for all emissions, the industrial process and stationary energy sectors are rebated to the point that there is a gross imbalance in the burden-sharing. Further, while the abatement resulting from the scheme overall will be very small, the gains available from industrial producers are further compromised by the extent of rebates to them. The principles of polluter pays and equity require a rebalancing of the relative burdens. In the first instance, this means a clarification of the overall burden that each sector should bear. This should be in line with that described above for agriculture: that each sector covers, in total and net, at least its pro rata share of the expected gross emissions in excess of 1990 levels. From this starting position, there will be particular sectors and industries that merit special evaluation and potentially transitional measures and/or ongoing assistance. There is a good case for the Government offering a ramped introduction of the level of obligation to all sectors as this makes adjustment easier for those that face an emissions charge while at the same time it does not involve additional costs to the nation under the Kyoto Protocol. This is because the Protocol requires the abatement Sustainability Council 4

7 measures to be achieved over the period as a whole, rather than any particular year. 6 This proposal is set out schematically in the following diagram. Ramping the Proportion of Emissions Priced Average proportion of emissions priced Emissions unpriced Emissions priced 0 yr Time 5 yrs In the long term, all emitters must meet a price on carbon. Short term, the lack of a global carbon market may mean distorted prices and unnecessary relocations. When considering assistance to particular firms, the government needs to assess for each major footloose firm whether to: pay a transitional subsidy, impose a tariff on related goods, or take no action. To the extent a transitional subsidy is paid, this should be by way of a direct financial transfer and not a transfer of NZUs. The electricity sector poses particular issues. These arise because: - MED projects that only about a quarter of all generation will be from fossilfired plant. Yet under current electricity market rules, all power sells at the same price regardless of whether generation caused emissions. This means that without intervention, electricity costs to consumers would be higher than is necessary to cover the costs of emission charges under the ETS. - As the explanatory notes acknowledge: Emissions from the electricity sector will not decrease in the short term, but in the medium to longer term there should be significant emission reductions relative to business as usual. This occurs as old thermal plant is replaced by plant with lower emissions (in particular new renewable generation capacity). - At the same time, the ten year moratorium on new thermal power station construction will serve as an alternative and substitute mechanism for inducing the principal change that the pricing of emissions in the electricity sector is designed to bring forward. These issues require further analysis and we will comment by way of supplementary submission. 6 While the environment suffers to the extent that emission reductions occur later in time, a ramp that delivers New Zealand abating at a higher rate than at the beginning paves the ways for more significant reductions at the commencement of the next commitment period than would be the case with uniform abatement over CP1. Sustainability Council 5

8 Recommend Changes The following changes to the Bill are recommended in consequence: c) The entry date for the sectors other than agriculture and forestry, set out in Schedule 3, is advanced to one that applies as soon as practicable. d) Any allocation plan for sectors other than agriculture and forestry during CP1 shall require the sector to cover, in total and net, at least its pro rata share of the expected gross emissions in excess of New Zealand s total in Additional requirements would be set subject to a national strategy set for long-term mitigation and adaptation (discussed below). This requires amendment to section 71 in particular. 5. Allocation of Credits for Sequestration The ETS rules for gaining credits for carbon sequestration via land use raise two concerns: a) The proposed ETS rules are inadequately framed to protect against unnecessary environmental degradation arising from afforestation intended to secure carbon credits; b) The proposed ETS rules will not require a true net measure of the greenhouse gas emissions resulting from a change of land use. The degree of departure seems likely to be sufficient to allow significant sub-optimisation. The proposed rules can however be augmented to better reflect the value of any gains or loses in biodiversity and other ecosystem services. This can be by way of both pricing tools and specific regulatory restraints. Such restraints would include the exclusion of certain sensitive land areas from being able to earn afforestation credits. The issuing of credits for sequestration activities offers the opportunity to vary the rules for the domestic allocation of the credits that the nation (in total) would be entitled to under the Protocol. There are two reasons for doing this: 1. As a simple insurance policy against the need to fully account for all sources of sinks and emissions post New Zealand has opted out of Article 3.4 for CP1 but it would be unwise not to undertake policy assessment on a basis that at least applied a risk weighting to the prospect of full carbon accounting post Considerable work remains to be undertaken by Government on such risk management approaches with respect to climate change policy for land use. Were the NZU rules to better reflect the true net GHG emissions resulting from a change of land use, this would not only more accurately reward activities in CP1 with respect to the policy target, it would set in place a long term policy approach that seems more likely to mirror long term arrangements in international agreements still to be negotiated. Sustainability Council 6

9 2. As an opportunity to mitigate unintended adverse environmental effects, and incentivise positive impacts. If the Kyoto rules are applied without modification, in certain cases this seems likely to result in negative impacts on biodiversity and other ecosystem functions. New rules could both limit such negative impacts and be used to drive desired outcomes by way of accounting for externalities that are not currently being recognised financially. The proposed rules can be augmented so as to include "adders" for activities that provide net benefits in the form of enhanced biodiversity and other ecosystem services (and subtractors for detrimental effects). However, the overall total of credits issued would be confined to that which the sequestration activities can earn internationally under the Kyoto rules. The individual value attributed to each application for credits would be subject to a distribution formula that weighs the various positive and negative factors. The number of NZUs ultimately issued to each applicant would be varied according to the outcomes of this distribution. 6. Other Issues There are a series of other issues arising from the Bill: Without a national strategy for long-term mitigation and adaptation, there is no benchmark against which to judge the adequacy or otherwise of the ETS in terms of performance outcomes. The absence of a domestic cap on emissions is relevant here. There needs to be an explicit national strategy. The market for NZUs will depend heavily on the ability to exchange these for other similar instruments that are internationally recognised. The impact of restraints set under the Protocol and measures developed under the Protocol designed to facilitate international trade in emissions, are two of the important issues that need to be considered when evaluating the ETS. There is an issue of the extent to which the mechanism for pricing emissions should rely on the new unit created by the ETS, the NZU, versus similar instruments that are internationally recognised. The Sustainability Council will address these in a supplementary submission. Sustainability Council 7