Emissions Trading Scheme Review Committee
ACT Party Minority Report Summary
Introduction
New Zealanders are being asked to cut their incomes on the grounds that 'science' has proven beyond reasonable doubt that future human-induced climate change is likely to be dangerous; that cutting greenhouse gas emissions is the best human response to this problem; and that an ETS is the most efficient way to reduce net emissions.
The UN IPCC asserts that the matter has been proven beyond reasonable doubt. But it is neither impartial nor authoritative. Its charter obliges it to focus on human actions as a source of climate change. The flaws arising from its lack of care, self-selecting and self-referential nature have been documented by many authors and to some degree by inquiries held by the House of Lords and the Wegman Committee report.
As the IPCC reports freely acknowledge in places, there are major scientific uncertainties: for example those relating to clouds, convection, solar activity, aerosols and the chaotic nature of some climatic processes. The surface of the earth has warmed, off and on, since the 19th century – and indeed for millions of years but daily headlines conveying evidence of warmth, floods or storms tell us nothing about whether humans are causing climate change.
Scientists who are most closely associated with the IPCC's most confident assertions about attribution put heavy weight on simulations conducted by climate change models. However, models are inevitably simplifications of a more complex reality. They embody many parameters whose values are highly problematic and cannot usefully model what is unknown.
For policy makers the bottom line is that if the climate is being driven by large natural but ill-understood forces, global governmental action to reduce emissions growth might be neither necessary nor effective.
As Bjorn Lomborg has pointed out, spending large amounts of money to bring about a miniscule reduction in temperatures is a poor use of resources from the perspective of both current and future generations.
Trade Issues
ACT concludes that the case that a carbon tax might help New Zealanders avoid material adverse international trade and diplomatic repercussions is not strong and needs to be quantified. New Zealanders might be prepared to pay something to see New Zealand 'playing its part', but no case has been made to date that they would wish to pay anything like the substantial costs of a commitment to reduce emissions to 10 percent or more below 1990 levels by 2020.
New Zealanders do not have a large 'carbon footprint' amongst the relatively wealthy countries for their own consumption of goods and services. It is the farm products that are exported for world consumption that lift the carbon emissions per capita attributed to New Zealanders. Shifting production of those products to other countries might make New Zealand look better in some comparative tables, but it could increase rather than decrease global emissions.
The committee was advised not to expect a comprehensive international agreement to be reached in Copenhagen. There is a deep divide between Annex I countries and other countries and a considerable reluctance amongst the latter for binding commitments. The emissions trading framework which is associated by some with the Kyoto Protocol may not be perpetuated.
Regulatory Impact Analysis
The foundation for good regulatory policy is a thoroughgoing analysis of the issues and available options. Much time is being wasted because Officials have not been required to present politicians with such an analysis. Politicians thereby lack a sound basis for evaluating options and reaching decisions. Poor analysis and idiosyncratic rushed decisions lay behind the previous government's ratification of Kyoto and its promotion of the fundamentally flawed existing ETS legislation.
No high-quality quantified regulatory impact analysis, as required under the terms of reference, was presented to the select committee. Since no analysis means no sound basis for taking policy decisions has been established, this omission fundamentally undermined what the select committee could hope to achieve in reporting back to the House of Representatives.
A regulatory analysis needs to evaluate likely benefits in relation to likely costs. A regulatory analysis also needs to identify alternative courses of action and identify the option that maximises net benefits. Alternative courses of action include the choice between a carbon tax, an ETS with an uncapped price, an ETS with a capped price and regulatory measures.
The analysis presented to the government suggests that achieving a 10% reduction on 1990 levels by 2020 would reduce income per person in that year by $1,400. Summed over 4 million people that is almost $6 billion a year.
Science
ACT has seen no observational-based evidence of any warming trend in New Zealand that would warrant grounds for concern. NIWA accepts that New Zealand warming might be only two-thirds of any global temperature increases.
ACT considers that New Zealanders would be better informed by an agency that focuses on assessing risks from trends in actual observational data rather than by NIWA which has focused to date on making alarmist temperature projections for New Zealand based on heroic regional 'interpolations' of data from unproven global climate change models. NIWA has acted too much as if it is the New Zealand branch of the IPCC.
The Government should commission independent expert assessments of the margin for error in NIWA's projections of New Zealand's temperature out to 2080 and further. Those assessments should be used to revisit the guidance being given to local authorities about likely future climate changes.
New Zealand already has a world best-practice civil defence agency to deal with natural environmental hazards. It is called GeoNet. GeoNet provides evidence-based information about short- and long-term hazards like earthquakes, volcanic eruptions, tsunamis and floods. In principle it could easily monitor underlying trends in New Zealand's temperature or sea level in order to ensure that any risks of longer-term climatic changes were identified and cost-effectively managed.
ACT suggests that GeoNet could be commissioned to report on what can be said on the basis of actual evidence about climate change in New Zealand.
ACT considers that more research could usefully be done on biological and chemical ways of reducing agricultural emissions. Barring scientific breakthroughs, reducing agricultural emissions while maintaining production levels would be very difficult.
Favoured Options
Prices for units internationally under an ETS have been very volatile and greatly influenced by non-transparent political decisions. A period of unexpectedly high prices for an ETS could destroy the viability of some New Zealand firms or industries, even if the average price over a longer period of time was no higher than the average rate of a carbon tax during the same period. A price-capped ETS is an inefficient and costly version of a carbon tax and subsidy scheme.
Officials correctly observed that under both a carbon tax and an ETS there would be difficult measurement issues with respect to the carbon content of what is to be taxed. What they did not discuss was the option of a low-level energy tax. This option would be much simpler and avoid those difficulties.
A tax would also avoid the costs associated with setting up a market in emissions units. It might also lend itself less to fraud or corruption associated with the allocation of emission units. If the tax were administered by IRD one could be more confident that such pressures could be resisted.
There is widespread agreement among top economists that a carbon tax is a superior mechanism.
As between the two, ACT favours a carbon tax coupled with an equivalent subsidy for carbon sinks and reductions in income taxes. It does so primarily in order to preserve incentives to invest in energy-intensive industries in New Zealand (for a given average level of carbon tax).
The simplest approach for New Zealand, if there is a need to be seen to be playing our part, or because of trade or international relations concerns, would be to plan conditionally to introduce a low-level energy tax. Depending on what other countries are doing, there may be no need to pad this out with other measures.
The only course of action that New Zealanders overall are likely to support would be action that is necessary as part of being a member of the international community. That is why the timing of any material action by New Zealand should depend on the timing of action by the countries in the world that are large enough together to really make a difference. It is still too early to predict with any confidence if this will occur. New Zealand should await the outcome of the Copenhagen Conference and final Australian decisions before making its own plans.
Conclusion
If it was considered desirable to respond to such scientific evidence as there is – eg by application of a precautionary principle, or to be seen to be “playing our part” internationally, or to avoid risks of formal or informal trade restrictions – it is unlikely that an ETS is the most efficient policy solution.
We agree that New Zealand should be seen to be willing to play a part in any fully international agreement. A low rate carbon tax and subsidy scheme is a more appropriate initial step, with any advance from there dependent on the advance of scientific knowledge and on a fully international effort to reduce emissions.