Govt to reap $5.6b carbon trade windfall

The government stands to reap up to $5.6 billion in extra revenue from the introduction of an emissions trading system, official figures show. And power generating companies could pocket net windfall gains of another $2b during 2010-2015.

Windfall gains will occur because the cost of carbon credits, which thermal generators must buy from 2010, will increase the wholesale price of electricity.

But because of the way the wholesale market works, renewable generation companies will also get the higher wholesale price, even though they won't have to use or pay for carbon credits.

And because the government still owns much of New Zealand's power generation, 75% of the windfall profits from renewable generators will ultimately fill state coffers.

The figures, obtained by the Sunday Star-Times under the Official Information Act, are based on a worst-case scenario of a cost of carbon of $50 a tonne. But even on the most optimistic scenario of $15 a tonne, both the government and power companies remain significant winners.

At that carbon price, government coffers would get an extra $1.16b over the six years and power companies would be $400 million better off.

The advice was given to the government in the months before September's announcement of plans for the introduction of an emissions trading system from 2010.

At that time, government ministers were at pains to play down the impact of the proposed climate change policy on consumers.

Climate Change Minister David Parker said power and fuel price rises would be no more than 5% and spread over several years.

Officials were quoted as saying the overall effect on households would be minimal, and Prime Minister Helen Clark said some form of compensation would be considered for low and fixed income electricity users.

But there was virtually no official comment on how, and to what extent both the government and power companies would benefit from a the new climate change policy.

Papers obtained by the Star-Times reveal what the government then knew, but chose not to talk about. Ironically, the papers say the emissions trading system "is not designed to generate revenue for the government". Yet they go on to spell out how it will do just that.

While renewable generators who don't have to buy carbon credits stand to gain most, some thermal generators will also benefit as the expected rise in wholesale prices will more than compensate for additional emission costs.

That could be the situation for Contact Energy, for example, whose generation is divided between thermal and renewable sources.

But not for Genesis Energy, which owns the Huntly Power Station, which provides 15% of the country's electricity need.

Under the best-case scenario (carbon at $15 a tonne), the Ministry of Economic Development estimates the average annual net windfall to all electricity generators between 2010-2015 will be $266m a year.

With carbon at $25 a tonne, a figure energy market sources say is more realistic, that figure rises to $610m a year.

Those sources don't rule out the cost of carbon reaching $40-$50 a tonne. "A big problem globally is a shortage of carbon credits with which to trade, and New Zealand will be buying credits from overseas markets."

At $50 a tonne, the average annual net revenue gain from generation will rise to $1.26b. But the total expected net revenue gain at that carbon price during 2010-2015 is $7.55b.

Three-quarters of those gains $5.6b will flow back to the government through dividends paid by SOEs or tax on SOEs and non-SOEs. But Parker said while increased revenue accrued to the government from windfall gains, "the government is definitely not a net beneficiary over climate change policy as a whole".

Because of the phased-in nature of the emissions trading scheme, the government would retain some responsibility for meeting its Kyoto Protocol responsibilities, which at June 30 stood at $704m (45.4m tonnes at $15.458 a tonne). However, he said, that could be reduced to 25m tonnes or less by incentives in the emissions trading scheme.

Other money would be invested in reducing energy use through efficiency measures and new renewable energy technologies.

Parker also said latest estimates for windfall gains accruing to energy companies were as low as $160m a year, not the $266m in earlier MED estimates.