All going well, our first major piece of climate change legislation will become law this coming week. Will it make or break the economy?
It will do neither. But because it puts a price on carbon, it will start to get businesses and consumers thinking differently about energy, technology and the economy.
If they respond well to the signals, they will use resources more efficiently and migrate to more sophisticated technology.
As businesses, they will find ways to profit from global shifts under way in consumer preferences, production processes and market opportunities.
As consumers, they will find ways to reduce energy bills and live in warmer, healthier homes by using better insulation. And through smart purchases, they will reward companies that take these challenges seriously.
Together, they will help make more credible the clean, green image on which New Zealand trades so heavily in overseas markets. This will make the country more resilient in economic and environmental terms.
If businesses respond badly to the signals, they will be hurt by the cost of carbon and rising energy prices. They will become less competitive at home and abroad. Ultimately, some will fail.
Some businesses, though, genuinely can't change quickly. They have no technology options or they face too much overseas competition. Rightly, the climate change legislation has mechanisms to help them in the medium term. Agriculture is a good example of a sector that needs time to develop the technology, management skills and market opportunities to profit from climate change disciplines.
But if a sector can't adapt over the long term, it is economically illogical to protect it indefinitely. It should fade away and its people, skills and capital put to more productive uses. This is how economies migrate to higher value activities. Nobody argues, for example, we should still be assembling tariff-protected, obsolescent cars in Wiri, Porirua, Hutt Valley and Nelson.
If consumers respond badly to the signals, they too will suffer from higher prices. Some will genuinely be unable to afford to adapt to these new circumstances. But the climate change bill offers some help, such as a $1 billion insulation fund and one-off tax credits. The Greens and New Zealand First respectively demanded them in return for supporting the bill.
Moreover, consumers are beginning to make much better purchasing decisions thanks to new sources of information. These include car fuel efficiency, electrical appliance efficiency and other data and programmes from the Energy Efficiency and Conservation Authority.
Getting even this short distance down the road of climate change and renewable energy has proved very difficult. For more than five years, the government has worked on these issues, focusing first on a carbon tax and greenhouse gas agreements with large emitters. When it failed to get sufficient support, the government ditched them in 2005 and moved on to the emissions trading scheme.
The broad architecture of the scheme won wide support, but that soon degenerated into fierce fighting to protect self-interests. It seemed everybody was in favour of a scheme as long as it didn't affect them.
To make their cases, a number of lobbyists indulged in shonky analysis and deeply misleading public statements. They also destroyed their own arguments by focusing only on the worst-case cost to them from the ETS. They ignored the two other elements required for sensible analysis: the benefits they would get from energy efficiency and other innovations; and the serious cost to them and the economy for failing to act on emissions.
While the lobbyists' inept campaigns captured the headlines, business and government were engaging far more constructively elsewhere. For example, the ETS has been improved significantly by the work of the parliamentary select committee and the many good submissions it received, the technical advisory groups and the Climate Change Leadership Forum chaired by Stephen Tindall. All this hard work has involved hundreds of people from business, government, science, NGOs and politics.
But passing the bill is not the end of the process. The next crucial step is to develop the regulations that will bring the framework act to life. There are many big issues to settle, particularly the exact allocations of carbon credits to companies and a raft of other rules.
Expect another round of heated lobbying as the big emitters, championed by Business New Zealand, the Greenhouse Policy Coalition and the Major Electricity Users Group, push for the easiest deal they can get. The original bill gave them plenty of scope for lobbying because the government could set allocations and other rules without reference to parliament.
But thankfully, the Greens, as a condition for their support, have won some major improvements in the process. The allocations will now be scrutinised by select committee and parliament; trade-exposed businesses will get additional allowances only in proportion to their trade-exposed production; and the idea of setting up an independent or semi-independent body to make allocations will be investigated.
But even after the bill is passed, the politics of it will remain treacherous. National withdrew its support in May, saying it had six major problems with the legislation. If it forms the next government, it says it will table a supplementary order paper to amend the act. It reckons it could get the changes through parliament in nine months.
But National will run some big risks to attempt such a plan. First, some of its planned changes would give heavy emitters an even easier ride than the bill offers them now. For example, our trade-exposed sectors will be given 79% of this country's free allocations while under the proposed Australian trading system theirs will get only 30% of national allocations. Any further dilution of our system will render it ineffectual.
Second, National's threat to weaken the bill will only add to its election liabilities. Environmentally conscious voters are already deeply uneasy about its plans for sweeping reforms of the RMA and its promise to allow gas to be used for new base-load electricity generation, thereby weakening the renewable energy strategy.
Third, National will run the risk of the act unravelling once it opens it up to major changes. In particular, the heavy emitters and energy users will seek to re-litigate every aspect of the scheme. National is seriously under-estimating how complex and inter-connected the issues are and how difficult it is to create a coherent system.
Fourth, the world is engaged in crucial talks to agree to a successor to the Kyoto pact. The goal is to conclude an outline treaty at a summit in Copenhagen in December 2009. To ensure the treaty best meets our needs, New Zealand has to play a leading role in the negotiations, particularly on agriculture and forestry.
But a National government will have no negotiating credibility in the run up to Copenhagen, and the summit itself, if it reopens our climate change legislation before the ink is dry then struggles to get a replacement passed.
If National were wise, it would leave the ETS Act in place. It could then use the ample scope in the legislation to achieve, particularly through rules and regulations, the more moderate and reasonable of the changes it wants.
The bill was designed to be adaptable. It is a very long-term framework that will adjust to global changes in technology, competitive pressures and economics.
It remains to be seen if New Zealand businesses and consumers will be equally adaptable to these new disciplines and opportunities. Recent history, particularly free-market reforms, suggests they will.
If they are, the upside for New Zealand is enormous.
- Sunday Star Times
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