The Government recently clarified its intentions on carbon trading. This is a positive move. We have now moved on from the tensions surrounding the possibility of carbon taxes and moved instead towards emissions trading – something that  BusinessNZ and EMA have advocated for some time.

We now have a better idea about the order in which different sectors of the economy will start paying for emissions, and it is also positive that the Government is willing to engage meaningfully with business on what will be required for this to happen.

We should not underestimate how ambitious are the Government’s plans, both in timing and coverage.

The aim of the move should be to help the global effort to reduce the negative effects of climate change while at the same time enhancing the competitiveness of New Zealand business.

It’s in the latter area that there are some concerns.

We are being reassured that costs will not greatly increase, on the basis that the price of carbon will be around $15 per tonne over the next five years.

But no-one really knows what the price of carbon will be over this period.

Government has confirmed that international trading is required to get the lowest cost possible for carbon credits, but we are a long way away from an international regime with tradable units acceptable under the Kyoto Protocol.

It is unlikely that the price in New Zealand could be lower than in the present European scheme (the only existing compatible international system linked to Kyoto) – where the price is currently around $30-$40 per tonne.

Certainly, there are cheaper carbon credits available from the kind of futures trading being undertaken under the Kyoto Protocol – where for example you can plan to build say a wind farm in China and get the credits from its future operation – such initiatives are called Clean Development Mechanism Projects and Joint Initiative Projects – but they have a relatively low level of guarantee and a high level of risk of non-delivery until completed and audited.

To get a carbon price of around $15 per tonne it would be necessary to have just about every country in the world trading at the same price. It would also be necessary to be able to move employees from one sector of the economy to another as our economy changes, at no additional cost to the economy. And it would require more certainty than currently available in relation to the Clean Development Mechanism and Joint Initiative Projects.

All this makes the figure of $15 per tonne quoted by Ministers seem too low, offering the possibility that we will have greater price increases on consumer goods like electricity, petrol and food in New Zealand.

The overall approach to carbon trading chosen by the New Zealand Government also appears a bit different from that in other countries. In the European scheme, trading is limited to the industrial and thermal generation sectors of the economy only, and covers carbon dioxide only, while New Zealand intends to introduce a system across all sectors of the economy and covering all six greenhouse gases.

Australia, by contrast, has decided to use emissions intensity instead of total emissions as their key measure – thus allowing for growth in their economy. In addition Australia does not intend to start trading before 2012, and the Australian system is initially designed to be internal, with a government-set method of capping prices rather than relying on international linkages.

It appears that we will be out in front ahead of many other countries in imposing carbon costs on ourselves. For businesses within the New Zealand economy, that is not a particularly comfortable place to be. The impact on the international competitiveness of our businesses is yet to be felt.

Much more detailed work will be needed before the scheme starts. It will be important that Government engages meaningfully with business on the process and the numbers involved – business is willing to play a leadership role in working through the detail of the emerging scheme in proposed workshops and technical working groups. With good will it should be possible to refine and improve the proposed scheme to ensure the lightest possible burden on business competitiveness while playing our part in the international effort to combat climate change.

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