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Opinion: Pre-election carbon tax announcement brave or foolhardy

By Simon Louisson of NZPA

Friday 6th May 2005

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With power companies having hiked prices four or five times in as many years while posting relentlessly higher profits, it looks about as good a vote winner as Tony Blair's decision to invade Iraq.

Among the few plaudits the Government received from business among truckloads of criticism was that it gave business certainty in planning.

Ironically, that mostly came from power companies, some of which will make windfall gains in the hundreds of millions of dollars.

While the Government will collect around $360 million from the new tax, you can bet Finance Minister Michael Cullen will play to the max offsetting tax cuts he is proposing in his May 19 budget.

So why has the Government taken this politically dangerous step that has exercised business to a degree seldom seen?

"Climate change is a direct threat to the New Zealand environment and economy," said Pete Hodgson, convenor of the ministerial group on climate change.

"The Government takes that threat seriously."

The path to the tax was set in 1992 when the then National Government signed the United Nations Framework Convention on Climate Change at the Rio Earth Summit. New Zealand, under then Environment Minister Simon Upton, committed to the Kyoto Protocol in 1997.

In 2002, New Zealand established that its preferred policy was to limit carbon emissions through a carbon tax and became the 101st country to ratify Kyoto.

The tax, due to be introduced in April 2007, was set at $15 per tonne, significantly below the initial proposed rate of $25.

It will be imposed high up the supply chain, affecting everyone through a 4c a litre rise in petrol and diesel and a 1c/unit, or 6%, rise in electricity.

Hodgson estimates it will cost households $4 a week on average.

The idea of the tax is to introduce a price differential between clean and polluting sources of energy.

The Government has long realised it would make some industries less competitive and has set up mitigating measures. Companies can avoid the tax through a Negotiated Greenhouse Agreement (NGA) if they can show they follow world best practice in energy efficiency.

And almost half of New Zealand's greenhouse gases are exempt from the tax because essentially its in the too hard basket. These originate from animal flatulence. New Zealand won't tax agricultural methane and nitrous oxide emissions as it claims there are limited means of reducing them without reducing output.

The tax is supposed to be a transitional measure on a path to emission trading which the Government sees as a superior option once a world market has developed.

This is portrayed to be a tax shift rather than increase, but as with any shift, there will be winners and losers.

Nearly all households will be losers as power and petrol prices go up yet again.

Businesses, big and small, that can't negotiate a NGA will also lose out as transport and energy costs rise.

Winners will be businesses and savers that can get the tax breaks to be announced in the budget, paid for by the carbon tax.

Electricity generators using renewable resources will reap windfall gains. Their cost of generating won't increase, but power prices will rise anyway. State-owned Meridian Energy and Mighty River Power may gain between $100m and $200m and the Government is unlikely to recycle its share of that windfall back to the public.

Forest Industries Council chief executive Stephen Jackobi branded the tax an "empty gesture" that would not change behaviour. It taxed industry and manufacturing but did nothing to tackle agricultural emissions which caused half of New Zealand's greenhouse gases, he said.

Business New Zealand labelled it a tax on growth. Chief executive Phil O'Reilly said it would cut purchasing power and slow the economy.

"Our economic growth depends on energy use. Taxing energy is just taxing growth," he said.

He claimed it would not reduce emissions and was a punishment rather than a policy.

Only 40% of companies would get exemptions and the grants for smaller companies would bring undesirable distortions.

One consequence of the tax, is that investment in wood processing, already looking on the sick side due to the high currency, would be less viable, said Jackobi.

"Quite simply the tax will penalise investment in wood processing by increasing the cost of energy when the outlook for energy supply is already very difficult.

"This means New Zealand will lose the economic benefit of value added manufacturing and we will see continuing growth in lower value log exports."

Alasdair Thompson of the Employers & Manufacturers Association complained that none of New Zealand's main trading partners had signed up to Kyoto -- Australia, the United States and China.

He also complained of a new bureaucracy in establishing NGAs and the mitigating grants and exemptions regime.

Julia Hoare of PriceWaterhouseCoopers said the NGA process had proved complicated and costly and with applications getting bogged down, many companies would struggle to get an agreement in place by April, 2007.

Roger Kerr of the Business Roundtable argues that the Kyoto measures will have minuscule impact worldwide and New Zealand was too small an economy to make any measurable difference.

He said that post 2012, the Government's policies imply drastic action to cut emissions at large costs to growth.

That was inconsistent with the Government's goal to raise New Zealand's standard of living to the top half of the OECD group of rich nations.

Farmers gave little thanks for the exemption on their farting livestock. Federated Farmers president Tom Lambie complained the tax would compound costs at every step of the production chain.

He also noted that the Government planned to nationalise the private sector's forest sink credits created by new plantings since 1990. These were mostly owned by farmers.

Meridian chief executive Keith Turner said the announcement meant it was now possible to quantify the impact of the carbon tax on the economics of any new development."

Too bad if the economics don't stack up any more because of the tax and the investment goes elsewhere.

On the other hand, as Hodgson notes: "If the world fails to act to limit the extent and impact of climate change, the potential impact on New Zealand will be serious, or very serious."

That is an understatement, which from a politician is about as rare as announcing a new tax just before an election.

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