Putting most of the Kyoto bill on the credit card is the Government’s plan.

Its announcement proposing changes to the Emissions Trading Scheme (ETS) did not begin to spell this out – and that it is our children who would needlessly face the bill. Nor was it explained that the nation’s Kyoto liability seems likely to be several billion dollars.

How does this square with the recent news that the country’s Kyoto account is back in balance?

The answer is that New Zealand is only in balance under the particular accounting associated with the Kyoto Protocol and this is not a useful measure of the country’s true greenhouse gas position.

The Kyoto accounts take New Zealand’s gross emissions in 1990 and compare these with its net emissions during the Kyoto period from 2008 to 2012. By comparing apples with oranges, they avoid showing lemons (see box below).

The full story is that New Zealand is forecast to be 22% in excess of its gross emissions target (apples with apples) and must pay for all of the overshoot. This 69 megatonne excess represents a liability of $1.4 to $10 billion, depending on the future price for carbon credits.

The Kyoto rules do allow payment to be made using credits generated by temporarily sinking carbon in growing trees. However, when the trees are chopped down in the 2020s and their carbon is released, the Government would need to find replacement credits for any cashed up now.

In other words, there would be a debt to repay. The Kyoto accounts fail to show this – and the Treasury warns that the price of credits is expected to be higher in future.

Further, New Zealand promised other governments early on that it would not use the forest credits to meet its Kyoto obligations. They were worried New Zealand would otherwise take no substantive action on climate change – precisely what has happened.

Originally, the ETS was to get around this by charging enough to pay off the full Kyoto liability.

However, first the previous administration delayed the start date for the levy on transport fuels so that under current legislation, the ETS charges only about 60% of that required to meet the Kyoto liability.

Now the Government has proposed a series of measures that would cut levies further, the most worrying of which is to cap the price of carbon to an extremely low level ($12.50).

Instead of polluters paying a world carbon price, they would pay just a low fixed fee and the proportion of the Kyoto liability covered by the ETS would plummet further. These moves change the nature of the shell game.

Under the original ETS, the small guys were to pay their Kyoto dues in full, while also funding multi-billion dollar subsidies to major emitters and agriculture.

The new proposal is that the bulk of the Kyoto liability be paid by a future generation in the 2020s: they pay the subsidies to those commercial polluters.

These subsidies are not means tested and amount to profits protection for industrials and capital gains protection for farmers.

Transition arrangements are justified, but in the great majority of cases the subsidies have nothing to do with the health of the economy and everything to do with these sectors refusing to take asset write downs.

The subsidy regime applying after 2012 is also to be enormously expanded under the proposed changes, and only the availability of more forest credits makes this conceivable.

The Treasury has rightly signalled that if the Government uses up forest credits early (to pay for subsidies) instead of keeping them for when trees are felled, it will need to show a potential liability in its accounts of as much as $18 billion. This is the expected cost of buying replacement credits in the 2020s.

Rather than building up debt, the requirement is to make polluters pay now.

The Government’s other option is to not reward the owners of “Kyoto forests” that are generating these valuable credits, and yet make them face deforestation charges later. At present, these owners can harvest at no cost if they do not take up ETS credits (and 92% of the eligible forest has stayed outside the ETS to date).

Making forest owners pay the Kyoto liability would send a dreadful signal to the industry that is New Zealand’s best hope for balancing its carbon accounts into the future.

Permanent afforestation could sustainably offset local emissions and its carbon credits could become a major new export earner.

However, unless the Government commits to purchasing credits offshore to replace the forest credits the ETS does not buy out, forest owners will live in constant fear that they will end up paying the full credit card bill – and will limit planting accordingly.

Finally, if New Zealand is left on a soft diet of forest credits for the next decade, who is going to believe that when the soothing tree music stops, the nation will suddenly cut its emissions in half to fit the carbon budget then available?

At present, the ETS is officially forecast to reduce gross emissions by just 1% during the Kyoto period and, astoundingly, the ETS review did not recommend a single complementary measure for the direct reduction of emissions.

The Government’s proposals fail the most basic requirement: to make today’s polluters pay today’s emissions bill. Getting the accounting straight is an important step to charting a new course.


This article was first published in the New Zealand Herald on 23 September 2009, under the headline: “Government waving the plastic for Kyoto”.