New Zealand has a carbon budget deficit equivalent to $1.3 billion because the ETS is failing to bring in enough revenue to pay the nation’s carbon bills.

Five years on from the commencement of the ETS, the taxpayer is in debt and emissions are projected to far exceed targets in future.

Yet draft legislation before Parliament would abandon requirements to properly provision for future carbon bills and would instead put costs onto future taxpayers.

The deficit in the government’s carbon accounts is derived from documents released to the Sustainability Council under the Official Information Act, using the government’s price for carbon of $25/tonne. It is the total of official forecasts for the ETS accounts and Kyoto Protocol accounts from 2008 to 2012 – a deficit of 51 million tonnes of carbon – as detailed in the Council’s new report, The Carbon Budget Deficit. Other liabilities that could also come home to roost are registered at 64 Mt, or another $1.6 billion.

Treasury documents project that New Zealand’s emissions will exceed its targets by 1.1 billion tonnes of carbon between 2013 and 2050. In order to still satisfy those targets, the Treasury shows New Zealand paying $28 billion to import carbon credits at $25/tonne – a price far below UK government forecasts for the period.

However the proposed change of legislation would convert the ETS from a scheme designed to collect serious amounts of revenue to pay such costs, into one that would freeze ETS income at current minimal levels and leave future taxpayers with costs not paid today. Future income would be cut by many billions of dollars over the decades ahead.

The changes would not only abandon a pre-election promise that they would be fiscally neutral, they would abandon carbon fiscal responsibility. This is in sharp contrast to the government’s emphasis on bringing the nation’s financial budget back from deficit.

A fundamental change of approach is required that would both protect future taxpayers and see New Zealand adopt carbon budgeting. This is a process of setting multiyear emissions budgets after careful analysis of how emissions targets can best be met.

Carbon budgeting would maximise the opportunities for funds to be spent in New Zealand, before purchasing credits overseas. This would better hold wealth within the country and make New Zealand more resilient to future rises in carbon and energy prices.

The UK’s Climate Change Act sets out a model process that provides for a series of five year carbon budgets. The most recent fourth budget, approved by a Conservative government that is imposing sharp spending cuts across the board, plans for a 50% reduction on 1990 level emissions by 2025. The UK is one of several countries not waiting for a global agreement before taking serious action.

Carbon budget deficits are different to those in financial budgets as failure to meet fair targets would pass a form of debt that also carries profound risk.



Note 1: The government uses a carbon price of $10.60/tonne in the May 2012 Budget as, by convention, it uses the market price at that time the accounts are issued. When it is examining policy options, the government relies on forecasts of future prices and currently uses a price for all future periods from 2013 onwards of $25/tonne (down from $50/tonne last year). As the current deficit will be paid off at future prices, it is analytically appropriate to use a forecast future price when assessing its value.

Note 2: Updated projections of the extent to which New Zealand is expected to exceed its emissions targets show almost identical totals over the full period, so the later projections do not mark any meaningful change.

Read the report: The Carbon Budget Deficit