The Emissions Trading Scheme

When Lunatics Run the Asylum

The New Zealand government has got us into an acidic, corrosive pickle. Flushed with messianic fervour, it rushed to sign the Kyoto Protocol. This obligated New Zealand to reduce carbon emissions.

The government, then and now, has no idea of the costs of that obligation. Never get in the way of idealist utopians when they are on the charge. Signing the treaty was all about political theatre—about making a statement. It was a grand propaganda exercise. In a global scale, New Zealand's emissions of carbon—even if they were proven beyond reasonable doubt to be harmful—are infinitesimally small. Even if the pseudo theory were true, and that, indeed, human carbon emissions were responsible for all increases in global temperature, New Zealand's emissions would be negligible.

While China and India refused to sign Kyoto and race ahead with economic development, their carbon output is increasing by the day. China is commissioning two new coal fired electricity generating plants every week. (Full marks to these nations—by the way. They have put the well-being of their citizens ahead of maniacal messianic utopianism. Would that western governments took their responsibilities and fundamental duties so seriously.)

So, New Zealand's contribution to the problem—if indeed there is one—was always going to be so small it was off the radar screen. But because our utopian government had a vision in search of a cause, it seized upon Kyoto as a way of idealistically leading the world. Costs did not matter. Moral high ground did.

Now we are faced with the problem of meeting our commitments. How on earth are we going to do it? Well, blow me down with a feather, it has finally dawned on the utopians in Wellington that the only way to reduce carbon emissions is to lower our standard of living—which is to say, everyone has to become poorer. But—due to the pandemic of cowardice which is always virulent amongst self-serving politicians—the government has not yet screwed up enough courage to tell the average Kiwi just how poor they are going to have to become in order to pay for Helen Clark's mad vision.

So the government has come up with a cunning plan to lower everyone's standard of living while guilding the lily. It is called an Emissions Trading Scheme (ETS). The political spinmeisters have gone into overdrive telling us that the ETS is the only way we can meet our Kyoto obligations. And it sounds cool. The use of the word “trading” connotes commerce, business, technology, markets—really exciting things.

Imagine how this would have gone down like a lead balloon politically if the pollies had had the courage to name the idiotic scheme accurately and properly. Imagine how the people would have regarded the ETS as a cup of cold sick if it were named correctly. The Emissions Trading Scheme needs to be renamed the Emissions Taxing Scheme, for that is what it is. It is purely and simply a new (very large) government tax. Imagine the effect on the forthcoming election if the government was planning to go to the polls with a platform that said, vote for us, we are going to put up taxes for everyone and make everyone poorer to meet Kyoto obligations.

But the culture of lies, legerdemain and deceit would not tolerate such straightforward blunt honesty with the people. It has instead to be dressed up in fancy clothes and called a Trading Scheme. Blackadder would have approved of it as a truly cunning plan.

It is supposed to works like this:

1.The Government will target certain industries as “bad boys”—who will have to participate in the ETS. These will be industries or firms which are deemed to be big emitters of carbon into the atmosphere. They will have to purchase ( initially from the government) some emissions tickets—an emissions permit—very much like the system of having to purchase rubbish collection stickers to put on your rubbish bags to ensure collection. These businesses will be “obliged” to “surrender” these tickets as they emit carbon in the ordinary course of their commercial activities. It's like buying a ticket to “pollute”. This is the taxing part.

2.The effect of this will be that costs for everyone are going to rise. If Fonterra, for example, has to by carbon tickets and then surrender them, it will be forced to put up prices. The cost of dairy food will rise. If oil companies have to buy tickets, the cost of petrol will rise. It is an indirect tax. The bad boys according to Kyoto are essentially consumers of energy and producers of food. Food and energy—the heart of an economy. Tax these and everybody is poorer in the end.

3.Where do these tickets come from, and what is their price? Initially, the government will create them out of thin air. Some it will give away for free. These will be emitters the government wants to protect or favour. Pork barrels, anyone? Others, it will sell. If you are one of the bad boys, you will almost certainly be forced to buy. What will be the going price for a ticket? No-one really knows. As high as it needs to be. And how high is that? No-one knows. “Trust us,” says the government. “We know what we are doing.”

There have been speculations about what an international price of carbon credits/emissions might be. No-one knows the price. Nor will the market set the price the end of the day. The EMS does not represent an exchange between buyers and sellers in truth. It is a system to tax carbon emitters until the emissions level gets back to no higher than five times what it was in 1990. So, if carbon emissions in New Zealand do not fall, then the price will have to rise, and rise, and rise—until it does. That means that the price of tickets is ultimately going to be set by the government, by government fiat, not by the market. It is a pernicious form of price control. This is inescapable—because the whole elaborate edifice is nothing more than an attempt to achieve certain commitments under the Kyoto treaty.

The price of tickets will have to rise until economic growth slows down. That is the bottom line.

The carbon emitters (virtually everyone living—so all human commercial activity, and by implication all households) will have their emissions taxed, or fined—either directly or indirectly. A lot of money will flow into the government coffers as a result. Each year the government will issue new tickets, which companies will have to buy. The private sector has the opportunity to create tickets, which represent reduced or controlled emissions of carbon. They can then sell these to bad boys for a price. This is where the trading comes in. But if the private sector is not “creating” enough private sector tickets to sell to the bad boys, the government has to create them by fiat.

The idea is that eventually a traded, market price for carbon tickets will be established that will reflect the strength of either supply of, or demand for, the tickets. But imagine a case where the supply of tickets is low. Their price will rise substantially as the bad boys compete to buy them. Their costs will escalate. The government will come under pressure to reduce the cost, by issuing more tickets into the market. After all, they can be created out of thin air.

Or imagine if the supply of tickets were high. The government policy objectives under Kyoto would be in jeopardy, so it will remove tickets out of circulation, forcing up the price again. In the end, the market price will be set by the government, in the same way that in end the price of money is ultimately determined and set by the Reserve Bank.

Now comes a really loony part. All businesses and commercial enterprises want to maximise returns to their owners. They want to increase revenue, keep costs under control, and reduce their tax liabilities. The ETS gives them a new way to do just that: they can now start producing carbon credits which can be instantly sold for cash. Every business in New Zealand, regardless of what goods or services it produces, will overnight have a potential additional adjunct business—creating carbon credits. If history is any guide, and will be, very rapidly large numbers of businesses and commercial enterprises will be distracted into creating carbon credits. They had better, because if they don't they risk being effectively surtaxed as carbon emitters. The quality and efficiency of New Zealand business is about to take a huge dive.

So, let's understand this. Select businesses in select industries will be taxed via the ETS for carbon emissions. Costs will rise. Everywhere. To cope, businesses will get focused upon creating carbon credits. Meanwhile, New Zealand depends on its ability to trade in a global marketplace. It competes against other nations and their businesses every day. A lot of those nations who compete with us have ignored Kyoto and have no such obligations. At one fell swoop, the cost base for all businesses just rose, managements put at risk of becoming distracted to focus attention on manufacturing carbon credits, and we have strengthened our major competitors. Good one.

The result: our noble politicians will have succeeded in making New Zealand an example to the world—but not as they had hoped.

They will have made us an example of reckless stupidity. They will have established for all to see that we really are a nation of woolly headed sheep.