BULLETINS
& ARTICLES
About
the CO2 tax
Brett Longley
Climate Change Office
The Kyoto Protocol is an international agreement
to address global warming and delay climate change. One hundred
and fifty countries, including New Zealand, have ratified the Protocol
and are taking steps to meet the targets set.
New Zealand’s
commitment is to reduce greenhouse gas emissions during 2008-2012
to their level in 1990, or take responsibility for any excess. New
Zealand’s emissions are increasing. The 2003 total was about
22 per cent higher than in 1990. Therefore the Government aims to
set New Zealand’s emissions on a permanent downward path by
2012.
POLICY
AIMS
Climate change presents both risks and opportunities for business.
The risks may seem unclear because the effects of climate change
may not be felt immediately, but can affect businesses in many different
ways. These effects range from the direct influences of changing
climate conditions on production and location decisions in agriculture,
forestry and horticulture, to the costs of insuring against risk
from extreme weather events and natural disasters exacerbated by
a changing climate.
The Government
recognises that at present these issues are not usually addresses
in day-to-day decision-making by business managers and leaders,
and that adjusting to climate-related changes poses a new challenge
for business. Yet this adjustment must be part of a longer-term
transition that New Zealand and other countries are going through
as we move from a fossil carbon-based (oil, gas, coal) economy to
one based on renewable sources of energy (for example solar, wind,
hydro).
This transition
to a low-carbon economy offers business opportunities to develop
new products, services and technologies as New Zealand and the rest
of the world work to address climate change.
Several official
policies are aimed at firms or industries that, as a result of the
planned carbon tax (discussed in more detail later), face significantly
greater risk to their competitiveness than produces in countries
with less stringent climate change policies. The Negotiated Greenhouse
Agreements, the Energy-Intensive Business scheme and Projects to
reduce Emissions programme are described in more detail later as
ways to help businesses adjust.
The Government
and agricultural sector groups have also signed a partnership agreement
(or memorandum of understanding) on voluntary research into agricultural
greenhouse gas emissions. An industry-led research strategy, co-ordinated
by the Pastoral Greenhouse Gas Research Consortium, support this
agreement. This consortium aims to develop safe, cost-effective
greenhouse gas abatement technologies to reduce methane and nitrous
oxide emissions from livestock by at least 20 per cent by 2012.
Under the Kyoto Protocol the Government will bear the cost these
agricultural sector non-carbon dioxide (CO²) emissions. It
will also maintain to least its current level of investment in agricultural
greenhouse gas abatement research.
All these policies
in place now will continue through to the end of 2012, supported
by several existing strategies.
The National
Energy and Conservation Strategy (NEECS) promotes energy efficiency,
energy conservation, and renewable energy. The New Zealand Transport
Strategy is focused on developing sustainable transport, especially
reducing the carbon intensity of transport. The New Zealand Waste
Strategy is a joint central and local government strategy. The Growth
and Innovation Framework sets out official sustainable economic
growth objectives for the state and private sector. The Resource
Management Act (Energy and Climate Change) Amendment Act 2004 has
been passed. Local government plans to include programmes to help
councils adapt to and anticipate climate change. And public awareness
and education campaigns are ongoing.
A carbon tax
will be introduced in 2007, and a domestic emissions trading scheme
may be considered.
EMISSIONS
TRADING
New Zealand’s obligation under the Kyoto Protocol in practice
means holding sufficient emissions units at the end of the commitment
period (end 2012) to cover all its emissions. Most of these units
will come from New Zealand’s initial “assigned amount”.
The remainder will need to be obtained from the international market,
or from using sink credits or units from projects in other countries.
The Kyoto Protocol
allows governments to devolve responsibility for managing emissions
to local businesses (and other organisations). This means that businesses
would be required to report their emissions (or activities closely
associated with emissions) and hold a corresponding number of emission
units. Businesses may trade these units on the domestic and international
markets to ensure that their obligations are met, under a system
called “emissions trading”.
This system
would give responsible businesses the flexibility to determine how
much to reduce emissions and how many emission units to purchase
(or sell). The system is expected to provide incentives to adopt
low-cost abatement options, encourage innovation and reduce the
overall cost of meeting Protocol commitments.
The Government
has not yet decided whether to introduce a domestic emissions trading
scheme.
THE
CARBON TAX
On 1 April 2007 a carbon tax will be introduced to help New Zealand
move towards a low-carbon energy future. In effect the tax will
create a price advantage for sustainable energy sources over fossil
fuels, which produce the greenhouse gas emissions causing climate
change. The tax will introduce into the economy a price for carbon
emissions. The aim of the tax is to influence business decisions
about energy use and encourage the use of more climate-friendly
fuels and manufacturing and production processes.
The tax will
apply to CO² emissions from the consumption of fossil fuels,
such as coal, gas, petrol; and from industrial processes, such as
chemical reactions involved in manufacturing. Initially it has been
set at NZ$15 per tonne of CO² equivalent. This figure will
change only if it depends substantially from the international market
price of CO² on a sustained basis. The tax is capped at NZ$25
per CO² tome equivalent.
The tax will
be levied as far upstream as possible. Points of obligation include
oil refineries, coal mining companies, gas producers, geothermal
energy producers, importers of liable products such as lubricating
oil, carbon pitch and coal, and users of limestone for calcination
(e.g., cement).
Possible price
effects of carbon tax at NZ$15 per tonne CO² equivalent.
The extra money
from the tax will be balanced by other changes so that there is
no net increase in government revenue. Revenue from carbon tax will
be recycled through the tax system to fund part of the cost of a
range of tax measures. Among other things, they include changes
in the depreciation regime, fringe benefit tax regime, access to
tax deductions for research and development, investment intermediaries,
foreign income for new migrants and New Zealanders returning after
10 years, subsidies for small businesses who use a PAYE intermediary,
and provisional tax.
Electricity
(residential) 1 cent per kWh
91 octane petrol (at pump) 4 cents per litre
Diesel (at pump) 5 cents per litre
Natural gas (residential) 92 cents per GJ
Coal Depends on type and grade
HELPING
BUSINESSES ADJUST
To reduce the impact of the carbon tax on New Zealand firms, the
Government will work toward a Negotiated Greenhouse Agreement (NGA)
with firms that meet eligibility criteria. Eligible firms that successfully
negotiate a NGA will receive either partial or full relief from
the carbon tax. The amount of relief from the carbon tax received
by the firm will ultimately be determined by the firm’s actual
“emissions intensity” performance compared to its target
from 1 April 2007 to 31 December 2012.
The Energy-Intensive
Business scheme will help energy-intensive businesses reduce greenhouse
gas emissions and lessen the possible adverse effects on them of
the carbon tax through improved energy efficiency.
Energy-intensive
industries include:
• Wood
and food processing
• Paper and paper products
• Basic metals
• Non-metallic products
• Tourism transport
• Glasshouse crops
• Fishing
• Irrigated agriculture (arable and dairy)
Ways of further
reducing greenhouse gas emissions and lessening the effects of the
tax could include using more efficient ways of heating and chilling,
alternative fuels (e.g. biodiesel), machine operator training, introducing
energy management systems, and modifying crop processing and other
technologies.
Depending on
the success of a pilot scheme, the Energy –Intensive Business
scheme will be implemented through four measures:
• Grants
to assist capital investment in technologies to improve energy efficiency.
• Demonstration of energy-efficient technologies to provide
support for innovation and technology uptake.
• Education for company executives and directors to help them
give higher priority to energy efficiency in corporate management
and governance.
• Training for managers and staff in efficient energy management.
The pilot scheme
was established on 1 July 2005 to test the effectiveness of the
grant scheme and demonstration projects, and to provide information
that could support establishment of a fully fledged scheme. Training
and education programmes will begin in2006. The pilot scheme is
a combined grant and demonstration programme whereby cash grants
will be available for projects that demonstrate the application
of proven energy-efficient technologies. Grants of up to 40 per
cent of the capital cost of a project will be available to a maximum
of NZ$100,000. Preference will be given to projects that can be
implemented and evaluated before 2007.
The Energy Efficiency
and Conservation Authority (EECA) administers the pilot scheme.
The EECA and the Climate Change Group in the Ministry of the Environment,
in consultation with industry associations, will select technologies
that are capable of making significant energy savings and capable
of widespread use in energy-intensive industries. These technologies
are demonstrated by firms in these industries and information on
the performance of the technologies will be made publicly available
on the EECA website and directly to businesses through industry
associations.
To be selected
for a demonstration project, an energy saving technology should
be capable of reducing fossil fuel energy intensity in any industry
or part of an industry (measured as energy use per unit of production).
It should have the potential to be used by most firms in any industry
or part of an industry, and be cost-effective in terms of business
objectives such as payback period, return on investment, productivity
improvement, profitability, or market performance.
To be selected
for a demonstration project, host firms should have production and/or
management operations typical of most firms in the industry or part
of the industry, and be able to co-fund at least 60 per cent of
the project’s capital cost. The firm should be willing to
make publicly available information about the project including
introduction, application, and energy performance of the demonstrated
technology, payback period, and other relevant data. The firm should
also be willing to allow third party monitoring and evaluation of
the project.
Information
from different demonstration projects will vary, but key data required
for the application of each technology include:
• Total
business energy use, and energy consumption by end use,
• Energy type by end use,
• Energy savings as a result of the application of the project,
• Capital investment required to implement the project,
• Operating costs for the project
• Contribution of the project to changes in business performance
(i.e. costs, production, percent change in profitability, payback
period),
• Potential for replication of the project or application
of the technology through out the industry and in other industries
(estimated total size of market, current level of uptake, main barriers
to adoption).
If successful,
the pilot scheme will be expanded in 2006 to provide grants to invest
in energy efficiency, demonstration projects to encourage innovation
and technology uptake, training of company directors to influence
a conservation culture in corporate governance, and education for
company managers and staff about energy efficiency.
The Projects
to Reduce Emissions programme will support initiatives to reduce
emissions of greenhouse gases. It supports initiatives that will
reduce greenhouse gas emissions over the first commitment period
of the Kyoto Protocol, 2008-2012, beyond the reductions that would
have occurred without the project, by awarding to businesses emission
units, or “carbon credits”. Emission units are internationally
tradable and add to the financial value of a project that will reduce
greenhouse gas emissions. They are available for projects that are
additional to business-as-usual, which means they help bring forward
projects that would not otherwise be economic. Tender rounds are
expected to be held annually.
