“The Infometrics report released this week by the minister for climate change does not support the government's claims that its climate change policies will have little impact on economic growth, and that the proposed emissions trading scheme (ETS) is the best approach to reducing emissions at least cost to the economy”, Roger Kerr, executive director of the New Zealand Business Roundtable, said today.

“This is not because the report is incompetent; it is because it is much less comprehensive than the minister appears to appreciate. The report makes strong assumptions about ongoing investment, does not explicitly consider alternatives such as carbon taxes or withdrawing from Kyoto obligations, acknowledges that it ignores transitional costs, and excludes other considerations that are concerning businesses and economists internationally about the emissions trading option.”

Mr Kerr said that the conclusion that real GDP is not much affected by proposed measures is more of an assumption of the model than an outcome. The model assumes no change in total employment of labour and capital (total investment is exogenous in the model, ie taken as given) and that these resources would be employed in activities that are essentially as productive. These are unrealistic assumptions given the costs and investment uncertainty associated with an emissions trading scheme that significantly reduced emissions.

Major points of concern to business are the threats to competitiveness-at-risk industries, which are only partially mitigated for a transitional period, and the likely volatility of permit prices under a cap and trade regime, which could make investment decisions very difficult. The first of these issues is not fully captured by the model and the second not at all.

Moreover, the minister's conclusion that the proposed ETS will reduce emissions at least cost to the economy cannot be drawn from the report. Infometrics did not consider whether an ETS would be less costly than an emissions tax (with an equivalent subsidy for forestry).

A further point is that the modelling did not incorporate the government's recent announcement of a ban on thermal electricity generation, which would have an additional impact on GDP.

Finally, the Infometrics model assumes an annual 2.9 percent real GDP growth rate for the period to 2025. This is higher than the growth rate of 2.3 percent assumed by the Treasury to 2022 but both are well below the minister of finance's 4 percent growth target, which needs to be achieved to meet the government's “top priority” goal of returning average incomes in New Zealand to the top half of the OECD. All government planning should be on a consistent basis and a 4 percent growth rate should be used in modelling climate change scenarios (assuming the government still aims to meet its target).

A recent official Canadian government analysis suggested that an attempt by Canada to meet its Kyoto commitments in 2008-12 would “plunge the economy into recession”, increase the cost of electricity and gasoline by over 50 percent and cut real disposable income for a family of four by C$4000. While New Zealand's circumstances are different, this illustrates the economic stakes involved.

Mr Kerr said that the stark reality was that New Zealand had few low-cost emission reduction options given present technology. Either policy measures would substantially reduce emissions and hit the economy hard, or they would have little impact on both emissions and GDP. The government cannot have it both ways.

“The Infometrics report is a useful input into policymaking but no Secretary to the Treasury could possibly advise the government that it is a comprehensive and reliable basis for assessing the economic effects of Kyoto policies in general, or the ETS proposal in particular. Only weeks before legislation is due, an official regulatory impact analysis has still not been released, and far more robust work is needed to assess the impacts of the proposed actions”, Mr Kerr concluded.

For more information, contact:

Roger Kerr
Executive Director
Ph: 04 499 0790
Email: rkerr@nzbr.org.nz
Web: www.nzbr.org.nz