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How Not to Design an Emissions Trading Scheme. Geoff Bertram Institute of Policy Studies 13 November 2009. Outline. Ten lectures in one slide Theory of emissions trading: the ideal-world textbook story (but only if you have a good textbook) Fitting NZ numbers to the textbook story - PowerPoint PPT Presentation
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1
How Not to Design an Emissions Trading Scheme
Geoff Bertram
Institute of Policy Studies
13 November 2009
2
Outline• Ten lectures in one slide
• Theory of emissions trading: the ideal-world textbook story (but only if you have a good textbook)
• Fitting NZ numbers to the textbook story
• Realpolitik sinks the textbook: the NZ ETS
• Outcomes for CP1
• Outlook beyond CP1: another time….
3
Ten lectures in one slide: how not to design an ETS, and lessons from NZ
4
• Start from a false dichotomy between carbon tax and cap-and-trade.• Make the scheme complicated, not simple.• Block the market mechanism from its function as a means of sniffing out,
rewarding and promoting technological innovation, emissions reduction and energy efficiency.
• Embrace the market mechanism as a means to transfer wealth from poor to rich, from weak to powerful, from unorganised citizens in general to well-organised polluters. Greenwash the process as necessary to save the planet, or at least to “meet international obligations”.
• Identify your biggest carbon-sinking sector (forestry) and expose it to as much regulatory uncertainty and expropriation risk as possible.
• Identify the sector where your headline opportunities for emission reductions lie (pastoral agriculture) and exempt it from all obligations for a decade or so.
• Assert repeatedly that the outcome is fair and efficient. Ignore critics who say it is neither.
• Move fiscal consequences off balance sheet and out of public view• Hand out subsidies on a basis that leaves the economy vulnerable to
imposition of anti-dumping tariffs by trading partners.• Treat future taxpayers in the same way as you treat the environment – as a
temporarily defenceless target to be plundered for the benefit of the present generation, or at least today’s political insiders.
LESSONS FROM NEW ZEALAND: Avoid the above.
5
Theory of emissions trading: the ideal-world textbook story (but
only if you have a good textbook)
6
The “carbon market”
Emissions, Mt
$ pe
r to
nne
of C
O2-
e
O
Demand for emissions = Marginal Product of Emissions = Marginal Abatement Cost
7
With emissions unpriced, the economy emits ON$
per
tonn
e of
CO
2-e
O N
BAU emissions
Demand for emissions = Marginal Product of Emissions = Marginal Abatement Cost
Emissions, Mt
8
If the price of emissions rises to Pe then the quantity falls to OM and the emissions reduction (“abatement” or “mitigation”) is MN
$ pe
r to
nne
of C
O2-
e
O N
BAU emissions
Demand for emissions = Marginal Abatement Cost
M
Pe
Emissions, Mt
9
Revenue to Government
One way of doing it: a carbon tax of Pe would lead to MN of abatement
$ pe
r to
nne
of C
O2-
e
O NM
PeCARBON TAX
Emissions, Mt
10
Revenue to Government if permits are auctioned;
windfalls to recipients if permits are given away
Or the Government could impose a cap at M, issue permits, allow trading, and the carbon price would be bid up to Pe
$ pe
r to
nne
of C
O2-
e
O NM
Pe
CAP
Emissions, Mt
11
In the real world, the MAC is uncertain and shifts about with technology shocks, sectoral restructuring, and so on
Emissions
MAC
0
TaxPe
M
So it is often said that in this situation the
government can have either
N
Cap
or certainty about the tax Pe
but not both
certainty about the quantity M
$ pe
r to
nne
of C
O2-
e
(an uncapped ETS gives neither)
12
• The atmosphere is a global commons, not a national asset• The climate-change problem is a global problem and there
exists, in principle, a global carbon price reflecting the real value of atmospheric storage for GHG emission streams (flows into a stock)
• Recognising this, the Kyoto Protocol allowed countries to buy and sell carbon units from each other as a step towards equalising marginal abatement cost across countries, in pursuit of “first-best allocative efficiency”
Open-economy emissions trading, however, is neither of those two closed-economy stories
• So there is a respectable case from mainstream neoclassical economics for uncapped emissions trading, so long as you believe either that the world market is efficient enough to deliver an equilibrium carbon price path that sustains the atmospheric commons, or that the imperfect world market will do better than your national government.
13
$ pe
r to
nne
of C
O2-
e
O NK
PwWORLD PRICE
Uncapped emissions trading in Kyoto instruments is “like” a carbon tax – not like a cap-and-trade scheme
This amount is spent by emitters to buy permits or credits offshore
The permits are surrendered to the Government
The Government sells them offshore and thus secures revenue
Done properly in the context of an efficient world market, it equates the
economy’s Marginal Cost of Abatement to the cost of cutting
emissions in other countries
The fluctuating world price determines both P
and Q locallyNeither is certain.
Emissions, Mt
14
• Choosing between uncapped emissions trading and the closed-economy cap-and-trade/carbon tax options is partly a matter of where the world price is.
• There are two cases: Pw>Pe, and Pw<Pe, where Pe is the carbon-tax or permit price required to achieve the Kyoto or other) target by domestic abatement effort, and Pw is the price at which other countries’ abatement credits can be purchased
15
Case 1: Pw > Pe. Cheaper to meet the target by closed-economy policies; but optimal to abate to OK and export KM of carbon credits.
$ pe
r to
nne
of C
O2-
e
O NM
Kyoto target
Emissions, Mt
PwWorld supply/demand
of Kyoto credits
Pe
K
Exportsof units
16
Case 2: Pw < Pe Closed-economy policy is more expensive than buying-in credits from offshore. Country abates to OK and imports MK
of carbon credits.$
per
tonn
e of
CO
2-e
O NM
Carbon tax to hit target by domestic abatement
Kyoto target
Emissions, Mt
PwSupply of Kyoto
credits
Pe
K
Importsof credits
17
Disposable Pays for excess
Fiscal/revenue implications of Case 2 under Kyoto rules: the Government receives OKTU of surrendered credits, hands over MKTR to the UNFCCC to cover excess emissions, and has
OMRU of disposable revenue (saleable credits) in hand. Lobbyists and politicians smell a rent-seeking opportunity….
$ pe
r to
nne
of C
O2-
e
O NM
Carbon tax to hit target by domestic abatement
Kyoto target
Emissions, Mt
PwSupply of Kyoto
credits
Pe
K
TU R
18
Why not simply hand all those disposable units back to emitters to make them happier?
• Because– The cost of those units represents the real cost of using
emissions as an input and the revenue is legitimate Pigouvian tax revenue [NOT a “taking!]
– There are better things to do with the money - such as promoting renewables and R&D, and compensating low-income households for the costs of higher-priced electricity etc
– In the long run the full price incentive for abatement has to bite if the MAC is to be shifted over time. Rebating of emission units blocks the market mechanism from doing its long-run job
19
Fitting NZ numbers to the textbook story
20
• To do this we need to have some idea of the MAC curve• There are quite a few estimates but none really solid• Generally the estimates tend to be conservative because
– they lack induced technical progress – they don’t allow for large-scale shifts in the structure of the economy– they all embody pessimistic assumptions about agricultural emission
reductions, or leave them out altogether (McKibbin & Pearce)• In particular, integrating “top-down” and “bottom-up”
estimates in a framework that includes backstop technologies has not been fully undertaken to date for New Zealand
• The proposition implied by the bottom-up curves that emissions become less price-responsive as the price rises above $100 per tonne seems intuitively wrong - backstops exist, but have not yet made it into the modelling
• Still, for better or worse, here we go….
Put some numbers onto our diagram
21
Estimates of the New Zealand Marginal Abatement Cost Curve (excl forestry)[Drawn here as a supply of abatement starting from BAU at zero]
-120-100
-80-60-40-20
020406080
100120140160180200220240260280300320340360380400420440460480500520540560
0 5 10 15 20 25
Mt annual abatement
$ pe
r to
nne
CO
2-e
GAINS appendix
GAINS online calculator gross notrade
GAINS online calculator net no trade
GAINS online calculator gross withtrade
GAINS online calculator net withtrade
MfE 2009 energy and agriculture
McKibbin/Pearce 1997 at 2020horizon
Infometrics 2007
22
Draw these MAC curves the other way around so that they become the emissions
demand curve, convert to 5-year total abatements, and plot them onto our
diagram for CP1
Health warning: I am taking big liberties by imposing long-run 2020-horizon
abatement estimates onto the short-run CP1 situation. This is a scoping exercise
only
23
-150
-100
-50
0
50
100
150
200
250
300
350
400
450
500
550
600
650
0 50 100 150 200 250 300 350 400 450
Emissions, Mt
Car
bom
n p
rice
$/t
CO
2-e
GAINS appendix GAINS online calculator gross no trade
GAINS online calculator net no trade GAINS online calculator gross with trade
GAINS online calculator net with trade MfE 2009 energy and agriculture
McKibbin/Pearce 1997 at 2020 horizon Infometrics 2007
Assigned Amount for CP1
CP1 assigned amount
Would meeting the Assigned Amount
have cost $100-200 per tonne carbon charge?
24
$ pe
r to
nne
of C
O2-
e
O 400
BAU emissions
Marginal Abatement
Cost
Emissions, Mt
There’s a nice clean simplicity about that Infometrics implied MAC so I’ll use that for a stylised discussion
300
100
Assigned Amount
25
Carbon tax path to hold NZ at 1990 gross emissions, assuming Infometrics abatement cost
curve
0
20
40
60
80
100
120
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
NZ
$/t
CO
2-e
26
$ pe
r to
nne
of C
O2-
e
O ≈400BAU
Marginal Abatement
Cost
Emissions, Mt
Let’s suppose the world carbon price for CP1 is $30/tonne
310
100
Assigned Amount
30Supply of Kyoto
credits
303
Assigned Amount net of PREs
An ETS without NZUs or gifting would* cut emissions to ≈370 Mt
and bring in $11.1 billion revenue
* assuming long-run response rate and the MAC as drawn
≈370
27
Realpolitik sinks the textbook: the NZ ETS
28
The NZU: the rent-seeker’s delight• Instead of requiring emitters to buy and surrender Kyoto units,
Government prints its own carbon fiat currency, the NZU, and announces it will accept NZUs as substitutes for Kyoto-derived AAUs, CERs, ERUs, and RMUs.
• There is now an exchange rate issue: Government has to decide whether to fix and defend the value of the local currency. [Monetary policy – is there a carbon-currency Central Bank somewhere?] Inconvertibility looms (check out proposed new s.222G in Nick Smith’s Bill)
• Instead of auctioning all the NZUs, which would still provide revenue to fund obligations to the UNFCCC and other activities, Government gives away big tranches of NZUs for free to appease politically-powerful business interests
• This effectively means the ETS’s disposable revenue is rebated as corporate welfare - gifted (“allocated”) NZUs are wealth transfers.
• Scarce resources that could have been used, e.g., to reduce emissions, are diverted to lobbying for political favours.
• .
29
Now take the simple scheme and make it complicated
• Instead of applying surrender obligations equally to all, exempt more than half the economy’s emitters entirely for the whole of CP1 (2008 scheme) or most of the next decade (2009 scheme)
• Start the scheme off in the middle of CP1 for most of the sectors covered, with only forests in from the beginning
• Make it voluntary for Kyoto forests to join the scheme, then give them confusing and often perverse incentives on whether to do so. Leave ownership of the carbon in their trees an open question but hint that it’s social, not private, property – potentially subject to eventual appropriation by government
• The next slide shows what the first two of these do to the total amount payable by emitters or users of emission-intensive products. (The polluter-pays benchmark here is $11.6 billion that a $30 carbon tax would collect on 386 Mt of currently-projected emissions including deforestation)
30
2008 ETS
-2,000
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
Tab
le 6
.1: f
ull
pollu
ter-
pays
Tab
le 6
.2: w
ith20
08 E
TS
exem
ptio
ns
Tab
le 6
.3: a
ddgi
fted
NZ
Us
unde
r20
08 E
TS
Tab
le 6
.4: a
ddel
ectr
icity
cos
tsun
der
2008
ET
S
$ m
illio
n
Coal, gas and oil producers
Agriculture and fishing
Large industry
Other industry, commerce,transport and services
Households
Pre-Kyoto forest owners
Amounts payable by various sectors on 386 Mt of CP1 emissions,2008 ETS
$11.6b
$3.1b
$1.8b
$0.8b
$3.1b
$0.4b
31
Then increase the complexity but cut the (already negligible) impact on emissions and extend the
subsidies’ life: the 2009 amendments
• The amendments now before Parliament knock about two-thirds off the amounts to be paid under the ETS
• They extend the gifting of NZUs to selected sectors out to the year 2088 for industry and 2091 for agriculture, on a scale that declines at 1.3% a year (effectively perpetual production subsidies)
• They allocate NZUs to industry and agriculture on a going-forward intensity basis rather than in lump sum amounts based on historic emissions, which means that emissions are likely to rise rather than fall, whereas New Zealand’s assigned amount must be expected to fall
32
Outcomes for CP1
33
2009 ETS amendments
-2,000
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
Tab
le 6
.1: f
ull
pollu
ter-
pays
Tab
le 6
.2: w
ith20
09 E
TS
exem
ptio
ns
Tab
le 6
.3: a
ddgi
fted
NZ
Us
unde
r 20
09 E
TS
Tab
le 6
.4: a
ddel
ectr
icity
cos
tsun
der
2009
ET
S
$ m
illio
n
Coal, gas and oil producers
Agriculture and fishing
Large industry
Other industry, commerce,transport and services
Households
Pre-Kyoto forest owners
Amounts payable by various sectors on 386 Mt of CP1 emissions,2009 proposed amended ETS
$11.6b
$1.3b$0.8b
$0.5b
$1.2b
$0.4b
34
2008 ETS
-2,000
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
Tab
le 6
.1: f
ull
pollu
ter-
pays
Tab
le 6
.2: w
ith20
08 E
TS
exem
ptio
ns
Tab
le 6
.3: a
ddgi
fted
NZ
Us
unde
r20
08 E
TS
Tab
le 6
.4: a
ddel
ectr
icity
cos
tsun
der
2008
ET
S
$ m
illio
n
Coal, gas and oil producers
Agriculture and fishing
Large industry
Other industry, commerce,transport and services
Households
Pre-Kyoto forest owners
2009 ETS amendments
-2,000
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
Tab
le 6
.1: f
ull
pollu
ter-
pays
Tab
le 6
.2: w
ith20
09 E
TS
exem
ptio
ns
Tab
le 6
.3: a
ddgi
fted
NZ
Us
unde
r 20
09 E
TS
Tab
le 6
.4: a
ddel
ectr
icity
cos
tsun
der
2009
ET
S
$ m
illio
n
Coal, gas and oil producers
Agriculture and fishing
Large industry
Other industry, commerce,transport and services
Households
Pre-Kyoto forest owners
$11.6b
$1.3b $0.8b
$0.5b
$1.2b
$0.4b
$11.6b
$3.1b
$1.8b
$0.8b
$3.1b
$0.4b
35
2008 ETS
2009 ETS
Projected CP1 emissions incl deforestation 386 386 Exempted from ETS coverage 284 332 Gross number of units required to be surrendered (mill) 102 54 NZUs issued as rebates (allocations) (mill) 31 16 NZUs for power price compensation (allocations) (mill) 20 10 NZUs for pre-1990 forests compensation (mill) 16 16 Net number of units required to be surrendered (mill) 35 12
Exemptions and rebates: effect on net surrender of emission units
These can come from offshore or from NZUs earned by Kyoto forest owners and sold off rather than banked
36
Fiscal impact: how much of those billions of dollars of ETS burdens actually comes to Government?
• With most of the liable CP1 emissions covered by gifted NZUs, Government pulls in only a small amount of direct revenue that can be used to pay for the country’s Kyoto obligations
• Under the 2008 scheme, I estimate that 35.4 million of the 102 million emission units surrendered would be of value to the Government to fund offshore Kyoto payments. Under the 2009 scheme that falls to 12.3 million.
• At $30 per tonne, the estimated effective direct revenue is $1.062 billion under the 2008 scheme and $369 million under the 2009 scheme.
• Before amendment, thus, the ETS yield is just 10% of the $11.1 billion from the hypothetical carbon tax for the whole of CP1 (slide 25 above). With the amendments this will fall to 3%.
• Relative to the 76 Mt expected overshoot of gross emissions for CP1, the 2008 ETS would pay for 47%; the 2009 ETS would pay for 16%. 84% then falls on taxpayers.
• My estimated revenue drop of $700 million is bigger than the $415 million shown in the Explanatory note to Dr Smith’s Bill, reflecting some different assumptions – mostly my use of a $30 carbon price rather than $25.
37
Fortunately for taxpayers there is a sort of silver lining in electricity prices
• The Government owns a big share of electricity generation capacity, including much of the renewable capacity.
• As the cost of fossil-fired generation rises, so will the wholesale electricity price
• SOE renewable generators then get windfall profits and these accrue to the owner (Government)
• Under the 2008 ETS total SOE electricity windfall profits during CP1 would be about $1 billion at a $30 carbon price. Under the 2009 ETS they fall to $0.4 billion. (Not all of this comes in as cash dividends to the Crown accounts, of course.)
• Adding electricity profits and ETS revenue, the 2008 ETS yields about $2 billion compared with the Kyoto excess emission cost of $2.3 billion. The 2009 ETS yields less than $0.8 billion, leaving $1.3 billion with taxpayers.
Emission Reductions? Forget them.
Sector
Projected Emissions for
CP1 under BAU without
ETS
(Mt)
Reduction due to 2008 ETS
(Mt)
Reduction due to
proposed 2009 ETS
(Mt)
Agriculture
184.0 0 0
Transport Fuels
72.1 0.2 0.1
Non-transport Liquid Fuels
14.0 0.2 0.1
Electricity 36.2 3.3 1.5
Stationary Energy from non-liquid fuels
37.2 1.1 0.5
Industrial Processes 21.4 0.6 0.3
Waste, Solvent and Other
9.0 0 0
Fugitive emissions 10.7 0.3 0.13
Total 384.3 5.7 2.6
* BAU emissions have been estimated by marking-up MfE’s projected emissions, since these already incorporate the Ministry’s
estimate of ETS-induced abatement. Hence total emissions in this table are 5.8 Mt greater than the 378.7 of projected emissions in the ministry’s most recent net position report.
39
Fugitive emissions
FishingPre-Kyoto forests, waste & solvents
Transport industries
Other industry
Commerce & services
Large industrialsAgriculture
Households
0
5
10
15
20
25
30
35
40
45
50
55
0 5 10 15 20 25 30 35 40 45 50 55
Share of emissions
Sh
are
of 2
008
ET
S c
ost
bu
rden
ETS burden compared with emission responsibility by sector, 2008 ETS
40
ETS burden compared with emission responsibility by sector, 2009 ETS
Households
Agriculture
Large industrials
Commerce & servicesOther industry
Transport industries
Pre-Kyoto forests, waste & solvents
Fishing
Fugitive emissions
0
5
10
15
20
25
30
35
40
45
50
55
0 5 10 15 20 25 30 35 40 45 50 55
Share of emissions
Shar
e of
200
9 E
TS
cost
bur
den
41
0
10
20
30
40
50
60
Table 6.1: fullpolluter-pays
Table 6.2:with ETSstart dates
Table 6.3: addgifted NZUs
Table 6.4: addrenewableelectricityprice rise
Sh
are
of t
otal
cos
t b
urd
en
Households 2008 ETS
Households 2009 ETS
Other sectors 2008 ETS
Other sectors 2009 ETS
Agriculture and fishing 2008ETS
Agriculture and fishing 2009 ETS
Large industry 2008 ETS
Large industry 2009 ETS
Pre-Kyoto forest owners2008 ETS
Pre-Kyoto forest owners2009 ETS
Effect of exemptions, rebates and electricity pricing on selected sectors
42
Short-run and long-run views of the subsidies to “trade exposed” (= “too big to refuse”)
sectors
Sector's share of excess
(Mt)
Share of Kyoto bill
($ mill)
Net cost proposed 2009 ETS
($ mill)
Excess payment
relative to fair share
($ mill)
Payment relative to fair share
(%)
Households (including private transport)
14.4 434 452 18 104
Large industry 11.4 343 -145 -488 -42
Other industry 2.9 86 96 10 111
Transport 3.3 98 102 5 105
Commerce and services 2.0 64 65 1 102
Agriculture 37.5 1,123 17 -1,106 2
Fishing 0.5 14 -4 -17 -25
Waste and solvents 1.8 54 0 -54 -
Coal, gas and oil producers 2.1 62 66 4 106
Totals (excluding deforestation)
75.9 2,277 649 -1,628 -
1. During CP1
43
Carbon Price and Sector Subsidy
2008 ETS
($ bill)
2009 ETS
Proposed ($ bill)
Assuming emission unit price 2013-2091 is $50 Large Industry non-electricity allocations 6.5 17.3 Electricity price compensation to industry 4.8 12.7 Agriculture late entry and NZU allocations 26.8 69.0 Total value of subsidies 38.1 99.0
Assuming emission unit price 2013-2091 is $100 Large Industry non-electricity allocations 13.0 34.2 Electricity price compensation to industry 9.7 25.0 Agriculture late entry and NZU allocations 53.6 134.2 Total value of subsidies 76.3 193.4
2. Value of Subsidies to Large Industry and Agriculture – 2010 to 2092(undiscounted figures, but no intensity change assumed)
44
Time out….
45
Do we need the NZU in order to be able to reward forest owners for not deforesting, and for sinking carbon?
• The NZU enables the New Zealand Government to pay forest owners for the valuable services they provide, at no cost to the taxpayer.
• The Government hands out newly-printed NZUs and leaves the forest owners to find a private buyer if they wish
• Forest owners can convert their NZUs to cash if they sell them – or they can “bank” them against future harvesting
• Because it’s not the Government that pays out the cash, this transfer to forest owners is at no direct cost to the taxpayer.
• In effect, the job of collecting the taxes to fund payments to foresters
has been privatised – this is “tax farming”
Em
ission units market: total net dem
and 85.3 million units
Agriculture ETS costs $115m
$30m $62m Ren
ewab
le e
lect
rici
ty g
ener
atio
n w
indf
all p
rofi
ts $
1,62
8 m
illi
on
Suppliers of oil, gas, and coal fuels used for energy
purposes collect $1,687m em
ission charges and pay $190m
for their fugitive emissions
Non-renewable electricity generation collects $583m passed-on emissions charges $583 m to purchase 19.4 million units
Pre-Kyoto forest owners Profit from ETS $411m
$69m to purchase 2.3 million units
$480m from sale of 16m distributed NZUs
$1,877m to purchase
62.6 m units
Households ETS costs $1,500m
$776m $532m
$458m
$344m
$192m Transport industries ETS costs $220m
$21m
Commerce & services ETS costs $535m
Fishing ETS costs $15m
$15m $4m
$13.5m from sale of 0.45m NZUs
Large industry ETS net cost
$114m $461m
$22m
$7m
$123
m
$68m
$191
m
Small/medium industry ETS net cost $412m
$145m $207m
$6m from sale of 0.19m gifted NZUs
$74m
$1m
$164
m
$969m from 32.3m gifted NZUs (after covering 12.7m of process emissions)
Sales of 48.9m gifted units
35.4m units from Kyoto
forest owners and offshore purchases of Kyoto units
Flow Chart of Projected Payments Under the 2008 ETS
to cover
$25m to cover 1 Mt
Em
ission units market: total net dem
and 43.6 million units
Agriculture ETS costs $41m
$11m to cover 0.5 Mt
$22m Ren
ewab
le e
lect
rici
ty g
ener
atio
n w
indf
all p
rofi
ts $
566m
m
illi
on
Suppliers of oil, gas, and coal fuels used for energy
purposes collect $764m em
ission charges to cover 41 M
t and pay $66m for 2.6 M
t of fugitive emissions
Non-renewable electricity generation from collects $202m passed-on cost of 8.1 m units $202 m to purchase 8.1 million units
Pre-Kyoto forest owners Profit from ETS $343m
$57m to purchase 2.3 million units
$400m from sale of 16m distributed NZUs
$830m to
purchase 33.2 m units
Households ETS costs $638m
$386m to cover 15.4 Mt $185m
$159m
$120m
$99m to cover 4 Mt
Transport industries ETS costs $109m
$7m
Commerce & services ETS costs $187m
Fishing ETS net profit $8m
$8m to cover 0.3 Mt $1m
Large industry ETS net cost
$14m $164m to cover 6.5 Mt
$8m
$3m
$43m
$66m
Small/medium industry
ETS net cost $167m $70m to cover 2.8 Mt $72m
$18m from sale of 0.7m gifted NZUs
$26m
$0.0
2m
$57m
$365m from 14.6m gifted NZUs (after covering 5.3m of process emissions)
Sales of 31.3 m gifted units
12.3 units from Kyoto
forest owners and offshore purchases of Kyoto units
Flow Chart of Projected Payments Under the Proposed 2009 Amended ETS
48
Surplus units generate $21 billion revenue to 2030
Free Allocation to Agriculture and Industry
Total New Zealand Units
Free Units Allocated under Current ETS Legislation
0
10
20
30
40
50
60
70
2010 2015 2020 2025 2030 2035 2040 2045 2050
Year
Mil
lio
n U
nit
s
Source: Christina Hood submission on Nick Smith’s Bill
49
Free Units Allocated under Proposed ETS Legislation
0
10
20
30
40
50
60
70
2010 2015 2020 2025 2030 2035 2040 2045 2050
Year
Mil
lio
n U
nit
s
Total New Zealand Units
Proposed free allocation to agriculture and industry
Source: Christina Hood submission on Nick Smith’s Bill
50Source: Christina Hood submission on Nick Smith’s Bill
Value of Subsidy - Current and Proposed
0
10
20
30
40
50
60
70
2010 2015 2020 2025 2030 2035 2040 2045 2050
Year
Mil
lio
n U
nit
s
Proposed: An extra $105 billion to 2050Current:
$25 Billion
51
Total free NZU allocations assuming no intensity effects
0
10
20
30
40
50
60
2010
2015
2020
2025
2030
2035
2040
2045
2050
2055
2060
2065
2070
2075
2080
2085
2090
Mill
ion
NZ
Us
Total under 2007 ETS
Total under 2008 ETS
Total under 2009 ETS
$ pe
r to
nne
of C
O2-
e
O 400BAU
Emissions demand curve steepens with
exemptions and shifts left with
recession
Emissions, Mt310
100
30Supply of Kyoto
credits
379
Projected emissions incl deforestation
303
Assigned Amount net of PREs
Exempted or rebated 351Mt worth $10.5b
ETS pulls in $1,1b
from 35 Mt
386
53
2008 ETS
Proposed 2009 ETS
Share of total CP1 emissions
%
Costs of ETS
$ mill
Share of total costs
%
Costs of ETS
$ mill
Share of total costs
%
Households 18.7 1,498 48 637 52
Large industry 14.8 114 4 14 1
Other industry 3.7 412 13 167 14
Transport 4.2 220 7 109 9
Commerce and services 2.8 530 17 185 15
Agriculture 48.5 111 4 39 3
Fishing 0.4 25 0.8 0 0
Waste and solvents 2.3 0 0 0 0
Coal, gas & oil producers 2.7 190 6 66 5
Total (excluding deforestation)
98.1 3,101 100 1,218 100.0
Pre-Kyoto forest owners 1.9 0 0 0 0
Total 100 3,101 100 1,218 100
ETS Charges for CP1
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