Wrong time to load carbon prices onto power costs

NEW ZEALAND - It is not a good time to be an electricity consumer, especially when households are struggling to make ends meet in today's tough economic environment.

The Commerce Commission inquiry into the electricity generation market concluded that households paid 10 per cent more than they would have if the market had been truly competitive over 2001 to 2007. That amounts to an extra $181 a year householders paid that could have stayed in their pockets.

On top of this, unless the government moves quickly to suspend the emissions trading legislation, business and consumers can expect significant price increases for their electricity as a result of electricity generators having to pay for carbon units in less than six months' time, when the act takes effect.

If carbon prices are around $25 a tonne, households will need to find an extra $160 a year, which is a 9 per cent increase in prices.

If carbon prices go back up to $50 a tonne, which is quite conceivable with prices set by the volatile international carbon markets, householders are looking at an extra $300 plus per year.

This price effect will hit from January 1 next year, unless the Government acts soon to suspend the entry into the scheme of the stationary energy and industrial process sectors.

There is a good case for doing so. Australia has put the introduction of its emissions trading scheme back to 2011 in view of the tough economic times. And even though the Rudd government has softened the impact of its proposed scheme considerably, it does not look like it will get the political support it needs to pass it into law.

It is quite conceivable they will not put a price on carbon before 2012, which is also the emerging trend in the U.S., Canada and Japan. While many of these countries' governments are making noises that are full of good intentions, tough economic times mean making energy more expensive is no longer getting popular political support.

In New Zealand, there is a select committee review of the emissions trading scheme legislation under way, due to widespread concern that the current scheme will undermine the competitiveness of New Zealand firms and worsen unemployment unless it is changed significantly.

The review is running two to three months behind schedule and, while the select committee deliberate (read disagree) on their report to Parliament, the ETS Act remains in force and will increase electricity prices soon unless the Government takes action to suspend it.

Suspension of the act is a good option, as it would allow the time to hold a proper consultation with stakeholders on how the act should be changed to better balance the environmental goal with the economic reality we are all living with right now.

Increasing prices in the electricity sector due to carbon charges result in millions of dollars of windfall profits for renewable electricity generators (which supply 60-70 per cent of our electricity), because they can increase their prices to just below the price of fossil-fuelled electricity, which will include the extra cost of having to pay for carbon units.

It is hard to see why we are shooting ourselves in the foot over electricity, when we are already world leaders in renewable electricity generation. Emissions from electricity generation only contributes 11 per cent to the country's greenhouse gas emissions, which is a standout performance compared to most other countries.

The fact of the matter is, no other country in the world has attempted an all-sectors, all-gases emissions trading scheme, largely due to the cost increases that will be the end result.

The proposed Australian scheme (if it ever gets off the ground) covers around 75 per cent of emissions and it is not certain that agriculture will ever be included. The European ETS only includes large industrials, which amount to about 40 per cent of emissions, and they do not include liquid fuels (oil, petrol, and diesel) yet.

New Zealand needs a policy approach which is in step with our major trading competitors, not out in front of them.

If we don't suspend the operation of the scheme in New Zealand to fix the flaws and get our timing in sync with large trade competitors, we might achieve emission reductions but the cost will be high, because it will come about from reduced economic activity which will lead to increased unemployment.