Moving ahead to an Effective ETS 8 May 2008

2 Outline ► Brief summary of our CGE modelling results ► Suggestions for amendment of the Bill ► Other material –Full report –Summary Report –Questions and Answers

3 NZIER analysis of proposal in the Bill ► Short term (2012), the proposed ETS –Reduces GDP by $900 million (0.5%) –Reduces average households expenditure by $600 (0.8%) –Reduces employment by 22,000 jobs (1.0%) –ETS costs 8x what paying for the Kyoto liability through taxation would cost ► Longer term (2025) –Reduces GDP by $5.9 billion (2.1%) –Reduces average household spending by $3,000 (3.0%) –Reduces hourly wage rate by $2.30 per hour or $90 per week (6.7%) –ETS costs 4x what paying through taxation would cost

4 NZIER analysis of proposal in the Bill ► Lost competitiveness is costly –One quarter of emission reductions are “leakage” –Technology change is not a complete solution –Lost earnings larger than “wealth transfer” –Impacts worse at higher prices for “carbon” ► Results similar to most other research/findings –Analysis suggests weight to give to particular issues or concerns “Policy used to address leakage should be simple and closely targeted. It should be designed to phase out as other countries regulate their emissions.” Dr Suzi Kerr, NZ ETS review, Motu, (2007)

5 Policy must be effective, efficient, fair ► New Zealand must play its part in addressing a global issue ► NZIER supports the idea that –society faces the full cost of the resources it uses –market instruments are used, such as an ETS –coverage is comprehensive and avoids carve-outs ► But cost and effectiveness of the ETS are closely tied up with the policies of our international competitors in both export and import markets

6 Make Bill enabling, not entrenching ► The Bill provides many of the administrative requirements we identified in our 2007 report ► But some of the elements in our report not picked up impose significant risks of long term regret : –Part 4 and Schedule 3 entrench entry and limits on allocation in isolation of what our trade competitors are doing –Leading in the introduction of new sectors and full exposure to price of carbon creates damage that will be hard or impossible to undo

7 Our recommendations ► Avoid regrets by amending Part 4/Schedule 3: –enable entry and/or free allocation, not limited to 90%, to manage competitiveness-at-risk –do not entrench obligations in isolation of what our trade competitors are doing. –provide mechanism to link introduction and phase out to competitor policies and technological opportunities ► Also improve transparency and scrutiny –use independent commission with statutory objectives and criteria to deal with allocation and timing of entry and phase-out –require that determinations on entry timing and allocations of sectors are made on basis of detailed cost benefit analysis