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