NZ ETS: Huge Expense For No Gain
John Boscawen MP, ACT New Zealand

Speech to Hamilton Grey Power, Celebrating Age Centre, 30 Victoria Street, Hamilton, Monday, June 28 2010

Key Points:

1. Electricity and petrol to rise on July 1. Windfall profits to government generators. Government still denying these profits.

2. The extra costs are not compensated for in Budget 2010. The ETS will take at least half of your tax cuts and superannuation increase.

3. Delaying the ETS would be more in line with ‘National’s principles’ on the ETS set out in its 2008 ETS policy, than implementing the scheme on July 1.

4. The EU ETS is not a justification for continuing with the NZ ETS; only 20 percent of EU trade is with countries that don’t have an ETS, whereas 85 percent of NZ’s trade is with such countries.

Speech:

Ladies and Gentlemen, thank you for the opportunity to address your meeting this morning.

Before updating you on National's Emissions Trading Scheme, may I briefly raise one other issue.

I am well aware that some of you will have incurred losses through the collapse of various finance companies. Since being elected I have led a campaign in Parliament to address some of the issues that contributed to those losses and I was successful in securing first Labour and Maori Party support, and then National's support for a Commerce Committee inquiry into finance company collapses.

I have also publicly announced my support for Lianne Dalziel's private member’s bill to get better compensation for those who lost through ING/ANZ.
That is why I was pleased with ANZ’s announcement last week that it had reached a record $45 million settlement with the Commerce Commission over the losses suffered by investors in ING’s Regular Income Fund (RIF) and Diversified Yield Fund (DYF).

While many investors will feel that a more substantial settlement should have been given, I feel happy for those ING investors who will receive additional compensation.

I congratulate the Commission on its investigation and the result it achieved. I particularly pay tribute to those members from the Frozen Funds Group who campaigned up and down the country for proper compensation from ANZ/ING, as I doubt such a settlement would have been achieved without their efforts.

Turning now to the Emissions Trading Scheme. I want to cover two main points this morning; first, I will outline what the ETS is and how it will impact on you. Second, I will take some time to respond to National’s allegations that I’m spreading ‘myths’ about the ETS, to use Nick Smith’s words.

WHAT THE ETS IS AND WHAT IT MEANS FOR YOU

On July 1 this year, the effect of National's ETS will be extended throughout the whole economy. The Treasury forecast that electricity will increase by five percent and petrol by four cents per litre. There will be another round of identical increases from January 1 2013 making a combined ten percent increase in electricity and eight cents a litre for petrol.

The Reserve Bank estimates that the ETS will push up inflation by 0.4 percent.

National argue that they have modified Labour's ETS. This is correct. Under Labour, we would already have had a ten percent increase in electricity from the beginning of this year. So while National argues that a five percent increase is not as bad as a ten percent one, ACT asks why we should have any increase at all.

The ETS operates by imposing a cost - or tax - on emissions of carbon dioxide given off from the burning of coal and gas to produce electricity. It will drive up the cost of producing electricity from these sources. However, because of the way our electricity market works, all generators will get the benefit of being able to charge the higher wholesale price of electricity.
Generators will be able to increase their price whether they incur the carbon cost or not and will make windfall profits as a result The Government doesn't want you to know this but I assure you it is true and that is why I am telling you.
In April of this year I was invited to speak to the Annual General Meeting of the Grey Power Federation in Christchurch. I think most members of the audience were both surprised and shocked by what they heard.

My predictions then of windfall profits have come to fruition. Just last month Mercury Energy and Contact Energy announced power increases of 3.3 percent and 3.2 percent from July 1, purely on account of the ETS.

While Contact's situation is different because it has a high proportion of gas fired generation, Mercury Energy's parent company, the Government owned Mighty River Power generates most of its electricity from hydro power stations along the Waikato River that you can see outside the window, as well as from geothermal power stations. It will incur relatively little carbon emissions cost.

Despite the fact that Mighty River Power incurs little carbon emissions cost, it gets the benefit of the higher wholesale price and realises it by increasing its prices to you, through its subsidiary Mercury Energy.

ACT forecasts that the total windfall gains to the Government from its three generators - Mighty River Power, Genesis Energy and Meridian - will be in excess of $150 million per annum from July 1. Worse still, the Government does not want to acknowledge to you, the consumers, that it is making these windfall profits. Regardless of whether these profits are returned as taxation, dividends or retained in the generating companies themselves, the Government continues to downplay its gains from the ETS. It repeatedly says in Parliament that its revenue from the ETS will be around $350 million per annum, when it is likely to be well in excess of $500 million per annum from July 1.

You may be surprised by this news, but ACT is the only party in Parliament that has been speaking out on this issue. Naturally the Labour Party - who would have enforced a ten percent power increase from January 1 - is silent.
You will be pleased to know however, that there is growing awareness of this issue. On May 28, just after the price increases were announced, 'The Dominion Post' printed a critical editorial of Mercury Energy's power price rise. It said:

‘Its price increase is not a matter of the company passing on increased costs to its customers, but of the company taking advantage of changed circumstances to inflate it's profit margins.’
Earlier this year the Prime Minister addressed your sister group, North Shore Grey Power, on the upcoming budget and speculation that there would be an increase in the rate of GST. He of course was at pains to point out that if the Government decided to increase GST to fifteen percent, superannuitants would be fully compensated through tax cuts and superannuation increases for the GST rise. Since that time we have now had the budget; as expected GST has been increased and there has been compensation.

As an ACT MP whose Party has a Confidence and Supply Agreement with National I can tell you that there are many very good things in Budget 2010. All income tax rates have dropped and the top marginal rate of tax is no longer such a disincentive to working hard and getting on in life. As a result of the tax cuts, around seventy-five percent of New Zealanders will have a tax rate no greater than 17.5 percent.

In addition, there are further incentives to save with a reduction in the top PIE tax rate to twenty-eight percent and a number of tax loopholes have been closed.

However, when the Prime Minister's North Shore speech was publicised earlier this year I was immediately suspicious as to whether or not the tax cuts would take into account the extra costs you will incur from the ETS. The Prime Minister was strangely quiet on that subject and I said so at your Federation AGM in Christchurch in April.

We now have the Budget and there will be increases in superannuation and all main benefits. However the budget says: ‘This will be sufficient to offset the estimated impact on prices due to the rise in GST.’

There you have it, Ladies and Gentlemen. You are being given just enough to be 'sufficient'.

On page seven the Budget gives the example of a retired couple who receive New Zealand superannuation; I quote:

‘A retired couple receive New Zealand Superannuation. They own their own home. Under Budget 2010 changes, they get a tax cut of $11.52 a week, plus an additional $10.12 increase in their New Zealand Super and pay $10.87 extra in GST to buy the same goods and services as before. Overall they are $10.77 a week, or $560.04 a year better off.’

My mother recently received a letter from the Prime Minister reciting the above example. I suspect most of you and hundreds of thousands of superannuitants around the country received it also. What that letter didn’t say, and what the budget didn't say, is that the retired couple used in the example will suffer extra costs on virtually everything they buy as a result of the government imposed ETS cost on electricity, gas and petrol and its flow on effect throughout the whole economy.

ACT estimates that you will lose around half of what the government purports to be giving you in the Budget. In other words, what Bill English has given you, Nick Smith is taking away.

So, in conclusion, the ETS is designed to and will increase prices for electricity and petrol in particular, with flow on effects for all other goods.

REBUTTING THE ETS MYTHS

Climate Change Issues Minister Nick Smith has repeatedly accused ACT and myself of misrepresenting the ETS. Recently, on TVNZ’s ‘Q+A’ show he went so far as to accuse me of spreading ‘myths’. Frankly, this is a bit rich. It has been Nick Smith and the National Party who have been misleading on this issue in a desperate attempt to justify their ETS. You and New Zealanders around the country are being fed false information on the basis of which you’re expected to make up your mind about the scheme.

Nick Smith claims New Zealand is not leading the world, because 29 out of 38 countries with Kyoto obligations already have an ETS.

Those 29 countries all operate under the European Union ETS (the 27 EU countries plus Norway and Switzerland). The EU ETS is not comparable to our ETS and certainly is not a justification for proceeding with it.

First, it is nowhere near as comprehensive as ours. Indeed, speaking to the first reading of the Climate Change Response (Moderated Emissions Trading) Amendment Act on September 24 last year, Nick Smith himself said that our ETS ‘will be the most comprehensive by including transport, industrial and energy emissions.’

Since then, Nick Smith has said that some EU countries do cover some transport emissions. I’ve asked the Parliamentary library to look into this; they could only find three countries. In the mean time, President Nicolas Sarkozy of France tried to introduce a petrol tax earlier this year, but had to give up the plan after voter backlash in a regional election.

Second, eighty percent of EU trade occurs amongst EU countries; therefore less than twenty percent of their trade will be exported outside the EU to countries whose producers don’t face ETS costs. By contrast, only fifteen percent of our trade is with the EU; that means eighty-five percent of our trade will be with countries whose producers don’t face ETS costs. In other words a much, much larger proportion of our industry will be at a competitive
disadvantage vis-à-vis their foreign competitors because of the ETS, than will be the case for European industry. Our ETS imposes a greater risk to Kiwi jobs and businesses, the source of the taxes that pay for your superannuation.

Nick Smith also overlooks the fact that our top four major trading partners, Australia, the United States, China and Japan don’t have an ETS. Former Australian Prime Minister Kevin Rudd announced earlier this year that the Australian ETS is off the table until at least 2013. We have since learnt that the new Prime Minister, Julia Gillard, was one of those lobbying for the delay. Therefore, it seems unlikely that the Australian Government’s policy will change on this front. The probability of an ETS making it through the United States Senate before their elections in November is fifteen percent. No one seriously thinks the Chinese will implement an ETS.

Nick Smith claims the cost of the ETS to the average household will be ‘only’ $3.17 per week. That is correct – if you only count electricity and petrol. However, when the Reserve Bank appeared before the Finance and Expenditure Select Committee on March 11, they told us that for every one dollar rise in the price of petrol and electricity there will be a seventy-five cent flow on effect to other costs. When these flow-on effects are taken account of, the $3.17 figure appears to be a considerable underestimate.

Nick Smith has also tried to undermine my credibility by claiming that ACT doesn’t believe in human induced climate change. Frankly, what ACT or I believe is irrelevant. The key question facing New Zealand at the moment on the environmental front is whether, given the lack of meaningful international action, anything we do as a nation will make even an iota of difference to the world’s climate. The answer of course is ‘no’. In the words of the Prime Minister’s Chief Science Advisor Professor Sir Peter Gluckman: ‘anything we do as a nation will in itself have little impact on the climate – our impact will be symbolic, moral and political.’

Finally, Nick Smith has said that National needs to proceed with the ETS to keep its pre-election campaign promises to New Zealanders. Yet, if one reads National’s 2008 ETS policy it quickly becomes clear that delaying the ETS is more in line with their election promises than implementing the scheme. Outlining ‘National’s principles’ the document says: The ETS ‘should not attempt to make New Zealand a world leader on climate change.’ By implementing the scheme we will be world leaders.

It also says ‘The ETS should be as closely aligned as possible to the planned Australian Carbon Pollution Reduction Scheme, with, where possible, common compliance regimes and tradability.’ Australia has scrapped its ETS; we should do the same.

Finally it said: ‘The ETS should have the flexibility to respond to progress in international negotiations rather than setting a rigid schedule. This way, industry obligations can be kept in line with those of foreign competitors.’ There has been no progress in negotiations and no other country has an ETS anywhere near as severe as ours. Industry obligations can only be kept in line with those of foreign competitors by delaying the ETS.

CONCLUSION

ACT has run a nationwide campaign against the ETS. Between us, Rodney Hide and I have held over 40 meetings up and down the country. Ordinary New Zealanders are not happy about the ETS. They see that the scheme won’t make an iota difference to the world’s climate and don’t see the point in having to pay more for their electricity, petrol and coal so that the National Government can make a ‘symbolic’, ‘political’ statement to the world.

Sadly, with only two days to go, it looks unlikely that the National Government will delay the ETS. That is a huge mistake on its part and very disappointing.
However, there is some light at the end of the tunnel. It looks likely that stages two and three of the ETS, which are scheduled to come into effect on January 1 2013 and January 1 2015 respectively, will be delayed. As the pressure on the Government from ACT and the public has increased, Nick Smith has repeatedly raised the threshold for continuing with those stages. That is a good thing, but it is not yet certain.

It is important that the pressure remain not only to delay stages two and three, but also to scrap stage one in the near future. ACT and I are committed to these goals, and will continue to work as hard as we can to achieve them.

If you are as concerned about this issue as ACT is, I urge you to contact the Prime Minister and tell him so. His email address is john.key@parliament.govt.nz, or you can write to him at John Key, Freepost, Parliament Buildings, Wellington.

In fact, I would urge you to email every member of the cabinet and better still, the entire National Party caucus. Their contact details can be found at www.parliament.govt.nz.

Thank you very much ladies and gentlemen for the opportunity to speak to you today.

ENDS

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