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Carbon price may have to rise ten fold

Drivers face massive fuel cost hikes and a ban on petrol and diesel engine vehicles within 15 years, while farmers will have to radically change land use if New Zealand is to become carbon neutral by 2050. Bernard Hickey reports.

The Productivity Commission has proposed economic policy changes over the next thirty years to reach carbon neutrality that would be as big as the deregulation seen from the mid 1980s to the mid 1990s, including a potential 1,000 percent increase in the price of carbon, massive new tree planting and a 'feebate' scheme on vehicle imports.

That scheme would see buyers of old vehicles with big engines subsidising electric car buyers in a 10 to 15 year period before an outright ban.

"Decarbonising economies and societies underpinned for a century or more by fossil fuels inevitably means substantial change," the Commission wrote in a 409 page report. "It requires old technologies and even old industries to be replaced by new," it wrote.

Agriculture would have to join the emissions trading scheme and marginal sheep and beef farms would have to convert back to forestry at the same scale as the forestry-to-dairy conversions seen over the last 30 years.

The proposals are included in the Commission's draft report into the policy changes needed to achieve a low emissions economy. The report was commissioned last year by then-Finance Minister Steven Joyce, but was beefed up by Climate Change Minister James Shaw, who earlier this year asked for fresh analysis of what it would take to get to carbon neutrality by 2050.

The Commission focused its findings on the need for the carbon price to rise sharply to send the right investment and consumption incentives. It said the existing Emissions Trading Scheme (ETS), which currently generates a carbon price of around $20 a tonne, had done little to change NZ's emissions path, given it allowed the use of questionable overseas credits until 2015 and has not included agriculture.

Farming produces almost half of NZ's greenhouse gas emissions in the form of methane and nitrous oxide.

The Commission also noted a collapse in new forest plantings because the ETS and its incentives were not attractive to foresters, which had worsened the outlook because the carbon sunk into growing trees offsets about a third of NZ's gross emissions.

Gross emissions rose by 24 percent 15 megatonnes (Mt) of CO2e between 1990 and 2015. Net emissions rose by 63 percent or 22 Mt CO2e, reflecting higher gross emissions and a fall in the net amount of CO2 removed by NZ’s forests. This meant NZ's emissions had risen faster than most other developed countries over the past 25 years.

The Commission proposed reforming the ETS to set yearly quantity caps for the next five years, with clear signals about further restricting the quantity.

Its modelling suggested the price would have to rise from around $20/tonne currently to between $157 and $250/tonne by 2050 to achieve the necessary emissions reductions. That $20 price equates to around three cents a litre extra to the cost of petrol, so a tenfold increase would imply a 30 cent per litre increase. The Commission recommended the inclusion of Agriculture in the scheme, albeit supported by free allocation for a transitional period.

"During the transition, action to mitigate greenhouse gas emissions will require real and significant changes which will have disruptive and potentially painful impacts on some businesses and households," the Commission acknowledged.

"These changes mean that the shift from the old economy to a new, low-emissions, economy will be profound and widespread, transforming land use, the energy system, production methods and technology, regulatory frameworks and institutions, and business and political culture," it wrote.

"Policymakers will also have to make difficult and sometimes controversial choices in order to create a low-emissions economy where we will, overall, be better off. Given that delaying action will result in a more abrupt transition, they will also need to find a path forward that protects vulnerable people, and supports firms and households to adjust in order to make the most of the opportunities that will be on offer."

Vehicle imports

If adopted, the Commission's proposals would radically change the prices and types of vehicle imports. It proposed a 'feebate' scheme where high emissions vehicles were charged fees on top of the import cost, and then that money would be rebated to buyers of vehicles with low-to-no emissions intensity.

It raises the prospect of buyers of big, old used vehicle imports with big and inefficient engines paying extra fees to be passed on to buyers of plug-in electric imports. Buyers of the Ford Ranger, currently NZ's most popular new vehicle, would pay extra to subsidise the cost of Nissan Leaf imports.

The Commission suggested making the scheme revenue neutral to make it more politically acceptable. It also proposed new and used vehicle imports be required to meet rigorous emissions standards.

"NZ is one of a handful of developed countries without vehicle emissions standards, and risks becoming a dumping ground of high-emitting vehicles from other countries that are decarbonising their fleets," it wrote, adding it had asked for feedback on phasing out all fossil-fuel vehicles by a specified date.

Nearly all vehicles entering the fleet by 2030 would have to be electric vehicles for the bulk of the fleet to be all electric by 2050. That would suggest some sort of ban or block on petrol or diesel vehicles within 10 to 15 years.

Farming and forestry

The Commission recommended changes to the ETS to make it easier for forest owners to take part.

"Only a minority of eligible forest owners currently participate in the ETS, as many find participation too costly and risky compared to the benefits of earning NZUs. The amount and pace of new planting required is beyond what NZ has experienced over the past 30 years," it wrote.

But it also noted that forestry planting was only a short term solution given extra plantings would be naturally limited by the amount of land available after 2050.

The Commission said land use would have to change dramatically, with the conversion of marginal sheep and beef land to forestry at a scale similar to the massive conversions of forestry to dairy seen over the last thirty years, as well as a move from pastoral farming to horticulture.

Other changes proposed included:

-Extending the current waste disposal levy to all known solid waste sites and increasing it over time to encourage better waste management,

-Removing ongoing subsidies for using fossil fuels, such as concessionary tax deductions for petroleum drilling and R&D,

-Mandate financial disclosure of climate related risks,

-Allowing Fonterra to refuse new suppliers that could inefficiently increase the use of fossil fuels in milk collection and processing.

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