Agriculture should be exempt from an emissions trading scheme until the cost of measuring its emissions becomes more cost effective, according to a new report.
The report by consultants NZIER and Infometrics, commissioned by the Ministry for the Environment, advocates the introduction of a price on carbon, saying it would not "significantly affect New Zealand's potential growth rate".
But it would come at a cost.
With a world carbon price of $100 a tonne, New Zealanders' per capita income could fall by up to $2000, by 2025; but the report expected income per capita to grow from $38,500 in 2009 to $56,000 in 2025.
It recommended initially introducing a narrow-based carbon pricing system, either a tax or trading scheme, at a low domestic price.
The Government has committed to an emissions trading scheme (ETS), but was reviewing the policy to ensure it was fiscally neutral, balanced environmental and economic interests, and was aligned with Australia.
Under the ETS, industries and companies would be allocated New Zealand units (NZU) equivalent to one tonne of carbon.
If they reduced emissions they could sell surplus NZUs, if they increased emissions they needed to buy them to cover any shortfall.
Vulnerable sectors such as agriculture would be exempt for several years from being included in the ETS.
The report said an initial narrow-based scheme would send the necessary signals about the impact of greenhouse gas emissions, but at a lower economic cost than an all-industry, all-gases emission trading scheme with free allocation of carbon credits to help with industry transition, as proposed by the previous government.
But in the long run, as the rest of the world took action and technology improved, a "broad-based full price signal with no free allocation or exemptions is the least-cost way of meeting our post 2012 obligations".
The aim of climate change mitigation policies was to change producers' behaviour, but measuring those emissions had to be cost effective, and that was not the case with sectors such as agriculture, which accounted for 48% of our greenhouse gas emissions.
"If the transaction costs of measuring emissions outweigh the benefits of emissions reduction, the policy may not be net welfare enhancing," the report said.
The report also recommended allocation of carbon credits to competitive-at-risk sectors based on output.
This could be phased out as competitors adopted carbon pricing.
Climate Change Minister Nick Smith welcomed the report, saying it supported the Government's view that the ETS as proposed needed modifying and aligning with other countries.
But the Green Party said the report sent a message that an ETS came with little economic cost and the Government should get on with implementing it.
World adopting ETS to counter climate change, tomorrow's business pages.
