Published in the National Business Review of 9 November 2007

Business interests are divided over whether it is possible to reverse the government's policy on climate change and on whether it is therefore better to seek to slow down its implementation.

A report from economic advisors, Castalia, has called for a drastic rethink of emissions trading policy while an earlier report from the New Zealand Institute sought to slow down its implementation.

New Zealand is unique in seeking to develop an emissions trading scheme that covers all sectors of the economy and all six greenhouse gases and to have this largely in place by 2013.

The Castalia report was paid for by the Greenhouse Coalition, an alliance of energy intensive users. Spokesperson Catherine Beard said there had been a sea change in business attitudes just recently.

"The reaction to the government's announcement of its emissions policy was rather muted, but our businesses later saw that some of the key things they were seeking just weren't there."

Attitudes had hardened since the government's initial announcement on 20 September, and there was now discussion about whether it was possible to reverse rather than just revise the government's policy.

The Greenhouse Coalition believed the proposed emissions trading scheme "was just bad policy", Ms Beard said.

Business New Zealand is stressing that businesses not be "put at risk in the quest to lead the world in the area of climate change."

In its report the New Zealand Institute asked whether New Zealand should "aim to be a world leader with respect to reducing emissions, to move with the pack, or to do as little as possible?"

Its answer was that New Zealand should be a "fast follower" which was a call to slow down the implementation of current policy.

However the New Zealand Business Council for Sustainable Development, which claims the ear of many cabinet ministers, said it was against any slow down.

It said that "the Coalition's report gave no evidence to support continuing taxpayer subsidies for emitters - already available for some until 2025."

The lack of empirical evidence to support its conclusions was raised by critics at the launch of the Castalia report on Monday, but its author, Alex Sundakov defended his paper saying that it examined the assumptions of the government's policy in the light of known facts about the New Zealand economy.

He cited the belief that the use of resources would change as the price of carbon rose.
"In New Zealand industrial plant either operates at full capacity or it shuts down. Steel and cement plants do not operate at 60%-70% capacity.

"If you change the assumption from reduced output to no output the cost to the economy becomes much greater than the 0.3% of GDP forecast by the government's advisors."

He also questioned the assumption that adjustment costs were likely to be low. "Nothing in our experience of major transformation supports this. The adjustment costs are likely to be very significant, as we learned in the 1984 reform experience where the transition costs were thought to be low, but in reality were quite high."

He questioned whether it was sensible for New Zealand to adopt a policy that was out of line with international practice.

"If the assumptions don't hold it'll be a very costly policy with irreversible consequences. Firms will have migrated overseas by the time we realise that the policy isn't working," Mr Sundakov said.