Published in the National Business Review of 8 February 2008

Business and energy interests have given the government a blunt 'get real' on the cost of its carbon neutrality policy, but Climate Change Minister David Parker has dismissed the group's economic analysis as "scaremongering."

Business Roundtable chief executive Roger Kerr says the government should be more open about the cost and implications of its policy of making New Zealand carbon neutral by 2050

The Business Roundtable and Petroleum Exploration and Production Association of New Zealand (PEPANZ) commissioned a report from Infometrics economist Dr Adolf Stroombergen, who had previously done work for the government's Emissions Trading Group.

His report models three scenarios including a business as usual case and concludes that the government's twin ambitions of carbon neutrality and a high rate of economic growth are mutually exclusive.

Based on the assumptions of an annual growth rate of 4%-5%and a shadow carbon price of $300/tonne, the model shows that the cost of the government's carbon neutrality policy would be $19 000 per household by 2025.

Electricity prices would double. Petrol prices would rise by 50% and carbon emissions would still be 40 per cent higher than 1990 levels.

The shadow price of $300mT factors in the (yet to be determined) trading price for carbon emissions and the cost of related policies such as ban on new thermal plant.

The actual international trading price of carbon may be only about $100/tonne. Some experts are talking of initial carbon prices as low as $20-$30 a tonne.

The price of carbon emissions is not the cost, Dr Stroombergen said in defence of the use of a high shadow price.

The modeling work also used an economic growth rate of close to 5%, the rate necessary to restore New Zealand to the top half of the OECD growth table. The Treasury is projecting growth of less than 3% per year and falling over the short to medium term.

Dr Stroombergen's earlier work for the government's emissions trading group used a growth figure of 2%-3%.

Climate Change Minister David Parker said the scenarios in the model were "way out of line with government thinking."

The government estimates that its carbon neutrality policies would reduce growth by 0.1% of GDP, although the Infometrics report says in a worst case scenario the fall would be as high as 11%.

"This report assumes the government will force New Zealanders to stop driving or using electricity by raising prices to exorbitant levels. The government has no intention of doing so," Mr Parker said.

Mr Kerr said the groups were not Kyoto skeptics, but "if the government wants to implement stringent policies with significant effects on the economy, it should be transparent about it."

"The goals of carbon neutrality and high economic growth are incompatible and the government's empty rhetoric about this is helping no one."