May 20, 2008

NZIER Analysis Of ETS Passes Peer Review

An independent review released today of NZIER’s analysis of the proposed Emissions Trading Scheme (ETS) finds that NZIER’s methodology is appropriate and that its conclusions follow logically.
Dr Brent Layton, Chief Executive of NZIER, said that “the review’s findings are in stark contrast to Hon David Parker’s accusation in Parliament last week that NZIER’s analysis has a ‘fundamental flaw in it’.”
The review was undertaken by Dr Adolf Stroombergen of Infometrics Ltd. Dr Stroombergen prepared the analysis of the economic impact of an ETS for the government.
Some of the differences between NZIER’s analysis and Dr Stroombergen’s work are caused by assumptions. “Economists always debate assumptions, but it is clear from the review that our assumptions are reasonable”, said Dr Layton. “What is important is that we understand the economic risks of an ETS and pick the best policy. Dr Stroombergen concludes that our economic analysis is a useful contribution to that understanding.”
Hon David Parker was also completely wrong to state that the NZIER work assumes that subsidies provided to agriculture would increase New Zealand’s overall GDP, and that this flies in the face of general economic theory. NZIER did not model a subsidy to agriculture, nor is it an assumption of the model. But it is not surprising that a tax rebate to the pastoral sector would have the effect of raising GDP given the many distortionary policies in place; a rebate could shift resources from the less productive non-tradable sectors to the more efficient export sectors, such as the pastoral sector.
“We were always confident in the rigour of our model and our analysis, not least because the underlying model is used all over the world, and was developed with the assistance of world experts in the field”, said Dr Layton. “The main point we are trying to get across is that moving ahead of our international competitors with an ETS would hurt the economy at little or no environmental benefit”.
The NZIER report, released on 30 April, estimated that by 2025 the proposed Emissions Trading Scheme would reduce GDP by $5.9 billion, reduce average household spending by $3000 a year and cost four times as much as if the Government simply purchased credits arising from worthwhile international projects to reduce emissions.
A copy of the review by Dr Stroombergen is attached to this media release. NZIER’s full report on the impact of the ETS is available at