Volume 6 – Number 1 – February 2010

Special Issue: After Copenhagen

Reducing emissions in New Zealand Two Cheers for Research after Copenhagen Terry Stokes 16 Phil O’Reilly 3 ACC the lessons from History The Copenhagen Climate Conference: Susan St John 23 It Still Takes Two to Tango Peter Neilson Free Allocation in the New Zealand 6 Emissions Trading Scheme A Critical Analysis REDD Progress at Copenhagen Christina Hood 30 Mark Belton 8 Electoral Finance Reform in New Zealand: International Emissions Policy and Agriculture A Need for a Conceptual Framework Paul Melville 11 Alec Mladenovic 37 A Momentary Lapse of Reason? Geoff Keey 13 – partly because national targets will lack stringency, and partly because there will be Editorial insufficient incentives for investment in green technologies. This issue of PQ includes brief perspectives on the Copenhagen conference from five Note contributors: Phil O’Reilly (the chief executive of Business New Zealand), Peter Neilson (the Volume 6 – Number 1 – February 2010 Welcome to this new issue of Policy Quarterly chief executive of the New Zealand Business (PQ). We hope you find the new format Council for Sustainable Development), Mark Policy Quarterly (PQ) is targeted at readers appealing and accessible. With the recent Belton (the managing director of Permanent in the public sector, including politicians and retirement and resignation of various academic Forests International, and a leading expert their staff, public servants and a wide variety of staff in the School of Government and the on forestry issues), Paul Melville (a policy professions, together with others interested in appointment and five new staff members, analyst with the Fonterra Cooperative public issues. Its length and style are intended we have taken the opportunity to refresh the Group) and Geoff Keey (the political advisor to make the journal accessible to busy readers. editorial board of PQ. Paul Callister remains on for Greenpeace New Zealand). As these The journal welcomes contributions of the board, and is joined by four new members: contributions highlight, the Copenhagen about 4,000 words, written on any topic Dr David Bromell, Dr Valentina Dinica, Dr conference was not a complete failure, with relating to public policy and management. Michael Di Francesco and Dr Mike McGinnis. I good progress on a number of important Articles submitted will be reviewed by am very grateful to those who have contributed issues – especially on measures to address members of the journal’s Editorial Board and/or their services to PQ in the recent past (i.e. deforestation and the establishment of the by selected reviewers, depending on the topic. editing and reviewing submissions) and those Global Alliance to address greenhouse gas Although issues will not usually have single who have offered to assist during the next few emissions from the agricultural sector. The themes, special issues may be published from years. problem, of course, will be how to maintain time to time on specific or general themes, I would also like to thank the School of the momentum on these issues if the wider perhaps to mark a significant event. In such Government Trust for its generous agreement negotiating framework remains highly cases, and on other occasions, contributions to fund the bulk of the direct costs of uncertain. may be invited from particular people. publishing PQ for the next three years. This This issue of PQ also includes contributions Subscriptions: The journal is available in PDF places PQ on a firm financial footing and on four other important issues. Terry Stokes, format on the IPS website: www.vuw.ac.nz/ips/ significantly reduces the extent to which the pq. Readers who wish to receive it by email the head of the School of Government, IPS will need to seek other sources of funding. should register as PQ subscribers discusses the relative weighting of research [email protected]. This service is free. As we enter 2010 and a new decade, and teaching in universities and suggests For all subscription and membership enquiries there is a plethora of important international changes to the performance-based research please e-mail [email protected] or post to and domestic policy issues confronting New fund (PBRF) in the interests of ensuring that Institute of Policy Studies, P.O. Box 600, Zealand. On the global front, critical issues applied research is not disadvantaged. Susan Wellington. include the regulation of financial markets, St John considers the recent controversy over Electronic Access: The IPS directs interested managing the large fiscal deficits that have the full-funding of accident compensation individuals to its website: www.vuw.ac.nz/ arisen in the wake of the financial crisis in late in New Zealand and argues that the current ips/index.aspx where details of the Institute’s 2008 and early 2009 (and the related risks policy framework is misguided. Christina publications and upcoming events can be of default in the case of certain European Hood evaluates the National-led government’s found. countries), and responding to the rise of China key change to the emissions trading scheme Permission: In the interest of promoting debate as an economic giant (including the related at the end of 2009, namely the shift from and wider dissemination, the IPS encourages issues of trade, exchange rate management historical grand-parenting of free units to an use of all or part of the papers appearing in and global economic governance). uncapped production-based allocation, and PQ, where there is no element of commercial Addressing the consequences of the UN questions the fiscal sustainability, equity and gain. Appropriate acknowledgement of both climate change conference in Copenhagen will environmental effectiveness of the new policy. author and source should be made in all also be high on the agenda. Plainly, progress Finally, in the context of the current review cases. The IPS retains copyright. Please direct was much less than many had hoped. of the legislation governing electoral finance, requests for permission to reprint articles from Accordingly, the immediate prospects of the Alec Mladenovic explores the philosophical this publication to [email protected]. global community successfully concluding a principles that should guide how democracies new, legally-binding multilateral agreement Editor: Jonathan Boston regulate the funding of political parties and (whether a Kyoto-plus or a new protocol) to Editorial Board: David Bromell, Paul Callister, electoral campaigns. Fundamentally, he argues Valentina Dinica, Michael Di Francesco, Mike take effect when the first commitment period that more attention needs to be given to the McGinnis and Jim Veitch under the Kyoto Protocol expires at the end principle of political equality, in particular ISSN: 1176 - 8797 (Print) of 2012 are now poor. In the medium-term, the norm of equal opportunities for political ISSN: 1176 - 4325 (Online) of course, much will depend on domestic influence. Volume 6, Number 1 – February 2010 policy developments in the US: if the Senate A variety of important policy issues Design & Layout: Aleck Yee eventually passes legislation establishing a will be canvassed in future issues of PQ, Production: Alltex Design comprehensive and effective emissions trading including the likelihood of special issues scheme, then there is a reasonable chance addressing the following subjects: regulatory of negotiating a satisfactory multilateral post- policy frameworks and the advantages and 2012 arrangement; but if not, then the days of disadvantages of a Regulatory Responsibility relying on multilateral approaches to mitigate Act; the funding and consequences of climate change look bleak. Instead, there may infrastructure investment; ethics and be no alternative but to rely on a bottom-up public policy; political finance and related approach, based on domestic, bilateral and constitutional issues; and health policy issues. regional arrangements. These are most unlikely Papers on other policy-related matters are, of Cover Photo © Kristian Buus / Greenpeace to deliver the level of emission reductions that http://www.greenpeace.org/new-zealand/ course, always welcome. many leading scientist consider necessary campaigns/climate-change if we are to avoid dangerous climate change Jonathan Boston

Page 2 – Policy Quarterly – Volume 6, Issue 2 – February 2010 Phil O’Reilly1

Reducing emissions in New Zealand after Copenhagen

The outcomes from Copenhagen were less definite than many not occupy a commensurate leadership role among developed nations, having hoped. The major disappointment was in not achieving an arrived at the conference without a clear internationally agreed CO2 reduction target, and everything position on emissions reductions. Without a domestic agreement on the else flowed from that, including not much progress towards issue, the US was not in a position to lead others on the global stage. Before the US international emissions trading. can take that role in the future it must pass domestic legislation to limit emissions, But there were some good outcomes. From The importance of food security was and with increased political opposition to a New Zealand perspective the progress also recognised. More generally, there were the Obama administration at home, this towards rules on land use was helpful. It is advancements in international thinking might not be easily achieved. imperative that rural landowners are not around relevant issues and a shared This does not mean we will never unnecessarily hindered by unsympathetic commitment to ongoing work. These are get international emissions trading. rules preventing them from changing all positive. There is a groundswell in favour of it in the use of their land from forestry to We also learned more about what many countries and some form of trade agriculture. would be required to get emissions trading emerging between at least some nations There was also a win for New Zealand operating among more countries. is likely in the medium term. So should in prompting the formation of a group To a certain extent this boils down we, as some suggest, do nothing about of countries prepared to undertake to future actions by the US and China. reducing emissions? research on science-led developments for Because of the strengths of their respective This would be wrong. Regardless of agriculture. This research is crucial for economies both of these need to be what is happening on the international New Zealand if we are to avoid our key involved to get other countries to sign up scene, it still makes sense to try and export sector being penalised because to any future international agreement. limit our greenhouse gas emissions, of animal emissions. We are all looking During the Copenhagen meeting China as a prudent precautionary measure – forward to some scientific breakthroughs assumed leadership of the developing prudent not only in terms of minimising that can help us minimise this impact. nations in attendance, arguing that they risk to the environment, but also in terms should not be subject to independent of ensuring an environmentally positive verification of their emissions reductions. brand for our exports. Phil O’Reilly is Chief Executive of Business New This position was rejected by developed This is the reason why the previous Zealand. nations, led by the US. However, the US did Labour-led government and the current

Policy Quarterly – Volume 6, Issue 2 – February 2010 – Page 3 Reducing emissions in New Zealand after Copenhagen

National government both framed emitted. major flow-on economic impact on every legislation for an ETS. Importantly, National’s emissions New Zealander. There is a great deal of difference trading scheme has a built-in review Obviously, another matter to be between the scheme legislated for by mechanism so it can be improved considered in the ETS review next year will the Labour-led Government and the according to changing circumstances. be whether its moderating mechanisms – one subsequently passed by the current Relevant circumstances include whether the carbon price cap and amount of free National Government. and how many countries are also adopting permit allocations – are adequate to offset Labour’s legislation would have emission reduction targets and moving to this competitive disadvantage. capped the quantum of free carbon price CO2 into their economies. The first The fact that the Australian ETS has permits available to businesses, imposing review will be next year. been put on the backburner will also need enormous costs on the productive sector. While there are clear advantages in to be considered by the review. There is Business NZ was extremely concerned National’s scheme in comparison with thus a need for some caution as the future at this prospect and committed a lot of the previous one, many businesses will shape of our ETS is considered. But we time and resources to environmental and still have some doubts about having an should not lose sight of the fact that there economic analysis and modelling to help ETS at all. In light of the failure of the are significant benefits to New Zealand’s ensure that these potential impacts were Copenhagen process to reach any shared actions to date towards reducing carbon widely understood. understanding on an early beginning to emissions. In particular, we were concerned that international emissions trading, this is Being able to attract consumers who any proposed scheme should have an understandable. want low-carbon goods and services intensity-based allocation method for free In Copenhagen’s wake, the New is extremely important. There is an carbon permits. Under this approach, Zealand scheme is one of only two enormously increased sensitivity among consumers all around the world towards the need to go easy on the environment There is an enormously increased sensitivity among by producing goods and services with the smallest environmental footprint consumers all around the world towards the need to possible. No longer confined to a small greenie fringe, this is now a mainstream go easy on the environment by producing goods and movement. Household shoppers, mothers, kids and more are all making services with the smallest environmental footprint their preferences felt. possible. The recent debate about palm oil in chocolate and use of palm kernels as feedstock is a good example of consumers refusing to accept a product they viewed as environmentally undesirable. at-risk enterprises would get a level of formal schemes in existence, the other Consumer groups can now influence protection that would increase or decrease being the EU’s. New Zealand’s scheme is customers almost instantaneously via the in step with production. In other words, significantly more comprehensive than internet. The ability for certain products under an intensity-based allocation the EU’s, in covering all greenhouses gases to be blacklisted all around the world method, enterprises would not be and all sectors including agriculture. within a matter of hours or days is a huge penalised for increases in productivity and Clearly, the lack of international power that can make or break a product economic growth would be encouraged, emissions trading partners is a key or a brand. rather than penalised as it would have problem for New Zealand’s scheme, and New Zealand producers have the been under Labour’s scheme. undoubtedly it will be high on the agenda opportunity to be ahead of the curve National’s scheme has incorporated in the first review of the scheme in 2011. and ensure their products are acceptable the intensity-based approach and also The main problem with having an ETS to this huge and growing market for has other features that reduce the risk to in advance of many others in the world sustainability. This is the context in which New Zealand enterprises. Notably, the is that it will impose a price on carbon we should view New Zealand’s steps so far price for carbon emissions will be limited within the New Zealand economy, with towards emissions reductions including to no more than $25 per tonne of CO2 there being no such additional cost in the our work towards an ETS. Of course, until the end of 2012. There will also be a economies of competitor nations. On an reducing emissions doesn’t begin and end further moderation of the price whereby enterprise basis, it means New Zealand with emissions trading – there are many permits to emit can be surrendered at a enterprises having to pay higher energy ways in which we can stem emissions rate of one permit for every two tonnes costs than competitor firms overseas from growth, all capable of bringing extremely of CO2 emitted – this effectively reduces 1 July this year. The significance of this can positive environmental branding for the carbon price cap to $12.50 per tonne hardly be overemphasised. It will have a us. The low-carbon challenge brings a

Page 4 – Policy Quarterly – Volume 6, Issue 2 – February 2010 number of difficulties but many of these schools and tertiary education institutions The Copenhagen conference failed will also have the effect of sharpening our and will need to ensure that we have to get an agreed reduction target or abilities and our wits. enough science graduates and enough international ETS in the short term, but What will we need to be able to take opportunities for them to contribute and for the long term it has signalled that the advantage of the opportunities furnished innovate. nations and consumers of the world care by this change in customer desires? These are areas where as a nation we greatly about environmental sustainability. Key factors will be innovation, science, have quite a bit of work to do. And for How New Zealand producers react to that technology and skills. These aren’t things individual businesses, adaptability will be signal will make a big difference to our that come in a box - they are the outcomes important. Businesses that will succeed economic sustainability. of a good education system and good best will be those that can adapt, adopt science and innovation frameworks. new technologies, and create new products We will need to focus hard on the and services that are fit for new consumer kinds of skills that come out of our high desires.

Are you an officer or manager who needs to critically evaluate data, evidence and reports?

Evidence for Policy and Decision-Making When: 18 & 19 March, Wellington Course leader: Dr George Argyrous – University of New South Wales Guest presenter: Geoff Bascand – Chief Executive, Statistics New Zealand

Evidence for Policy and running research projects. While the workshop Decision-Making is designed for touches upon the way that evidence is used in public sector employees who decision-making, the emphasis is on the way that need to use or critically evaluate the evidence base for decision-making is built and evidence that informs policy and can be critically evaluated. decision-making, or who may The workshop will be invaluable to officers and need to commission research for managers across a broad range of departments these purposes. Its emphasis is and agencies. It will appeal to those in a policy not on the technical aspects of research and role but also managers in an operational or service analysis, but rather on broader issues. These issues delivery role who need to critically evaluate data, include: the relative strengths and weaknesses of evidence and reports. different decision-making frameworks; the perils and pitfalls of quantitative analysis; and how to best Places are limited, REGISTER NOW manage an evidence gathering project, especially when it involves the engagement of private consultants. For more information or to register please contact Executive Workshop Coordinator Lechée Donato on The workshop will provide a high level of practical training that will enable the participants to sharpen +61 3 9285 9116 or [email protected] their critical skills and make the best use of the many different options available in interpreting evidence and www.anzsog.edu.au ANZSOG Executive Workshop

Policy Quarterly – Volume 6, Issue 2 – February 2010 – Page 5 Peter Neilson

The Copenhagen Climate Conference It Still Takes Two to Tango

When we were 16 or 17 our girlfriends were always keen on know what it could best offer. Therefore, no one else had a reason to put up their going to a dance but the males were usually very reluctant best offer. While Copenhagen was not as dancers. By about 10 o’clock two couples would finally make successful as it might have been, it did it onto the floor and then everyone would be up for dancing. represent some solid progress: • All of the major emitters were engaged By 12 o’clock the band would be packing up and everyone in finding a solution, a big advance on would be saying we should have started earlier. the Kyoto Treaty. • There was broad agreement that the world should aim at a maximum At Copenhagen most of the countries ‘dead letter’ agreement back to the United increase of average global temperatures present had a better offer for emission States. US agreement to a climate change of 2°C (even if the Group of 77 of reductions to table, but it needed the treaty requires a two-thirds majority less developed countries would have United States and China to go onto the agreement of the US Senate, unless fast- preferred 1.5°). dance floor to really get the party going. track approval legislation is passed, as • $100 billion per year in finance from The US, while offering to help contribute has been done for trade negotiations developed countries to help less to $100 billion a year in assistance from in the past. When the Kyoto Treaty was developed countries adapt to climate 2020 for least developed countries facing negotiated, the US delegation headed by change has been agreed from 2020, the full impact of climate change, did not Al Gore raised expectations that the US along with opening to scrutiny the move beyond an emissions reduction would be an active participant in reducing emission reduction performance of all target of 17% below 2005 levels by 2020. emissions. The Clinton administration countries with commitments. This reduction is in the Waxman Markey did not submit the Kyoto Treaty to the The sting in the tail is that achieving Bill passed by the House of Representatives Senate because it knew it would not be the 25%–40% emission reductions in 2009. supported. President Obama’s offer to needed to hold temperature rises to the One of the first things US climate the Copenhagen talks was not so good agreed 2°C will require all developed change negotiator Todd Stern said when that it would require China to respond or countries, including New Zealand, to appointed was that he would not take a the European Union and other developed increase their current emission reduction countries to increase their offerings. targets. Current emission cut offers on the New Zealand and other countries at table fall 4 billion tonnes short of the level Peter Neilson is Chief Executive of the New Copenhagen were mandated to lift their scientists advise will be needed to have Zealand Business Council for Sustainable offerings if a US–China agreement only a 50% chance of achieving the agreed Development. He attended the COP15 climate with sufficient ambition was made. The temperature cap. change talks at Copenhagen as a member of the delegation of the World Business Council for Copenhagen conference came about a The biggest change since 2005 is who Sustainable Development. year too early for the US administration to is now relevant to the debate. Previously it

Page 6 – Policy Quarterly – Volume 6, Issue 2 – February 2010 was the EU and developing countries. Now, industries, will need to persuade their other developed economies. Consumer for the first time the US, China, India and constituents that they will not be awareness of the environmental impact Brazil are taking formal responsibilities. adversely affected by an agreement on of goods and services through the The other major emitting bloc, the EU, climate change or the introduction of an whole supply chain will grow. The US is is also prepared to cut further once emissions trading scheme. particularly keen on finding the cheapest the emitting heavyweights make more So the debates, in New Zealand and possible ways of mitigating and cutting ambitious reduction commitments. abroad, over the extent of emission cut emissions and so will have a reasonably The reality is that while we have commitments and how to achieve them, open regime for importing emission huge sympathy for the issues faced by so well canvassed in the past year here, will reduction offsets from anywhere in the the less developed nations from climate be had again.Importantly, they are going world. change, they have little to trade at the to take place now within the required At Copenhagen in December I listened table. Developed countries – and the fast context of the agreed global target the to the US secretary of agriculture speak developing nations – have the greatest scientists tell us is necessary. Through all of agriculture, while responsible for 7% potential to change their emissions this New Zealand needs to take care not of the US emissions problem, being a profiles and have the biggest share of total to lose some significant gains made at potential source of 20% of the country’s emissions. Copenhagen. solution. He sees this coming through So what happens now? changes in land use, biosequestration and • Countries will put their emission soil carbon.The New Zealand initiative cut commitments on the table by 1 for a global research partnership to find February 2010, and list what they are ... the new global clean- ways of reducing agricultural emissions going to do to mitigate and adapt economy market will be offers us the potential for new export (with these pledges being subject to industries built around new mitigation review, reporting and verification). very large and potentially and adaptation technologies, such as an • The US emissions trading scheme law inoculation to reduce methane produced will probably pass the US Senate in very profitable. by ruminant animals. the first or second quarter of this year Clearly, transport fuels for aircraft and – a vital part of securing significant shipping, important to New Zealand, are commitments from the major emitting going to be part of the new global agreement and developing nations, including the The draft agreement text, although still – and this will result in businesses striving US, European Union, China, India and to be signed, will deliver us the benefits of for greater efficiency, using new technology Brazil. flexible land use. If the draft text holds and more environmentally friendly fuels. • A more comprehensive world agree- – and no one exercises an unforeseen Skilful marketing will also be needed. In ment should be negotiated this year, veto – then we will be able to harvest Copenhagen there were protesters calling probably in time to be put before trees planted before 1990 and replant on for the world to go vegetarian or vegan, the US Senate for ratification after another site without incurring a carbon claiming this would cause fewer emissions mid-term elections in November. penalty. There is also recognition that than producing food from animals. Alternatively, President Obama might carbon is embedded in wood products While intuitively obvious yet factually get fast-track approval powers, as have and does not all return to the atmosphere wrong, the ‘buy local’ and ‘food miles’ been given previous presidents for on felling. campaigns have to be addressed.There is trade negotiations. Our historical land use flexibility a risk that simplistic slogans will be used One of the biggest steps which must be advantage needs to continue. For example, to frame the debate, with people thinking taken before the end of 2010 is to persuade at current meat and wool prices many ‘I care, therefore I’m doing something’ if senators and congressmen from the US farmers are finding it more profitable governments do not take action. Midwest to increase their ambitions to to grow trees. For others it will mean a However, as a result of the widely reduce emissions. President Obama has switch to dairying or other production supported new agreement, the new global been careful to move no further than while replanting forests on marginal land. clean-economy market will be very large what the US Senate is likely to support. These proposals are not a potential veto and potentially very profitable. Herein lies The aim this year is to have a legally issue at the moment for any of the major a significant opportunity for government, binding agreement, ratified by the Senate players. However, we need to be vigilant researchers and business to leverage this unless otherwise authorised. While there to ensure it remains that way, even if wild together in the national interest. is considerable enthusiasm for action on cards are played by other nations during climate change on the east and west coasts the negotiations. of the US, each state has two votes in the So what are the business implications? Senate. The senators from Midwest states, There will be a huge market in abatement which have a high dependence on coal, technology to cut emissions in the US, agriculture and traditional smokestack China, India, Brazil, the EU and in the

Policy Quarterly – Volume 6, Issue 2 – February 2010 – Page 7 Mark Belton

REDD Progress at Copenhagen

While there has been widespread grief about the stalled within the UNFCCC, when agreement was reached to launch a two-year initiative UNFCCC (United Nations Framework Convention on to examine the potential of REDD. This Climate Change) process following COP15 at Copenhagen, subsequently lead to the decision at COP 13 to include a somewhat expanded there were some areas of positive progress.1 One of the most concept of REDD, so-called REDD-Plus, in the Bali Action Plan on mitigation notable was in the development of agreements on reducing strategies, in preparation for anticipated emissions from deforestation and forest degradation agreements at Copenhagen. At Bali the findings of the Fourth Assessment (REDD). REDD was excluded from the Kyoto Protocol Report of the Intergovernmental Panel on Climate Change were presented and because at the time the policy and methodological issues were rainforest destruction and degradation considered too difficult to resolve. was identified as accounting for as much as 17.3% of annual global emissions – in An object lesson on the importance of forests and forest peat soils. As much the order of 8 giga-tonnes per annum. of reducing emissions from tropical as a third of global CO2 emissions during However by 2008-2009, in the midst rainforest destruction occurred in the this extreme climate event in 1998 could of a global recession, reduced drivers year following the Kyoto COP 3 meeting, be attributed to destruction of tropical of deforestation, more effective actions when a major El Niño event which spread forest. by rainforest nations to counter illegal across South East Asia caused severe It took eight years, until COP 11 in rainforest removals (especially by drought, widespread fires and destruction Montreal, for REDD to regain traction Indonesia and Brazil), and in the absence of a major El Niño event, emissions from destruction of forests may have dropped Mark Belton is Managing Director of Permanent Forests International. He attended the COP Bali and to as low as 10% of the global greenhouse Poznan conferences with the New Zealand government delegation and the Copenhagen conference as a guest of Victoria University of Wellington. Permanent Forests specialises in the origination and gas (GHG) emissions. I mention this wide design of environmentally and socially sustainable carbon forestry projects. Projects worked on have range in rainforest emissions to illustrate included large-scale forest sequestration programmes in New Zealand and combined afforestation their huge variability, and the complexity and REDD programmes in the rainforest regions of the Brazilian Amazon and South East Asia. Permanent Forests also brokers ‘high-quality’ forest offsets to both voluntary and Kyoto markets. of factors involved, and the challenges that lie ahead for design of effective

Page 8 – Policy Quarterly – Volume 6, Issue 2 – February 2010 REDD methodologies, particularly the was agreed upon by the Subsidiary the social responsibility, sustainable determination of national baselines. Body for Scientific and Technical Advice development and conservation goals To halt destruction and degradation (SBSTA) and subsequently adopted included. The arbitrage opportunity for of tropical rainforests is unquestionably by the COP. Its key decisions included profit between generation cost and on- of critical importance to maintain their recommending that historical emissions sale value in carbon markets, and the huge carbon stocks and to conserve provide the baselines for REDD with level of regulatory surety (de-risking) evolution’s most outstanding terrestrial adjustment for national circumstances, will determine the scale of private sector ecosystems. REDD provides a unique and recognition of the need for full and financing and engagement. Developing opportunity for placing a sufficiently high effective engagement with indigenous countries hosting REDD national fund- value on intact rainforest ecosystems so as peoples. The issue of accounting at based programme can be expected to to beget a multitude of actions for their a national or sub-national (project- charge fees or levies on their carbon conservation. In this regard the challenge based) level was covered by providing for exports. The alternative (of private is to develop policies, methodologies establishment of ‘robust and transparent project-based approaches) risks transfer and regulations that will facilitate pricing scams that would dwarf those the considerable financial transfers that have long shamed the tropical timber required to support these actions while trade, whereby very little of the value of simultaneously achieving other desired The three-page the rainforest product, in this case carbon outcomes, notably sustainable economic offsets, remains in the country of origin, development and nature conservation, Copenhagen Accord set the greater part ending up in offshore the defining elements that make up an objective of limiting accounts in tax-efficient jurisdictions. REDD-Plus. Developing countries have become REDD is particularly difficult global warming to a highly sensitised to economic neo- territory to navigate and thus far much colonialism, whereby their remaining of the path-finding work has been maximum of 2°C, but did rainforest assets risk being permanently undertaken outside the UNFCCC, in the not specify any emission locked up under REDD conservation voluntary market, and through REDD agreements – effectively a loss of capacity-building initiatives such as reduction targets. sovereignty – while the wealth generated the UN-REDD programme, the World from REDD offsets is realised elsewhere. Bank Forest Carbon Partnership, and However, the accord Hence the emergence of the ‘national by countries such as Norway (support made a firm financial funds’ approach, championed by Brazil of Brazil’s Amazon Fund) and Australia with its Amazon Fund. (REDD partnerships with Indonesia and commitment requiring In the absence of a Kyoto successor Papua New Guinea). In the circumstances agreement, the sub-group agreements of ‘catching up with the play’ on REDD, developed countries to on REDD will remain stranded and the COP 15 sub-groups working on facilitate the provision largely ineffective. It is possible that policy and methodological agreements the UNFCCC process has reached an made significant progress. of US$30 billion to impasse that cannot be breached, at least The ad hoc working group on in the urgent time-span required to reign cooperative action (AWG-LCA) drafted developing countries in GHG levels. Copenhagen forcefully a policy agreement that provided for demonstrated a ‘new play’ at the table REDD-Plus mitigation actions (and over 2010–2012 ... of climate change politics, and while various non-REDD initiatives) to be 120 heads of state equivocated under the funded under a proposed climate facility. UNFCCC process, former outsiders, the The draft reached the final stages of national forest monitoring systems, and US and four major developing countries preparation with minimal unresolved if appropriate, sub-national systems as (China, India, Brazil and South Africa) (bracketed) text; however, its completion part of national monitoring systems’. by-passed the old Kyoto club nations and was thwarted in Copenhagen’s final The sub-text on inclusion of sub- delivered the Copenhagen Accord ‘fait chaotic days. The AWG-LCA draft national systems ‘if appropriate’ is accompli’. prepared the ground rules for financing prescient of how project-based REDD The three-page Copenhagen Accord REDD-Plus from developed countries, initiatives might be provided for. Private set an objective of limiting global and between the lines appears to have left sector interests have the potential to warming to a maximum of 2°C, but room for private funding. Unfortunately, deliver massive funding for REDD, did not specify any emission reduction detail on ‘who is to pay, how much, when and to deliver innovative designs in targets. However, the accord made a and how’ was not mapped out, and seems pursuit of the very real potential for firm financial commitment requiring still a long way from being resolved. large-scale and low-cost generation of developed countries to facilitate the A text on REDD-Plus methodologies REDD project offsets, albeit with all provision of US$30 billion to developing

Policy Quarterly – Volume 6, Issue 2 – February 2010 – Page 9 REDD Progress at Copenhagen

countries over 2010–2012, increasing to trade system may not be supported in the mitigation strategy. In the absence of US$100 billion per annum by 2020, to Senate. It is notable that the US cap-and- a global agreement, it is almost certain help them reduce emissions and adapt. trade design provides for up to a billion that REDD will be part of bilateral or REDD funding is provided for within offsets per annum to be sourced offshore, regional initiatives. While international this financial commitment. a clear preparation for massive inflows of negotiations continue, REDD capacity- REDD was also strongly endorsed in low-cost REDD credits. This would serve building initiatives will continue in the accord text: to reduce the entry cost of a US cap-and- concert, as will REDDís involvement in trade system and help appease major voluntary markets. By the time post- We recognize the crucial role of emitter industries. The ability to harness Kyoto compliance markets are activated, reducing emissions from deforesta- REDD has therefore become critical to either under a new international tion and forest degradation and agreement or alternatively by way of the need to enhance removals of domestic cap and trade regimes in the greenhouse gas emissions by forests US and Europe, REDD programmes in and agree on the need to provide By the time post- the major rainforest countries should be positive incentives to such actions ready to contribute. through the immediate establishment Kyoto compliance New Zealand is already contributing of a mechanism including REDD- globally to REDD by virtue of its log plus to enable the mobilization of markets are activated, and wood product exports. These and resources from developed countries. either under a new other managed forest wood supplies The accord (unlike the SBSTA text) substitute for wood that otherwise would gives explicit recognition of the need international agreement have to be sourced from the worldís for GHG removals by forests, making or alternatively by way primary forests. At this time there is room for inclusion of afforestation no price recognition for this; however, and reforestation (A/R) sequestration of domestic cap and opportunities could arise in the future, alongside REDD. This is critically with developing countries linking their important because demand for fuel trade regimes in the REDD programme with wood imports wood and timber is a major driver of de- US and Europe, REDD to specifically address leakage issues. forestation, and in the absence of supply- The New Zealand government should substitution from A/R programmes programmes in the major be preparing the ground for bilateral and developing countries have no hope of regional agreements to enable REDD achieving forest conservation through rainforest countries units to enter the New Zealand ETS, ‘stand alone’ REDD programmes. It is thereby providing New Zealand emitters instructive that New Zealand was only should be ready to with access to offsets in the lower-cost able to implement sustainable harvesting contribute. range, whilst supporting constructive of indigenous forest with the passage of outcomes in developing countries with the Forests Amendment Act 1993, and respect to their indigenous people, finally choke-off native forest harvesting. sustainable economic development and This was only possible because by this rainforest conservation. time a growing surplus of wood from our the US aspirations to introduce a cap- 1 I would like to thank Bryan Smith for his helpful comments planted forests rendered native timber and-trade scheme. Interestingly, the in preparing this paper. economically insignificant. Kerry-Boxer Bill provides for a country With the Copenhagen Accord the fund approach to REDD financing and US has taken on the mantle of global explicitly excludes direct project-based (co)–leadership on climate change, approaches. potentially sidestepping (and knee- The USís suitability for leadership is capping) the UNFCCC process. The US’s also undermined by it having the lowest focus is very much on what it can achieve 2020 emission target (and second highest domestically, then ‘internationalising’ per capita emissions levels) amongst the those actions. However, it remains to developed economies. be seen whether the US can sustain a Notwithstanding the difficulties leadership role, given the swing against ahead for reaching an effective global the Democrats ahead of the mid-term agreement on climate change, under elections in late 2010, and the now either the UNFCCC or some grouping very real risk that the Kerry-Boxer Bill of the worldís leading economies, REDD containing the proposed US cap-and- has clearly become accepted as a key

Page 10 – Policy Quarterly – Volume 6, Issue 2 – February 2010 Paul Melville

International Emissions Policy and Agriculture The Copenhagen climate conference is now history and there is presently some debate on what the conference achieved and what the events that occurred there will mean for the future of international climate change negotiations.

Most reflections on Copenhagen have the alliance will improve the global co- which will co-ordinate research under focused on the apparent inability of the ordination of funds spent on agricultural different work streams, such as pastoral conference to make sufficient progress emissions mitigation research. It is farming, rice farming and intensive towards a legally binding treaty. These well recognised that, in order to reduce livestock. We also understand that there reflections perhaps do not recognise global emissions to levels recommended will be no commitment to give money to the efforts under way outside the main by the Intergovernmental Panel on a central pool, but rather members will negotiating focus to address issues of Climate Change, global agricultural have the ability to fund individual projects importance to the pastoral sector. emissions must be managed. It is also as they see fit. We support this proposal as It was hoped that the conference well recognised that current mitigation it allows members to retain control over would establish a work programme on options can only make a small dent in the projects they are financing. The end agriculture. Unfortunately this was not agricultural emissions. Meanwhile, world result should be a stronger flow of funds finalised despite widespread support. demand for food production continues to agricultural mitigation research, and However, New Zealand was successful in to grow. To solve this challenge, there better use of those funds due to a greater launching a global research alliance on is an unquestionable need to research level of co-ordination between nations. agricultural greenhouse gases. new methods to abate greenhouse gas emissions from agriculture. Agricultural work programme Global alliance Fonterra is supportive of the formation There are a number of issues that are The announcement of the global alliance of the global research alliance and looks unique to agriculture within international was an important achievement from forward to continuing to work with policy to reduce greenhouse gas emissions. Copenhagen, albeit separate from the the government in funding the existing For example, there is a crucial need to official UNFCCC (United Nations Pastoral Greenhouse Gas Research maintain food security while reducing Framework Convention on Climate Consortium. emissions; limited mitigation options Change) negotiations. Formation of Details of how the global alliance will are currently available to farmers; and function will be decided at the inaugural there is a need to develop tools that more senior officials’ working meeting of the accurately measure emissions at their alliance, to be held in Wellington in April source (rather than aggregating emissions Paul Melville is a sustainable dairying policy 2010. New Zealand negotiators tell us at the food processor level). analyst at the Fonterra Cooperative Group. there will be a number of research groups The issues facing agriculture are

Policy Quarterly – Volume 6, Issue 2 – February 2010 – Page 11 Copenhagen and Agriculture

evident by having a quick look at the a cap on global emissions and reduce units is capped until the end of the Kyoto domestic emissions trading schemes this over time, we cannot simply force period (December 31, 2012). After this currently being developed in Australia agricultural producers to cut emissions time participants will need to source and the United States, as well as the at any cost. As the minister responsible units from various market mechanisms. emissions trading scheme under way in for international climate change negotia- As limited direction has emerged about tions, Tim Groser, has said, ‘If, in the area the characteristics of a post-Kyoto of livestock production, “mitigation” framework, this makes it difficult for simply means “cut production” – we do participants to have any cost certainty Agriculture needs to not have a sustainable way forward.’1 for emissions liabilities post-2012. For be included in global Some will argue that food security example, beyond 2012 we do not know concerns are unavoidable once the reality how many units our government will emissions policy but of climate change is faced because, if have to auction, or what international agricultural emissions growth continues markets will be available to us to source it needs to be in a way unabated, the negative effects on third units. that seeks to balance world nations from climate change may The New Zealand emissions trading be even greater than those from reduced scheme was largely designed assuming the twin global issues food production. This is one of the a Kyoto-type framework would operate. reasons a work programme is needed: This may yet be a valid assumption. of food security and we cannot simply ‘cut production’, but The ETS wisely allows for reviews we can equally not simply continue with every five years, with the first in 2011. If climate change, ‘business as usual’. Agriculture needs to international negotiations for a second be included in global emissions policy commitment period have not concluded but it needs to be in a way that seeks to by the time of the review, there may be balance the twin global issues of food a strong argument for conducting a security and climate change. second review of domestic policy once negotiations are finalised that can allow Europe. None of these countries treat Effect of delay on Fonterra for emergent international developments agricultural emissions in the same way Many commentators have noted to be reflected in the New Zealand ETS. that they treat smoke stack emissions. correctly that if the USA and China reach As we look back on Copenhagen, By including agricultural emissions an agreement outside the UN process it there remain many unanswered in a separate work programme, the will provide direction to the negotiations questions. Hopefully the path forward international community can begin to and increase the possibility that an will become clearer in the coming address those issues that have led to the international treaty will be agreed to. A months. Fonterra understands that New disconnect between the all-gases all- USA-China agreement itself may hinge on Zealand negotiators had little control sectors approach of the Kyoto Protocol the ability of the US to pass clean energy over the events that led to the lack of and the ‘fossil gases only’ approach of legislation currently being considered in progress towards agreement on a post- most governments. the Senate. Until these things occur, it is Kyoto framework at Copenhagen, but we In addition, it is important that a hard for member nations to commit to recognise that inroads have been made work programme quantifies food security reductions. on issues important to New Zealand and concerns to ensure that, in attempting Fonterra recognises the global we commend our negotiators for this. to address climate change, the global importance of this current phase of 1 Tim Groser, New Zealand statement to the UN climate community does not negatively affect negotiations. However, this phase also change conference high-level segment, 12 December the world’s most vulnerable people by raises many questions for Fonterra. 2008. reducing their access to food. While Under the New Zealand emissions trading international agreements need to place scheme (ETS) the price of emissions

Page 12 – Policy Quarterly – Volume 6, Issue 2 – February 2010 Geoff Keey A Momentary Lapse of Reason?

What did the person on Easter Island say when cutting down capitals to consolidate text and come to the compromises needed to make progress. the last tree? That was a question posed to US academic This lack of a mandate led to the 200-page Professor Jared Diamond by a student in a lecture on how text with its thousands of brackets that negotiators faced at Copenhagen. societies appear to knowingly overshoot their resources. The two ad-hoc working group chairs were able to take the initiative He referred to the incident in his book Collapse: why to consolidate the text only after the civilisations choose to fail or survive, which describes a threat of a further Danish text emerged at Copenhagen.Sadly, this effort was string of societal collapses as a result of failing to address sabotaged by the United States during the environmental problems. process of handing over the negotiating text from the working group on long-term Professor Diamond’s book ought to be compulsory co-operative actionto politicians.The US ambushed the hand-over process with reading for all the negotiators and politicians and their demands and refused to allow the hand- advisers involved in the climate negotiations because they over to occur until its demands were met. After 10 hours of stalemate, the US got its are repeating errors Diamond identified in his book: wrong way, opening a retaliatory floodgate of demands from other countries. The effect values, poor strategic choices and denial.Copenhagen was so of this was to destroy the practicality of disturbing precisely because the world’s leaders know they the negotiating text. New Zealand’s own strategy was part face a serious threat to humanity and yet failed to properly of the problem. New Zealand failed to address it. meet the commitment it made in Poznan by delaying announcement of its target. To understand why Copenhagen failed, it incompetent Danish chairing and an Then, when asked to provide information is important to look behind the publicly impracticable negotiating text – to the on the proportion of its target that would visible and immediate causes – such as underlying reasons behind the failure. be met through offsetting, forestry or domestic emission reductions, New Why was there a 200-page negotiating text? Zealand refused, saying that there were During the 2009 UNFCCC (United too many uncertainties to provide that Nations Convention on Climate Change) kind of information, despite Environment Geoff Keey is the political advisor for negotiations many countries, New Zealand Minister Nick Smith giving projections Greenpeace New Zealand and was a member of included, seemed unready to negotiate. about the emissions trading scheme in Greenpeace’s international political team at the climate change negotiations throughout 2009. Negotiators lacked a mandate from their Parliament.

Policy Quarterly – Volume 6, Issue 2 – February 2010 – Page 13 Diversity and Democracy

Developing country concerns about comparability approach of responsibility and capability appears to have slipped off the agenda have been exacerbated by the low level of ambition entirely. Developing country concerns about of developed countries, in terms both of numerical comparability have been exacerbated by the low level of ambition of developed targets and the relative amount of domestic countries, in terms both of numerical emission reductions versus offsetting through clean targets and the relative amount of domestic emission reductions versus development and land use, land-use change and offsetting through clean development and land use, land-use change and forestry(LULUCF). forestry(LULUCF). Offsetting and forestry imply that developed countries New Zealand’s best contributions in countries appears based on its concern are deferring structural change to their 2009 were probably when negotiators about the level of per capita emissions economies and developing countries are were in UNFCCC chairing roles, rather developing countries would be allowed concerned that offsetting will mean that than implementing government policy. under a global goal of 50% cuts by 2050 cheaper abatement in their countries will The underlying problems with the and a developed country goal of 80% be sold to developed countries, leaving negotiating texts and the lack of progress cuts by 2050. China’s assessment is that them with considerably tougher emission relate to three main issues.The new this would allow developed countries to reductions when it is their turn to take US administration’s failure to make pollute at twice the rate of developing on unilateral targets. progress in the Senate on climate change countries. Put bluntly, why would China New Zealand’s approach of having a legislation has meant the US negotiators willingly agree to a long-term path that 50% reduction by 2050 and relying almost were not ready to strike a deal. This fed allows its strategic competitors to pollute exclusively on offsetting and forestry sets into the wider lack of ambition from at twice the level of its own citizens? a particularly bad example. developed countries (on both finance and Long-term comparability, rather than Developed countries, for their part, targets). This in turn fed into the widely external verification of its emissions, may are facing political pressure as firms in differing views of what constitutes a fair be the real bottom line for China which their countries compete with firms in distribution of effort. might have conceded verification in developing countries like China and Added to this mix was a marked shift Copenhagen if it had received something India.The opaque political system in in power towards China and its allies in in return from the US. However, without China exacerbates concerns within the BASIC group of countries (Brazil, the backing of Congress, President developed countries that claimed China, South Africa and India). Obama had nothing to offer. emission reductions may not be real. The BASIC countries are now Ultimately, comparability goes to the The emergence of China consolidating their position by proposing core of diplomatic gaming at the climate Along with the rest of the BASIC group, to fund adaptation for vulnerable change negotiations. Political leaders are China is a now a dominant player countries, taking the diplomatic initiative acting like the proverbial farmers in the in climate change. Rising emissions from developed countries. ‘tragedy of the commons’: unless they and a strong economic position have show leadership to put aside some of their given China considerable power in the Comparability is a critical issue in climate national interest in favour of the global negotiations. Its approach at Copenhagen change negotiations interest, everyone suffers. A common appeared to be driven by the desire to Three approaches have emerged at understanding of comparable effort may preserve development space and avoid climate change negotiations during be needed to enable leaders to have the long-term targets it considers would year: a justice approach that is based on courage to tackle climate change. result in an unfair distribution of effort. principles of historical responsibility, A factor in China’s reticence was anxiety historical debt and an equal share of a The Copenhagen Accord over whether low-carbon development common resource, for which Bolivia On first reading, the Copenhagen Accord will deliver the rate of development is an obvious proponent; a baselines looks promising. However, the fine print China needs to avoid civil unrest. Lesser approach that compares targets against on emission reductions and financing factors included increasing advocacy 1990 baselines, favoured primarily by the shows that it is a backwards step from the from climate sceptics and a common European Union; and abatement costs, Bali Action Plan. belief that climate change negotiations which is favoured by those countries that The proposed developed country are a Western plot to constrain China’s have failed to reduce emissions (such targets are bottom-up targets.This development. as New Zealand and the United States) ignores science and undermines the China’s controversial blocking of and so have a greater amount of work to UNFCCC process, which is based on the 80% by 2050 target for developed do to reduce emissions. The UNFCCC setting a science-based aggregate target

Page 14 – Policy Quarterly – Volume 6, Issue 2 – February 2010 and then agreeing to individual targets that handling of the Commonwealth Heads to survive.If New Zealand risked being will deliver the aggregate.This bottom- of Government Meeting. Prior to the completely wiped off the map, wouldn’t up approach will fail to deliver the kind meeting, Foreign Affairs Minister Murray we expect our leaders and diplomats to be of reductions needed to avoid dangerous McCully publicly announced that New strident too?New Zealand sends its soldiers levels of climate change because countries Zealand didn’t want the time taken up with overseas to kill on lesser provocations. will not be forced into ratcheting up their ‘Copenhagen issues’, despite clear signals effort.This has been shown in the pledges that climate change would dominate the The global challenge seen to date in the accord, which are at the agenda. At the meeting New Zealand came On the present track the world is headed lower end of pledges being proposed in a with an offer of agricultural research that towards at least 3°C warming by the end of UNFCCC context. was so clearly mismatched to the occasion the century. This has dire implications for Further, the pledge on short-term that Prime Minister John Key was forced huge numbers of people. If it happens, it finance is not what it seems. The British into a public u-turn by the other leaders will almost certainly be the kind of disaster government has already admitted that its present. that has befallen past civilisations. fast-track finance is largely a reclassification There are signs that New Zealand is no Developed countries will need to face of existing funding and may include longer viewed as a serious player in climate up to their responsibilities on both targets money that has already been spent.This is change negotiations: the United States and financing to build confidence in the likely to be repeated elsewhere. claimed the credit for the agricultural negotiations. Unless they are willing to The long-term financing is also very alliance in its media release; John Key was deliver emission cuts of at least 40% problematic. The pledge itself is very weak, publicly dropped from a BBC debate at below 1990 levels by 2020, major emitting merely supporting a goal of mobilising Copenhagen and appears to have been developing countries will strongly finance, with no explicit commitment to excluded from the core group negotiating resist taking on commitments. Without deliver. The financing is also proposed the accord; and New Zealand appears to significant new finance, poorer developing from such a wide variety of sources that have been dropped from a ministerial countries will have no incentive to take it is unclear what the $US100 billion per chairing role during the second week of the action. annum by 2020might mean in practice. negotiations. All of this occurred despite Major developing countries will need The UNFCCC has carefully provided New Zealand being a contributor to the to realise that a right to development guidance to countries over the status of Greenland Dialogue.Consequently, New may well be irrelevant if climate change the accord to ensure parties understand Zealand needs to be wary of moves away wipes out their capacity for development that it has no legal weight, and only time from the UNFCCC process.This move is through drought, desertification, salt will tell what weight it has. At the time of about large countries taking control from water inundation and other impacts. writing, the BASIC countries have agreed weaker ones. New Zealand is likely to be a The leadership of all countries will to support the accord, but are seeking at loser if the UNFCCC process is sidelined. need to show the courage to find common least five sessions of the ad-hoc working At least at the UNFCCC the country has a ground on what is their fair contribution groups before COP 16 in Mexico. veto; outside the UNFCCC process, New to a science-based effort to tackle climate Within ASEAN, Malaysia, Brunei and Zealand may be presented with agreement change. Subordinating scientific evidence Vietnam seem very unlikely to support text and asked to sign. of likely impacts in favour of short-term the accord, while Indonesia and Singapore New Zealand needs to act on the nationalistic economic gains is the sure are likely to support it. The Philippines advice of the prime minister and listen path to failure. and Thailand are likely to support the to vulnerable countries. One of the The deserts of Iraq were once the accord but only offer aspirational targets. biggest disappointments for me has been agriculture-driven cradle of civilisation. A number of other developing countries observing ministers launch into strong It is a lesson our leaders should never be are also likely to associate with the accord criticism of countries that are merely allowed to forget. to access finance, but also only offer asking for action needed to enable them aspirational targets. The Marshall Islands is offering a 40% cut by 2020 to up the moral pressure on developed countries.A group of Central and South American There are signs that New Zealand is no longer countries, led by Bolivia and Cuba, refuse to support the accord, as does Tuvalu. viewed as a serious player in climate change Developed countries will almost certainly negotiations: the United States claimed the credit all join the accord. for the agricultural alliance in its media release; Challenges for New Zealand New Zealand will need to be better John Key was publicly dropped from a BBC debate prepared than it was last year. This was at Copenhagen ... most publicly reflected in New Zealand’s

Policy Quarterly – Volume 6, Issue 2 – February 2010 – Page 15 Terry Stokes1 Two Cheers for Research

My title is an adaptation of a passage from an essay by E.M. ‘An emphasis on research and research Forster: training is a defining characteristic of UWA.’3 Two cheers for democracy: one because it admits variety Victoria University of Wellington holds a similar regard for research. Its and two because it permits criticism. Two cheers are quite research policy states, inter alia: enough: there is no occasion to give three. Only Love the All academic staff have the right and beloved Republic deserves that. (Forster, 1965, p.78) are required to conduct research and engage in scholarship and to publish His general point is that ‘there lies at the narrowly conceived, or over-emphasised, their findings. ... [emphasis added] bottom of every creed something terrible research can limit what universities aspire The requirement to undertake and hard for which the worshipper may to, and are able to provide. research is a career expectation ...4 one day be required to suffer’ (ibid., p.76), Is research really commonly repre- and, in particular, that democracy, as an sented as an unalloyed good, especially This is consistent with the first state- ideal, is not something we should place in relation to universities? I think so. For ment of the National-led government’s upon a pedestal and worship uncritically. example, we find this on the web site of view. A recently released Ministry of I think that is also true of research, and the University of Sydney: Education Draft Tertiary Education of its role in a university. I will argue Strategy states: At the heart of the University’s mission that, while research is a distinguishing is a fundamental moral commit- Universities have three core roles: characteristic of higher education, it ment to intellectual discovery and • to undertake research that adds to should not be seen as an absolute good. If development. Our students benefit the store of knowledge through research-led teaching. Our • to provide a wide range of research- creativity and discovery deliver led degree and post-graduate Professor Terry Stokes was educated at education that is of an international Macquarie University and the University of cultural, social, economic and political Melbourne. He taught and held a postdoctoral benefits to the community. standard fellowship at Deakin University, and was a • to act as sources of critical thinking lecturer and senior lecturer at the University The University’s reputation and intellectual talent. of Wollongong. He was a Counsellor to the is directly linked to the quality of Australian Research Council (ARC), and has The document goes on to say: served as Director of Research Services at our research. As our reputation as a Monash University and as Assistant Secretary research-intensive university grows, so The Government expects universities in the Office of the National Health and Medical too does our ability to attract and retain Research Council. He was successively Pro-Vice- to: Chancellor at Central Queensland University, high-performing staff and outstanding • enable a wide range of students to and General Manager, Higher Education and research students. Research is at the successfully complete degree and Regulation in the Victorian Office of Training and core of everything we do.2 post-graduate qualifications Tertiary Education, before working as a tertiary education consultant. In January 2008 he took The University of Western Australia • undertake internationally recog- up the position of Head of School in VUW’s goes even further on its web site, saying: nised original research School of Government.

Page 16 – Policy Quarterly – Volume 6, Issue 2 – February 2010 • create and share new knowledge Basic research leads of Period II were sown in Germany by that contributes to New Zealand’s Wilhelm von Humboldt, who sought to economic and social development, to new knowledge. have the universities demonstrate and and environmental management. promote the process of the discovery It provides scientific of knowledge. As the 20th century got This emphasis on research in under way, the Humboldtian idea took universities is comparatively recent, capital. It creates root across the Atlantic in the United essentially a post-World War II States, and, not without debate, later in phenomenon. Writing in 1852, in the the fund from the United Kingdom, though not really preface to The Idea of a University, John which the practical in the Dominions. Thus we find the Henry Newman said: applications of 1924 New Zealand royal commission The view taken of a University in on university education saying: ‘The these Discourses is the following: knowledge must function of a university is not so much – That it is a place of teaching to conduct researches as to train students universal knowledge. This implies be drawn. to that inquiring attitude of mind which that its object is, on the one hand, inevitably makes them investigators’ intellectual, not moral; and, on the (cited in Malcolm and Tarling, 2007, other, that it is the diffusion and p.91). extension of knowledge rather than them with those tutors. He did not wish The history of New Zealand the advancement. If its object were to train researchers but to develop powers universities, and Australian universities, scientific and philosophical discovery, of mind and of clear, cogent expression in the first half of the 20th century is that I do not see why a University should which would equip undergraduates to of teaching institutions in which some have students; if religious training, I take their place in public life’ (Mayr- academics strove, largely unsuccessfully, do not see how it can be the seat of Harting, 2007). to ignite interest in research. An example literature and science. (Newman, So how did the teaching-focused was ‘A statement by a group of teachers 1907) conception of the university espoused in the University of New Zealand’, which asserted: ‘We do not accept the point of Cardinal Newman (1801–1890), by Newman and Jowett transmogrify view that teaching is the main function a prominent Anglican convert to into the research-dominated one we of the University. ... The two activities Catholicism, developed these views as now have? My thinking on this issue has of the University, teaching and research, rector of the then newly-established been strongly influenced by an address should be co-ordinated and combined’ Catholic University of Ireland (now given at Leeds Polytechnic in 1990 by (Allan et al., 1945). The signatories to this University College, Dublin). His book is the foundation chair of the Australian statement included Karl Popper, then seminal in the study of higher education, Research Council, Don Aitkin. Professor at the University of Canterbury. Until although I suspect it is now more cited Aitkin, for whom I then worked, is a after the war talented graduates went to than actually read, by non-Catholics at distinguished political scientist who went Britain to do their research training, and, least. At the time, however, Newman was on to become the vice-chancellor of the for the most part, their research. Popper, articulating a view held by others: for University of Canberra. He proposed ‘a of course, left for Britain immediately example, Benjamin Jowett (1817–1893). three-period model of the development after the war. Jowett was regius professor of Greek, the of the modern university’: It was Vannevar Bush who ushered great translator of Plato’s works (in which Period I: from the first degree- in Aitkin’s Period II, with his report to capacity I personally first encountered granting universities in Europe, United States president in 1945, Science: him), master of Balliol College and vice- beginning with the University of the endless frontier. The key argument of chancellor of Oxford University. Logan Bologna in 1088, to World War II this was that: Pearsall Smith records Jowett as saying: Period II: post-World War II to the ‘Research! Research! A mere excuse for 1980s Basic research leads to new knowledge. idleness; it has never achieved, and will Period III: from the 1980s to now. It provides scientific capital. It creates never achieve any results of the slightest the fund from which the practical value’ (Smith, 1938, p.169). Of the first 850 years Aitkin says: applications of knowledge must Jowett’s vehemence derives from ‘Period I universities as a whole were be drawn. New products and new the threat he saw posed to the tutorial places of teaching and scholarship, processes do not appear full-grown. system he championed by the developing but not notably for research. And the They are founded on new principles enthusiasm for research, modelled on research that was done was mostly of and new conceptions, which in the German universities. Jowett’s ‘ideal small scale, and relatively cheap’ (Aitkin, turn are painstakingly developed was to have undergraduates read out 1991, p.236). by research in the purest realms of essays to tutors, particularly on ancient These were Newman’s and Jowett’s science. (Bush, 1945) philosophy and history, and to discuss universities; though, as noted, the seeds

Policy Quarterly – Volume 6, Issue 2 – February 2010 – Page 17 Two Cheers for Research

Bush is asserting a linear model of with which, by the way, I have no quarrel. know which of us should get your money innovation, very convenient for basic To fund his vision Bush successfully – and whether the results we got were researchers but not much supported these argued for the creation of the National worthwhile. Or, as a captain of industry days. Unexpected practical applications Science Foundation (NSF). Massive once put it to me: ‘Just slip the cheque do emerge from basic research, but American government support for basic under the door and bugger off quietly.’ practical problems also succumb to a research in the universities through the Little wonder, then, that peer review direct approach and such work is often NSF, and through national institutes of should be popular among researchers inspired by ‘market push’. However, that’s health, copied in Britain, Australia, New as a way of deciding things in research. I a story for another time. Zealand and many other countries, was shall be returning to peer review, and its Vannevar Bush had a special place for the engine of universities in Period II. limitations. But before that, my first cheer universities in his vision: Among its principles, as articulated by for research. As Don Aitkin says, after the Bush, was that: explosion of research funding following Publicly and privately supported World War II, colleges and universities and the Support of basic research in the public endowed research institutes must and private colleges, universities, and The result has been an astonishing furnish both the new scientific research institutes must leave the advance in the knowledge that knowledge and the trained research internal control of policy, personnel, humanity has of the physical universe workers. These institutions are and the method and scope of the and of its own part in the universe, uniquely qualified by tradition and by research to the institutions themselves. an advance that is perhaps without their special characteristics to carry on This is of the utmost importance. any precedent in human history. The basic research. They are charged with flowering of research in the second Even more important still was the way the responsibility of conserving the half of the 20th century is arguably in which decisions were made about who knowledge accumulated by the past, our century’s most useful gift to the would be funded and the results evaluated: imparting that knowledge to students, 21st century … (Aitkin, 1991, p.238) peer review – namely the evaluation, by and contributing new knowledge of all experts in the relevant field, of a research Motherhood and apple pie surely kinds. proposal for which a grant is sought, or have nothing on research as a self-evident His last sentence captures the of a paper proposed for publication. More ‘good thing’. Well, perhaps. There’s always traditional view of what universities do – colloquially we might say: Trust us, we the Pandora’s Box problem: there are some things that perhaps we shouldn’t know – such as how to make weapons of mass destruction. We will be returning to that issue; but for the present, it would be churlish, indeed absurd, to deny the triumphs of research, in terms of either pure understanding or practical application. But before we get too carried away – an awful lot of dross was produced along with the bullion. The standard measure of whether basic research results are valuable is citation of the publication in which those results appear by later publications. Citations acknowledge intellectual debt. Other things being equal, the more often a work is cited, the more important and influential the results are taken to be. Various caveats are necessary: self-citations and negative citations, for example. But even negative citations can be impressive if there are enough of them and they go on for a long period of time. There is a whole research field – bibliometrics – devoted to this, and into which I cannot go very far here. I just want to point to one or two well established bibliometric findings with fundamental implications 5

Page 18 – Policy Quarterly – Volume 6, Issue 2 – February 2010 for research policy. The first is that most Figure 1: Lotka’s Law7 research and/or teaching degree-level research publications don’t rate very well. programmes are eligible. Although In his classic paper, Derek de Solla Price 100 institutions may choose not to submit an observes: Evidence Portfolio (EP) for some eligible staff, those staff are then automatically It seems that, in any given year, about rated ‘R’ – research inactive.8 At Victoria 35 percent of all the existing papers University submission of an EP was are not cited at all, and another 49 compulsory in the recent internal round percent are cited only once … . Only for those expected to be in position for 1 percent of the cited papers are cited the next, 2012 external round. as many as six or more times in a year This contrasts with the British … (Price, 1986, p.107) 10 Research Assessment Exercise (RAE), So much for the problem of self- on which the PBRF was generally citation. In fact, more recently, Hamilton modelled.9 Higher education institutions (1990) found that ‘55% of the papers there selected research-active staff Number of authors published in journals … did not receive for inclusion from their eligible staff. a single citation in the five years after In the last, 2008 RAE, 61% of eligible they were published’. The figures vary permanent academic staff were selected by discipline and type of publication, and 38% of all academic staff (Higher 1 and there are arguments in the literature 1 2 3 4 5 6 810 Education Funding Council for England, about the exact level of uncitedness Number of papers 2009, p.12). A key difference is in the (Pendlebury, 1991). The point is simple, reporting aspect: in the United Kingdom though: if one is to judge by citations, 1990). In others an even higher exponent those who are not submitted do not a great many journal articles are never – 3 or 3.5 – has been proposed as best appear in the denominator, whereas in 10 read by anyone other than the author, the fitting the data. But the general point is New Zealand they do. Another is that in journal editor and the referees. well established: a few researchers are New Zealand, academics are individually Moreover, citation frequency is responsible for most of the publications. scored and graded, whereas in the RAE logarithmically distributed. That is, of Taking these two general findings it is ‘units of assessment’ – broadly those papers that do get cited, as noted together, we can say that most researchers speaking, equivalent to departments – most receive only one or a few citations, are unproductive, and their work has little that are rated. and a tiny percentage have most of or no impact. Therefore, to optimise Victoria University has a minimum the impact. So, to take one example, research outcomes and their impact, expectation of a ‘C’ grade for those who high energy physics: in a database with funding should be focused on a few, are not new to research – defined as those 234,885 citeable papers, of the most really a very few, talented researchers, and having ‘produced a reasonable quantity highly cited papers, 10.66% had more not the many talentless ones. In policy of quality-assured research outputs, than 50 citations, 5.79% had more than terms, where the quantity and quality of acquired some peer recognition for their 100 citations, 1.29% had more than 250 the research is the primary concern, an research, and made a contribution to citations, 0.38% 500 or more citations implication of this is to favour research- the research environment within their 6 11 and 0.13% had more than 1,000. only organisations, such as the crown institution’. But this does not reflect This is true of productivity as well as research institutes in New Zealand and the reality of research capacity among 12 impact. Lotka’s (1926) Law is an inverse- the CSIRO in Australia. academics, here or anywhere else. square law of productivity which states Nevertheless, as we have seen the The operation of the PBRF would that the number of people producing n New Zealand universities are expected be considerably improved if individual 2 papers is proportional to 1/n . by government to undertake research academics could choose whether to have This means that for every 100 as well as teaching. And since 2003 their research evaluated. Even when they researchers who publish one paper, there university research been assessed and do, the time available to them, or elected are 25 who publish two; 20% of authors rewarded through the Performance- by them, to do that research should be will publish five papers or more; 10% at Based Research Fund (PBRF). In my a factor as well; although implementing least ten. Another way to put this is that view, at least as implemented at Victoria that may be easier said than done. 10% of authors produce more than 50% University, the PBRF flies in the face of Otherwise, it seems inevitable that many of all papers, and 2% produce a quarter the bibliometrically-established realities will do poorly in the PBRF. But it is of all papers (Price, 1986, p.41). about research just discussed. All academic also a case, I think, of the tail wagging Many studies have been done to see staff who are employed for a minimum the dog. The PBRF represents 20% of whether Lotka’s Law holds in various of one day a week on average, or 0.2 government funding to universities, disciplines. In some fields it is confirmed: FTE, and whose employment functions and 10% of all university income. At an example is finance (Chung and Cox, include a substantial contribution to Victoria University, research accounts

Policy Quarterly – Volume 6, Issue 2 – February 2010 – Page 19 Two Cheers for Research

for about 10% of all revenue (Victoria University, as well as national teaching happy with this arrangement. But applied University of Wellington, 2008, p.43). awards. But if teaching excellence is truly research, which seeks to solve problems, is The preponderant majority of all income to be co-valued with research there needs ill-served by the PBRF because the people received by the university – whether from to be a tangible, dollar reward for it on at with the problems are not asked how good government or from students themselves least the same scale as the PBRF: that is, the proposed solutions were at addressing – is for teaching. The notional split at somewhere around 20% of government them. And it is applied research that is Victoria University of Wellington between funding to universities. And, while good most important in places like the School teaching and research duties for academics researchers feel rewarded when they are of Government. Our primary stakeholders is 40:40 (with the remaining 20% covering asked to do more research, good teachers are the public sector agencies, not eminent administration, service to the university do not feel so rewarded when they are asked academic researchers elsewhere in New and service to the community). Even that, to do more teaching. This means that a Zealand and around the world. which underestimates the actual focus on substantial amount of any ‘performance- Government is by no means the only research, is out of whack with funding based teaching fund’ would need to find field of university research where applied purpose and reality (unless, perhaps, you its way into academic salaries. research is most important. To take one decide to impute 40% of academic salaries random further example, I would venture to research). to suggest that educational research which Teaching is the primary responsibility had no impact on teaching or learning of the university, the primary source of would be an entire waste of money, its income from government and of its ... we need to measure regardless of how well cited it might have income from the students themselves. Ross teaching performance been in academic research. Guest, professor of economics at Griffith Of course, researchers who work on University in Australia, recently pointed at least as routinely as applied problems can also publish their out that ‘Given that research performance work in academic journals, and many of is measured and extrinsically rewarded we do research if it is those in my school do. But such journals more systematically than teaching to be valued properly are, by and large, not read by senior performance, effort and performance is public officials, who prefer face-to-face biased toward research’ (Guest, 2009). in the university communication or read the reports they There is, of course, no national evaluation have commissioned. There is a cost to of teaching performance to compare with environment. this need to serve two masters – the time the PBRF. As a head of school, I cannot and effort taken to convert a report to a require that the teaching done by my government department into an article staff be assessed and see the results in published in an international journal is the way that PBRF scores are provided to very considerable, and necessarily reduces me. Nobody tells me that I must manage productivity (everything has to be done the performance of poor teachers, in As well as over-emphasising research, twice). Moreover, to get something contrast with the requirement for detailed the PBRF also emphasises one kind of published in an international journal can reporting on how I am managing those research at the expense of another. The key mean stripping the New Zealand content with poor PBRF scores. As Guest notes, problem is the way in which the research out to meet off-shore demands. This has there is is assessed. Overwhelmingly it is other to be done because New Zealand-based academics who make these judgements. journals – such as this one – are regarded A well-established economic principle The peer review panels for the 2006 as inferior publication vehicles. … that when buyers cannot discern the PBRF quality evaluation consisted almost There is, however, some glimmer of quality of a product being offered for exclusively of academics.13 Even in an area hope. I referred earlier to the Ministry sale (in this case teaching quality) they like business and economics, the panel of Education’s Draft Tertiary Education tend to offer a price commensurate was composed entirely of academics: Strategy 2010–2015, released in September with average quality. This means that there were no business people; there were 2009. There we find the government good teachers are paid less than they no Treasury officials; no users of research, arguing that: are worth and poor teachers are paid nobody who might comment on whether more. (ibid.) New Zealand must have a strong any of this business and economics contribution to research and Clearly we need to measure teaching research improved business bottom lines innovation from the tertiary education performance at least as routinely as we or helped frame government economic sector. Research-driven innovation do research if it is to be valued properly policy. will be a major factor in helping New in the university environment. But we also The dominance of peer review – trust Zealand industries to become more need to reward good teaching at least as us, we know how good we are – is very productive. much as we do good research. Of course evident, and it is hardly surprising that there are, now, teaching awards at Victoria good ‘pure’ or ‘basic’ researchers would be

Page 20 – Policy Quarterly – Volume 6, Issue 2 – February 2010 And the strategy goes on to say: which these conclusions are based is active in research. It is important, too, not high. (Zaman, 2004) to remember that the universities in The Performance-Based Research New Zealand have a unique role as the Fund has been successful in Another study notes: only institutions awarding research promoting quality improvements, At the level of the individual member qualifications. Here I think the nexus is and will continue to enhance research of staff, the simple models of staff strong. At some point in the more senior quality. We will look at whether the who are heavily productive in research undergraduate courses, and certainly Performance-Based Research Fund outputs being the most effective at honours level, students need to be is working well for all parts of the teachers, or that high productivity in introduced to research, in terms of both sector. research results in effective teaching, substantive content and method. Here, Perhaps this is a hint that it might be are clearly suspect. (Jenkins, 2004, too, there is a need for good teaching to appreciated that it is not working well for p.11) be informed by research. So the need for applied research. The next PBRF round some teaching to be informed by research On the other hand, it did find that ‘In is in 2012. I earnestly hope that it leavens can justify many, if not most, academics the UK, there is clear evidence that, while the peer review panels with research users being engaged in research – the extent of many mission statements … state the from both the private and public sectors. such an engagement depending upon the importance of the link, few teaching or I have argued that widespread levels at which they teach.14 engagement in research by university But I think there is bit more to be said academics is not the best policy for in favour of research. Donald Rumsfeld, optimising research output and impact, sometime US defense secretary, has been pure or applied. Is there any other In universities we much mocked for saying: reason to want to have large numbers of There are known knowns. These are academics doing research? There is one teach the things we things we know that we know. There very commonly advanced argument: that are known unknowns. That is to say, teaching is improved by being done by know we know (or there are things that we now know active researchers. So, for example, it can think we know) to we don’t know. But there are also be found in university mission statements unknown unknowns. These are things such as that of the University of Sydney, our students. We try we do not know we don’t know.15 cited earlier: ‘Our students benefit through research-led teaching.’ And we to resolve the known Partly this mockery is because he find it in the Ministry of Education’s unknowns: that is, we missed out something rather critical: Draft Tertiary Education Strategy: the things we think we know, but which we don’t (because they aren’t true); in Research needs to inform do research. this case that Iraq had weapons of mass teaching, both in academic and destruction. Still, he has a point, albeit applied settings. This enables the rather clumsily put. In universities we development of human capital, as teach the things we know we know (or tertiary education institutions play a think we know) to our students. We try key role in spreading knowledge and research strategies have clear mechanisms to resolve the known unknowns: that is, in transferring technology through for delivering the teaching–research link’ we do research. But most importantly we teaching. (ibid., p.31). accept that this research will, from time A teaching–research nexus is not As with many shibboleths, there is not to time, not merely add to our stock of very plausible in relation to beginning a great deal of evidence for the teaching– knowledge, it will transform it entirely, as undergraduates: their teaching could research nexus. One recent study which we discover unknown unknowns. hardly be informed by research they looked at what there is found that: The scholasticism of the schoolmen could not yet understand. A researcher in the medieval universities was the evidence ... suggests that who is a talented teacher might, however, fundamentally doctrinaire, and much research and quality teaching are not communicate something of the excitement the worse for it. What a commitment to contradictory roles. However, we and importance of their research in a first- research, the Humboldtian ideal, bequeaths cannot conclude from the information year lecture. So let’s say the association is to the contemporary university, and to its at hand that the link is strongly positive. weak, rather than absent. teaching, is, above all, a horror of dogma. The evidence indicates the relationship On the other hand, students working And there’s my second cheer for research: may be modestly positive, though it is for research-based masters degrees and it is antithetical to dogmatism. (Mind likely to be stronger at postgraduate doctorates can surely be satisfactorily you, it won’t have been long since you last than under-graduate levels. The overall supervised only by academics who heard something like: ‘The overwhelming quality of the statistical analyses on themselves hold such degrees and are consensus of scientific opinion is …’. Often

Policy Quarterly – Volume 6, Issue 2 – February 2010 – Page 21 Two Cheers for Research

it is said by a journalist or a politician but, to try. The balance between teaching and least for some fields, in future, and renamed the Research Excellence Framework. sadly, rather too frequently it is said by a research is currently awry, with the latter 10 Jonathan Boston, personal communication. 11 https://intranet.victoria.ac.nz/research-office/policy-and- scientist.) excessively rewarded to the detriment services/PBRF/grades.html#c. So we may say, two cheers for research: of the former. And the kind of research 12 I do not have the space to do so here, but it is instructive to compare the spread of outcomes by level (excellent to poor) one because it has given us so much rewarded is too narrow, rewarding basic in peer-review driven exercises such as the PBRF and the RAE, with the distribution which bibliometric data shows: knowledge of the world and ourselves, research at the cost of applied research. the latter offers a much harsher judgement. For example, and two because it fights dogmatism. But, compare Trends in measured research quality: an analysis 1. This is an edited version of an inaugural professorial lecture, of PBRF Quality Evaluation results (Ministry of Education, as E.M. Forster said, ‘Two cheers are quite delivered on Tuesday 17 November 2009. 2008) at http://www.educationcounts.govt.nz/__data/assets/ enough: there is no occasion to give three. 2 http://www.usyd.edu.au/ro/rmp/importance_research.shtml. pdf_file/0018/29403/PBRF_-_report.pdf., figure 4, p.17, 3 http://www.research.uwa.edu.au/. which shows a distribution of research output scores with a Only Love the beloved Republic deserves 4 http://policy.vuw.ac.nz/Amphora!~~policy.vuw. distribution not far from normal. ac.nz~POLICY~000000000945.pdf. 13 Tertiary Education Commission. that.’ I have suggested that there are 5 My thanks to my colleague Professor Bob Gregory, who used 14 In the light of the earlier discussion of the distribution of some aspects of research in New Zealand this cartoon in his own inaugural lecture earlier in 2009. talent in research, however, it should be noted that much Reproduced by permission. of the research undertaken by academics which is justified universities, and at Victoria University 6 http://www.slac.stanford.edu/spires/play/citedist/. Note that by their teaching responsibilities will be pretty low quality of Wellington, which mean we need to the data are not cumulative (i.e. a paper with 512 citations research. is only counted in the 500+ category, not in the 50+ and 15 Press conference at NATO Headquarters, Brussels, Belgium, withhold the final cheer. Most academics 100+ categories). 6 June 2002. 7 Drawn by Amanda Cunningham after Price (1986), p.39. are not capable of truly outstanding 8 Tertiary Education Commission. research, and should not be compelled 9 Likely to be metrics- rather than peer review-based, at

References Lotka, A.J. (1926) ‘The frequency distribution of scientific productivity’, Aitkin, D. (1991) ‘How research came to dominate higher education and Journal of the Washington Academy of Sciences, 16 (12), pp.317- what ought to be done about it’, Oxford Review of Education, 17 (3), 24 pp.235-47 Malcom, W. and N. Tarling (2007) Crisis of Identity? The mission and Allan, R. et al. (1945) ‘A statement by a group of teachers in the management of universities in New Zealand, Wellington: Dunmore University of New Zealand’ reproduced in NZ Science Review, 46 Mayr-Hartin, H. (2007) ‘The Oxford tutorial’, http://www.lawrence.edu/ (1-3), pp.72-3 news/pubs/lt/spring07/oxford.shtml Bush, V. (1945) Science: the endless frontier, Washington: United States Ministry of Education (2009) Draft Tertiary Education Strategy Government Printing Office, accessed online athttp://www.nsf.gov/od/ 2010–2015, released end of September, http://www.minedu. lpa/nsf50/vbush1945.htm govt.nz/theMinistry/Consultation/TertiaryEducationStrategyDraft/ Chung, K. and R. Cox (1990) ‘Patterns of productivity in the finance TertiaryEducationStrategySep09.aspx literature: a study of the bibliometric distributions’, Journal of Newman, J. (1907) The Idea of a University, London: Longmans, Green Finance, 45 (1), March, pp.301-9 and Co., available at http://www.newmanreader.org/works/idea/ Forster, E. (1965) Two Cheers for Democracy (originally published 1939), Pendlebury, D. (1991) ‘Science, citation, and funding’, Science, 251, Ringwood: Penguin Books pp.1410-11 Guest, R. (2009) The Australian, 7 October Price, D. (1986) Little Science, Big Science … and Beyond (originally Hamilton, D. (1990) ‘Research papers: who’s uncited now?’, Science, published 1963), New York: Columbia University Press 250, pp.1331-2 Smith, L. (1938) Unforgotten years, London: Constable Higher Education Funding Council for England (2009) Selection of Victoria University of Wellington (2008) Annual Report 2008, at http:// staff for inclusion in RAE2008, http://www.hefce.ac.uk/pubs/ www.vuw.ac.nz/annualreports/2008/2008-Annual-Report.pdf hefce/2009/09_34/#exec Zaman, M. (2004) Review of the academic evidence on the relationship Jenkins, A. (2004) A Guide to the Research Evidence on Teaching between Teaching and Research in Higher Education, London: Research Relations, York: Higher Education Academy, http://www. Department for Education and Skills heacademy.ac.uk/assets/York/documents/ourwork/research/id383_ guide_to_research_evidence_on_teaching_research_relations.pdf

Page 22 – Policy Quarterly – Volume 6, Issue 2 – February 2010 Susan St John1 ACC the lessons from

Introduction The 2008 National-led government, concerned with history what it saw as an explosion in costs, claimed that the rising number of claims, increased costs, funding of historic claims should be Accident Compensation a poorly-performing share market, and, extended. most importantly, accounting changes The funding debate is full of semantic Corporation (ACC) board to the actuarial assumptions behind the ambiguities that confuse the debate. In this did not have the skills to valuation of outstanding claims. article, ‘full funding’ or ‘full pre-funding’ While income exceeded expenditure means funding in an insurance sense: secure the financial stability for the 2008/2009 financial year by $1 the actuarial requirement that current billion, the change in value of outstanding assets are sufficient to meet all accrued of the ACC scheme. In March claims had resulted in a reported loss of obligations. ‘Pre-funding’, a more general 2009 the minister, Nick $4.8 billion. The minister described the term, implies a scheme that has some choices ahead for ACC as ‘pretty ugly’, and assets but is not necessarily fully funded. A Smith, dismissed the chair insisted that without change ‘ACC is on pay-as-you-go (PAYG) scheme may have of the board, Ross Wilson, course to go broke’. He claimed: contingency reserves, but a reserve fund is not an essential part of PAYG. This will go down in New Zealand and appointed in his place In late 2009 the National government history as the biggest corporate loss introduced the Injury Prevention, of any entity, public or private, and is accountant John Judge. Rehabilitation, and Compensation (IPRC) actually bigger than any deficit that the Amendment Bill, with changes to levies government has run collectively across As at June 2009, ACC’s reported out- and entitlements designed to ‘facilitate all portfolios. (Sunday Star-Times, standing claims liability was $23.8 billion, cost containment’ and to improve 2009) while invested reserves were just $10.4 financial ‘reporting and accountability’. billion. The $13.4 billion ‘unfunded’ The Labour opposition pointed out While the date for achievement of full liability had grown from $8.4 billion the that a surplus of revenue over current actuarial funding was extended from 2014 year before. This ‘blow-out’ reflected a expenditure meant that ACC was more to 2019, the principle of fully funding than paying its way. Unfortunately, ACC to ensure sustainability was strongly Labour did not question the underlying reinforced. Susan St John is an Associate Professor in the presumption that ACC should be fully By this time, serious questioning of Department of Economics at the University of funded. Instead, ACC spokesman David the funding requirement had begun.2 Auckland, Co-Director of the Retirement Policy and Research Centre, and a member of the ACC Parker argued that, to ease the burden The purpose of full funding for a private group. on levy payers, the 2014 date for the full insurer is clear: policy holders require

Policy Quarterly – Volume 6, Issue 2 – February 2010 – Page 23 ACC: the Lesson From History

certainty that their claims can be met if our history points in the direction of the Royal Commission of Inquiry on Workers’ the firm should go out of business. In any need for a buffer of reserves, set at a level Compensation, 1967, p.90). given year, enough revenue must be raised agreed to by all relevant political parties. Operating under the Workers’ to meet the costs of that year’s claims, no Compensation Act 1956, the scheme matter when they fall due. History matters was financed by a system of differential On the other hand, critics argued that premiums that reflected industry risk. When you are peering into the future there was as little economic rationale It was run on insurance principles, to see where you are going it is not at for fully funding ACC as there would including being fully funded and tightly all a bad idea to remember where you be for fully funding education or state circumscribed, with limited no-fault have been. (Woodhouse, 1999) pensions. Governments do not have to benefits for ‘workers’ only, with the right fully fund. They do not face the prospect The purpose of this paper is to locate to sue for damages in cases where it of insolvency and can always fund their the funding debate in a frame that reflects was believed that fault could be proven. social commitments from higher levies or ACC’s history over more than 40 years. Demarcation between work and non- taxes. Social insurance schemes in other This history reveals that there is nothing work accidents was a clear problem: countries are generally not fully-funded, new in the current ACC debate. From the the dividing line between a man but some reserves may be held. In the beginning there were tensions between hurt on his way to work and the one case of the United States social security the view that ACC was insurance and injured within the factory gates has programme, for example, the trust fund should be funded as such, and the view at times been so thin as to be almost holds government bonds as a reserve that ACC was more like a welfare system imperceptible. (Young, 1964, as quoted buffer for periods of deficit that might and could have a PAYG basis. Rather than in Royal Commission of Inquiry on arise, say in a recession (Rejda, 1984). be prisoners of our history, we could draw Workers’ Compensation, 1967, p.82) In the case of New Zealand, the New important lessons from it for future policy Zealand Superannuation Fund (NZSF) development. The shortcomings of that scheme provoked Woodhouse’s radical rethink of how a modern society should treat accidents. One key parametric change ... it is ... argued that the [ACC] scheme can only be (Royal Commission of Inquiry on Workers’ Compensation, 1967) was to see stable if it is fully funded. [The] whole point of having that, in determining fair compensation, social insurance is to enable society to escape from the it did not matter whether or not the accident was at work, nor did it matter strictures of private insurance. who was at fault. Woodhouse argued that the revolutionary 24-hour/7-day ACC scheme he proposed should not be based on private insurance principles. It required may be seen as a device to smooth tax Workers’ compensation rights an entirely new frame, more fitting to the rates in the light of demographic change, The first workers’ compensation legisla- social innovation it represented. but falls far short of fully funding New tion, introduced in 1900, required limited Zealand Superannuation. The money no-fault compensation for accidents at ACC was to be social insurance invested in NZSF might equally have been work. In an amendment in 1943, every Thus, the 1967 Woodhouse Report used to repay debt or increase other assets employer was obliged to insure against suggested that the replacement for workers’ such as infrastructure. the risk. There were criticisms of the compensation should be viewed as social In a somewhat ahistorical context, profits of private insurers, and a further insurance. As Woodhouse emphasised: Littlewood (2009) mounted a persuasive amendment in 1947 gave the state-owned As the scheme will be a Government argument for the ACC fund to be insurer the monopoly on this business. scheme of social insurance it must in abolished, with ACC placed on a pure, Then, from 1951, it was opened up to the final resort receive the backing of PAYG basis. Levies could be set on private participation once more (with the state ... It is for this reason that a whatever basis was appropriate, but, he 61 insurers) as a result of pressure from formal system of funding cannot be argued, the ACC should not itself manage the industry (Campbell, 1996, p.16; Royal regarded as essential to the stability of a fund of invested assets. Requiring ACC Commission of Inquiry on Workers’ the whole scheme. (Report of the Royal to be fully funded, he argued, exposes Compensation, 1967, p.80). Commission of Inquiry on Workers’ the Crown to unnecessary financial risk Woodhouse found this ‘interpolation’ Compensation, 1967, p.175) (Littlewood, 2009). of private insurers into what was essentially This paper argues that ACC should mandatory social insurance inappropriate This clarity has been lost in the current return to its original inception as social and ‘extremely expensive’, with no debate in which the goal of fully funding insurance with PAYG principles, but that corresponding advantages (Report of the ACC has become the tail that wags the

Page 24 – Policy Quarterly – Volume 6, Issue 2 – February 2010 dog: it is now argued that the scheme can said ‘logical argument is an insufficient implied a clear obligation for a funded only be stable if it is fully funded. Yet the reason for shifting these costs in such a scheme ‘in the strict sense’. It appeared whole point of having social insurance fashion’ (ibid., p.171). However, he did not to have operated this way in the 1970s. is to enable society to escape from the recommend a flat rate levy with no risk- Woodhouse is in no doubt that this piece strictures of private insurance. The or performance-based differentiation as of the act was based on a misconception benefits under social insurance can be a more appropriate way to finance ACC. of the nature of the scheme, and he more redistributive and comprehensive Reserves were seen as a useful by-product noted in 1979 that his views and those of than under private insurance. The small which would cover a contingency such as the commission ‘had been on a collision print does not have to limit coverage and a major earthquake, but not essential to course for some time’: scope, and evolution or change of the PAYG. The notion that an instrumentality scheme is not only possible, it is desirable The Law Commission’s report of the State engaged upon the as new risks emerge. Weekly compensation in 1988 notes how the unavoidable administration of a social welfare for long-term accidents can be inflation- transition from workers’ compensation programme should be obliged to and wage-growth-adjusted – a near to ACC contributed to the subsequent act on a private enterprise funded impossibility for private insurance; and, misunderstandings: principle of finance is, in my opinion, importantly, the scheme does not have [it] left behind for some people the based on economic misconceptions. to meet the funding standards of private misconception that it is simply a new In the present context it is unnecessary insurance.3 means of obtaining cover against on any grounds of prudence, such Far from these disappearing as new risks, it is wrong and a cause of a system is far more expensive in economies develop, as Barr (2001) confusion to think of it in this way. operation than the method of pay as argues, the 21st century has new risks and This scheme is not in any sense an you go and I think it is unfair to those insecurities that increase rather than lessen insurance system (New Zealand Law who may later be asked to pay the extra the need for social insurance. Nowhere is Commission, 1988, S2) costs. (Woodhouse, 1979) this more true than for the provision in an increasing unpredictable world of full compensation and rehabilitation for all accidents on a no-fault basis. ... it is unnecessary on any grounds of prudence, such The funded basis of the 1972 Accident Compensation Act a system is far more expensive in operation than the In the 1967 royal commission report, Woodhouse suggested that a levy of method of pay as you go and I think it is unfair to those 1% of all wages would approximately who may later be asked to pay the extra costs. replace the existing insurance premiums. In the first years of ACC the outgoings for current accidents would be less than income. Although this surplus was to be invested in the short term, there was no suggestion that the scheme would operate The report of the 1970 select In 1977 Geoffrey Palmer was sceptical on a full-funding basis. Built-in inflation committee, chaired by George Gair, was that the idea of full funding made much adjustments, wage indexation and the strongly influenced by the insurance basis sense. He pointed to the event of rapid subsequent expansion to meet new of workers’ compensation. Thus, the 1972 inflation in the 1970s and the emergence needs would make full funding entirely Accident Compensation Act legislated of a long tail of claims, which ‘makes the inappropriate. Furthermore, Woodhouse an insurance-based approach, with estimate of contingent liabilities very intended that the levy rate be fixed, with differential levies set by order-in-council, much a matter of guesswork’. But, he additional funds in the future to come with possible penalties and rebates. claimed, from general taxation as and if required The scheme also paralleled its it may be worthwhile preserving the (see Royal Commission of Inquiry on predecessor in being set up on an pretence of a funded scheme until the Workers’ Compensation, 1967, p.176) apparently fully-funded basis, requiring plateau is reached and it is possible While it is possible and logical to fund actuarial reports at five-yearly intervals to know with some certainty what social insurance by general taxation on to assess whether levies were ‘sufficient to the annual payout would be under a a PAYG basis, Woodhouse argued that meet the current and future liabilities of [PAYG] scheme (Palmer, 1977, p.202) he had to take account of the premiums the Fund’ (Accident Compensation Act on industry that were already in place. 1972, p.7). Palmer described the end result as To change to general taxation would Campbell (1996) questions whether ‘a curious mixture that provides useful unduly benefit industry. Accordingly, he these requirements as set out in the act insulation and flexibility’. Thus, the

Policy Quarterly – Volume 6, Issue 2 – February 2010 – Page 25 ACC: the Lesson From History

arrangements as they evolved in the Nevertheless, the National govern- amid strident demand for review of this 1970s were a pragmatic mix of PAYG and ment’s 1980 Cabinet caucus committee, ‘costly’ scheme. pre-funding. Eventually, as the scheme chaired by Derek Quigley, under pressure In its 1988 report on the ACC scheme, matured, with stable demographics it from employers and failing to see the the Law Commission made several would be expected that inflows would point made by Woodhouse recommended recommendations to address the many equal outflows. At this point, the scheme a PAYG basis which was then endorsed perceived problems of ACC. They had this would be essentially PAYG. in the Accident Compensation Act 1982 to say about the role of reserves in their (s.19). proposed draft legislation for a new act: 1. In estimating its income needs for any financial year, the Corporation Figure 1: ACC reserves in months of expenditure shall set aside a sum amounting 50 to not less than half its estimated

45 expenditure for that financial year as a reserve fund. 40 2. The Corporation may draw on that 35 reserve fund as a source of working

30 capital and to meet any unforeseen contingency. ( New Zealand Law 25 Commission, 1988, p.154) 20 The report was largely ignored and the subsequent lack of attention to the

ves in months of expenditure 15 determination of an appropriate level eser R 10 of reserves, and the purpose of those

5 reserves, paved the way for the future funding debate. 0

1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Funding and the 1990s Source: St John, 1999, p.161, and ACC annual reports, 1997-2009 In 1990, National repeated the cycle by once again bowing to employer pressure Funding and the 1980s The National government’s 1980 and reducing levies. ‘The result was By 1980 the ACC fund had reserves equal decision has been widely derided as ill- another serious rundown in reserves over to 20 months of expenditure (see Figure fated. Rennie (2003, p.348) refers to it the next five years [see Figure 1] creating 1). There was pressure from employers as ‘disastrous’, producing a ‘short-term the conditions once again for claims of for a return of these funds, as they were reduction in levies but a subsequent ‘blow a blow-out in costs, possible insolvency, concerned about their levy costs. However, out’ in levy rates and the obliteration of and thus the need for sharp levy increases as Woodhouse later reflected, the build-up reserves’. Chapman (2009), however, in the future’ (St John, 1999, p.160). in funds should not have been regarded as locates the problem in the non-stipulation Employers had been resentful of the tail of evidence that levies were too high: of a minimum level of reserves that should long-term claimants and their obligation have been maintained under PAYG. to fund non-work accidents. National MP ‘The fact that the scheme had By 1985 levies had been reduced by Bill Birch had fomented this resentment some years to run before it reached 30%, and by March 1986 the reserves by claiming costs had mushroomed out maturity was never discussed. Nor had fallen to less than was considered of control between 1985 and 1990, and was it said that an upgraded workers’ necessary to support a PAYG scheme calling for cutbacks and more individual compensation scheme would have (Rennie, 2003, p.340). By 1987 reserves responsibility. The result was the Accident been far more costly. Instead, the early were down to only two months’ worth Rehabilitation and Compensation confusion about the nature of the of expenditure (Figure 1), with claims of Insurance Act 1992. This was supposed to reserves as a painless side advantage a cost blow-out and angry demands for make ACC ‘fairer’ by scaling back benefits of a still maturing scheme led directly review and cutbacks. In response, levies and reintroducing more of an insurance to their remarkable political decision were increased sharply, 238% on average. basis: for example, by removing non-work that they could now be eroded in There was recognition that the PAYG accidents from the earners’ account, and order to supplement a reduction in the scheme had to have sufficient emergency by renaming levies as premiums (St John, levies. It was rationalised on the basis reserves for an unforeseen event such as 1999, p.163). The ACC was, however, kept that the scheme should now become a major earthquake, in addition to six on a PAYG basis in the meantime. By 1995, a pay as you go operation – a method months of estimated expenditure, but this reserves were again down to only three the system was already operating.’ was never enacted (Chapman, 2009). By months of expenditure (Figure 1). (Woodhouse, 1995) 1990 the reserves were back to 13 months, By 1997 reserves had improved to

Page 26 – Policy Quarterly – Volume 6, Issue 2 – February 2010 equal six months of expenditure and The Accident Insurance Act (AIA) that from time to time there had been the then chair of ACC suggested that 1998 required employers to purchase glimpses of insight: levy reductions were possible, amid accident insurance for their employees, Ruth Dyson was absolutely spot lobbying by business interests. In the 1996 and legislated for full funding of the on when she said that the reason Budget, however, large tax cuts had been motor vehicle (MV) account and earners’ the Government is doing this right announced by the minister of finance. account. Premiums were to reflect the full now is to get that scheme ready for In December 1997, while the average funding of the current year’s accidents privatisation. Just as the employers’ employers’ premium was reduced by 10%, and funding of the outstanding claims account has been privatised, the motor the earners’ premium was increased from liability by no later than 30 June 2014. A vehicle account is the next on the block. 70c to $1.20, perhaps to partly offset the clear connection was made between full But in order to get it into shape for ‘inadvisable’ tax cuts of 1997–98 (St John, funding and private insurance principles privatisation, the Government has to 1999). Under the new GAAP (generally of incentives at numerous times in the bring it into the fully funded scheme. accepted accounting practice), ‘whole debates. For example: (Dalziel, Hansard, 20 May 1999) of government accounting’, the increase The sorts of things that have influenced in funding of ACC would have had me are when I visit, for example, a favourable consequences for the operating The curious 2000s motorway development in Auckland surplus and balance sheet. The election of Labour saw the social where the employer and the workers It is at this time that the government insurance principles of ACC firmly tell me how proud they are of their began to talk of requiring ACC to be reinstated. The purpose of the new non-accident record even though they fully funded over 15 years to align it more Injury Prevention, Rehabilitation, and are a major construction company, with private insurance. This was to allow Compensation Act (IPRC) 2001 was to then in the next breath they tell me a greater degree of competition, and, by ‘reinforce the social contract represented how they resent the fact that they are signalling this direction, to somewhat by the first accident compensation lumped together with other employers mollify disappointed employer interests scheme’ (preamble). It also reversed the who have lousy work records. Those (St John, 1999, p.169). privatisation experiment of the AIA workers and those employers are The levy increases and the move to full which had seen the employers’ account entitled to have the experience-rating funding were hotly debated, with the leader opened to competition, removed the term mechanism reward them for their of the opposition asking the minister for ‘insurance’ from the title, and renamed performance. The only way we can accident rehabilitation, compensation premiums as ‘levies’. do that is to go to the full funding and insurance, Jenny Shipley, to explain Surprisingly, Labour kept full actuarial of the scheme. (Shipley, Hansard, 2 the sudden conversion to full funding: funding by 2014 for the scheme as a whole, Does the Minister recall telling a women’s forum in Auckland as recently as March: ‘I want to bring the average The purpose of the new Injury Prevention, levy down over the next 3 years.’ If so, when did her road to Damascus Rehabilitation, and Compensation Act (IPRC) 2001 conversion on the need to move to a was to ‘reinforce the social contract represented by fully funded scheme occur? (Clark, Hansard, 4 December 1997) the first accident compensation scheme’ ... The minister responded in terms that have echoes in the debates of 2009: The members may scoff, but they including the non-earners’ account in the should go back and look at their own December 1999) IPRC. Did it not just pave the way for the history in managing the accident In 1999, facilitated by the move to full new government in 2008 to claim that compensation scheme. We are trying funding (Caygill, 2003, p.400), private ACC was insolvent? Was it the influence not only to bring the scheme to competition was introduced for work of Treasury? Was it to enable higher levies a mature state in terms of all the accidents. Labour had, however, promised to produce more favourable operating accounts but to get the four accounts to repeal the AIA if elected in late 1999, so surpluses under the GAAP accounting under control. It is in the interests of that the privatisation experiment was to rules? workers and levy payers to see that be short-lived. A possible scenario is that Labour accident compensation does fund While Labour failed to appreciate wanted to prevent the Quigley and Birch itself so that we can have confidence adequately the connection between the scenarios ever again threatening the in the 24-hour cover of that scheme. goal of actuarial full funding and the end security of the scheme. Perversely, the (Shipley, Hansard, 4 December 1997) game of privatisation, Hansard reveals stick of full funding has threatened the

Policy Quarterly – Volume 6, Issue 2 – February 2010 – Page 27 ACC: the Lesson From History

scheme anyway, even when reserves have the value of ACC’s reserves increased Repeating the scenario of the late 1980s, actually been at an historic high in the last significantly. Most of the growth was it is also convenient for the government to decade (see Figure 1). due to retained investment income and raise revenue via ACC levies as this will Although Labour’s conversion to full strong returns in equity markets, but the strengthen the GAAP accounts and offset funding ACC has been hard to understand, economy was also strong and levy revenue the effect on the operating surplus of what it is unmistakable that it saw the move to was higher than forecast. ACC used the may be viewed as ‘fiscally inappropriate’ full funding as a good thing: extra funds from the surplus to expand tax cuts granted by National in late 2008. the investment portfolio in order to In a repeat of former history, the employers As a consequence of improved accumulate sufficient funds to cover the have been mollified with the promises of performance by ACC, its overall claims liability. The stated aim in the ACC privatisation and competition for the work unfunded liability has reduced annual report for 2007 was for ACC to be account, and by the fact that the bulk of considerably and some schemes are fully funded (ACC, 2007, p.49). the increase in levies would be raised from now approaching full funded status. employees and motor vehicles. ... I do remember that the 2008–09: ACC under attack National Government that held office Labour bought into the concept of full Lessons to be learned before 1984 ran down the reserves of funding, at least in part, because of the What can be learned? There are clear the corporation dramatically and put extreme pressure it witnessed on ACC patterns from our past. Both pure PAYG it on the point of insolvency, but of under the PAYG approach in the 1980s and and full-funding concepts have been used course that is not possible under the 1990s, with each period leading to large by the National government in power to full funding model formula. (Cullen, levy rises and accusations of insolvency attack ACC. Labour in turn failed to see Hansard, 14 March 2000) and entitlement cuts. Although the 2000s the dangers of full funding and failed to question the flawed basis of using GAAP rules for a social insurance scheme when Both pure PAYG and full-funding concepts have it had the opportunity (Littlewood, 2009). It also failed to point out why some level been used by the National government in power to of reserves is required under a social insurance-PAYG type scheme. attack ACC. Labour in turn failed to see the dangers The experience of PAYG is that reserves can be quickly dissipated in an evolving of full funding and failed to question the flawed scheme, leading to panic about cost blow- basis of using GAAP rules for a social insurance outs and financial failure. Destabilising increases in levies follow. The more scheme when it had the opportunity recent experience is a variation on that theme. This time, instead of reserves disappearing under PAYG, reserves have Another explanation might lie in produced a large increase in reserves, it was been growing strongly for some years the fiscal conservatism of the Labour not large enough to meet the requirement with economic growth and favourable government: Caygill argued that while full for full funding by 2014. The scheme was asset markets. The benchmark, however, funding was a precursor to competition, it thus vulnerable once again to National’s has become some mythical fully-funded could be justified on its own merits. Quite claims that the scheme was in crisis and nirvana and the stability of the scheme is clearly, the consolidation of ACC into the ‘technically insolvent’. now determined by actuarial projections Crown accounts would involve the accrual In 2009 the ACC minister, Nick Smith, that are notoriously difficult to make. of future liabilities and require levies to used the full funding requirement as a ‘[Actuarial projections] as a scientific meet more than current needs. justification for sharply increased levies exercise are almost as pointless as the and reduced ACC entitlements. However, debate in mediaeval scholasticisms as to This may seem a trivial argument for even after share market losses in 2008, the number of angels that can dance on retaining full funding and indeed there reserves were still at about 37 months of the head of a pin’ (Clayton, 2003, p.460). are stronger arguments (for example expenditure (Figure 1). The justification If full funding is actually achieved at the more accurate costing requirement for full funding was the GAAP accounting any point, share markets may still crash of any proposed change to the level requirements imposed on the government, again, or the discount rate may fall, or or form of future benefits). On the even though these have applied selectively the ACC may have to accommodate other hand, I suspect the balance and should be no more applicable to ACC unforeseen expenditures or new risks in an sheet argument would be sufficiently than to New Zealand Superannuation or uncertain world. Full funding is therefore persuasive for any future Minister of health care costs (Littlewood, 2009). The a chimera as well as an inappropriate Finance. (Caygill, 2003, p.400) driver of full funding is arguably a political goal. The current full-funding ‘crisis’ may From 2000 to 2007 (see Figure 1) and ideological agenda. force the partial privatisation of ACC,

Page 28 – Policy Quarterly – Volume 6, Issue 2 – February 2010 when what is required is a dispassionate suggested. A possible rationale is to have projections, to ensure New Zealand has investigation of what design of ACC, a contingency fund sufficient to meet a the best possible scheme. Unfortunately, including the financing arrangements, is large disaster and to allow practical day- it is not presently clear how to achieve in society’s best interests. to-day management, especially in unusual the multi-party political agreement and There is a way to prevent these times such as a recession. the economic understanding that this destabilising attacks. First, we need to While levies should never be adjusted solution requires. acknowledge that ACC is a form of social in a discontinuous way to meet some 1 The author thanks Michael Littlewood, Claire Dale, Jonathan insurance and has clear advantages over reserve objective, the level of reserves Boston and Bob Stephens for helpful comments on earlier private insurance. Second, we need to should be allowed to fluctuate in line drafts but alone is responsible for views expressed in this paper. acknowledge that while full funding is an with the economy and markets. This 2 For example, a forum on ACC funding was held on 15 December 2009 at the School of Business, University of inappropriate goal, a buffer of reserves would give employers, individuals and Auckland. See www.rprc.ac.nz. can be useful and prudent. The reserves markets a degree of certainty about levies 3 This is in some ways the core of the argument. The accounting standards of private insurance require full could be, say, set as a range of years of over the short-to-medium term. The funding, i.e. that, each year, the company raises enough expenditure, or set in relation to levy entitlements and design of ACC should be revenue to cover the all the current and future costs of accidents incurred in that year. income, as the Law Commission (1988) reviewed, independently of any actuarial

References Rejda, G. (1984) Social Insurance and Economic Security, New Jesey: ACC (2007) Accident Compensation Corporation Annual Report 2007, Prentice Hall Wellington: ACC Rennie, D. (2003) ‘Administering Accident Compensation in the 1980s’, Barr, N. (2001) The Welfare State as Piggy Bank: information, risk Victoria University of Wellington Law Review, 34 (2), pp.329-49 uncertainty and the role of the state, Oxford: Oxford University Press Royal Commission of Inquiry on Workers’ Compensation (1967) Campbell, I. (1996) Compensation for Personal Injury in New Zealand, Compensation for Personal Injury in New Zealand. Report of the Auckland: Auckland University Press royal commission of inquiry, Wellington: Government Print Caygill, D. (2003) ‘1990s: decade of change’, Victoria University of St John, S. (1999) ‘Accident compensation: a fairer scheme?’, in P. Wellington Law Review, 34 (2), pp.392-406 Dalziel, J. Boston and S. St John (eds), Redesigning the Welfare Chapman, J. (2009) Unpublished commentary on M. Littlewood’s paper State in New Zealand: problems, policies, prospects, Auckland: on PAYG funding for ACC, Massey University Oxford University Press Clayton, A. (2003) ‘Some reflections on the Woodhouse and ACC legacy’, Sunday Star-Times (2009) ‘The painful bills about to wallop your wallet’, Victoria University of Wellington Law Review, 34 (2), pp.449-63 http://www.stuff.co.nz/sunday-star-times/news/2952015/ Littlewood, M. (2009) ‘Why does the Accident Compensation Corporation Woodhouse, O. (1979) ‘Aspects of the accident compensation scheme,’ have a fund?’, PensionCommentary, 2009-1, Reitrement Policy and New Zealand Law Journal, 18, pp.395-405 Research Centre, University of Auckland Business School Woodhouse, O. (1995) ‘Accident compensation in 1995’, paper presented New Zealand Law Commission (1988) Personal Injury: prevention and at the launch of the coalition on ACC, Wellington, 4 December recovery, Wellington: New Zealand Law Commission Woodhouse, O. (1999) ‘ACC: integraton or demarcation?’, paper Palmer, G. (ed.) (1977) The Welfare State Today: social welfare policy in presented at the ‘Rebuilding ACC beyond 2000’ conference, New Zealand in the seventies, Wellington: Fourth Estate Books Wellington

Policy Quarterly – Volume 6, Issue 2 – February 2010 – Page 29 Christina Hood

Free Allocation in the New Zealand Emissions Trading Scheme A Critical Analysis Introduction their international competitiveness. Other sectors, such as electricity generation and In November 2009 the government passed significant liquid fuels, will be required to purchase amendments to New Zealand’s emissions trading scheme (domestically or internationally) units to surrender to the government. As (ETS), barely two months after the legislation was international Kyoto-compliant units are introduced. Submitters were given two weeks to make acceptable under the scheme, the price of NZUs will be capped at the international written submissions, and some were asked to appear for price of emissions. oral submissions with only a few hours notice. Very little Carbon leakage and free allocation economic analysis of the legislation was released by the There is substantial economic analysis showing that once there is widespread government at the time or has been since. international emissions pricing, the least-cost domestic response is economy- This paper provides an introduction to, Background: the New Zealand emissions wide pricing with no exemptions or free and critical analysis of, the key change trading scheme allocation (for example, see Montgomery, to scheme: the shift from historical New Zealand’s ETS, first passed into law 1972; Stavins, 2007; NZIER/Infometrics, grandparenting of free units to an in late 2008, is unique internationally in 2009). However, there is a common concern uncapped production-based allocation. that all sectors of the economy are to be that without widespread international Decisions around long-term allocation phased in by 2015: electricity generation, action, emissions pricing could cause will drive major investments and steer energy, industrial processes, transport emitters to lose competitiveness or even New Zealand’s emissions track over the fuels, agriculture and forestry. relocate to jurisdictions that don’t price coming decades. Under the ETS, entities that are emissions, leading to both job losses and responsible for greenhouse gas emissions higher global emissions. This effect is (such as fuel importers, cement known as carbon leakage. manufacturers, dairy processors, or those This concern is often overstated, Christina Hood is an energy and climate change policy analyst. She worked as a policy adviser clearing forests) are required to submit both environmentally and economically. to the minister for energy and climate change one New Zealand unit (NZU) to the Although the competitiveness of some issues during 2002–2005, and is the co-author government for each tonne of emissions. sectors will certainly be affected by (with Colin James) of Making Energy Work: Those undertaking compliant forestry a sustainable energy future for New Zealand emissions pricing, analysis shows that (Institute of Policy Studies, 2007). She won activity are entitled to receive units. this does not generally lead to major the Prince of Wales Prize for the best science Some emissions-intensive sectors, such economy-wide issues or major increases student at the University of Otago in 1993 as industry and agriculture, will receive free in emissions (IEA, 2008; WRI, 2008). and holds a PhD in physics from the California Institute of Technology. allocations of units, ostensibly to protect Nonetheless, free allocation of units

Page 30 – Policy Quarterly – Volume 6, Issue 2 – February 2010 forms part of every emissions trading face greater costs. As the specialist adviser International experience scheme currently being developed. It aims to the parliamentary select committee, Dr Unlike the economy-wide coverage of to support the competitiveness of affected Suzi Kerr, put it: the New Zealand ETS, overseas schemes sectors until the world transitions to more Not having effective reduction policies tend to cover only the energy, industy and widespread emissions pricing, or at least in every sector would raise the costs sometimes transport sectors. to uniform action across sectors. It can of compliance to the economy as a Empirical analysis of a proposed ETS be thought of either as compensation for whole. Excluding a sector from the for the United States shows that a free assets stranded by the policy change, or emissions trading system or providing allocation in perpetuity of 13–21% of the else as a production subsidy to be phased high levels of free allocation to some total number of units issued would fully out as competitors introduce emissions firms imposes high costs on all other compensate private industry for equity pricing.1 sectors and firms who must cover the losses, or equivalently a 50% allocation New Zealand’s 2008 ETS used a costs of those emissions through taxes. phasing out to zero by 2025 (Bovenberg et ‘grandparenting’ approach to allocation: (Kerr, 2009) al., 2003; Stavins, 2007).2 that is, the free allocation was to be a fixed number of units based on historic levels of emissions. Energy-intensive trade- At an emissions price of $100/+CO , free allocation exposed industries and the agriculture 2 sector were to receive a fixed annual of 30 to 40 million units per annum is an annual cost allocation of units until 2018, set at 90% of 2005 emissions, phasing out to zero by to government of $3-4 billion. 2030. Under grandparenting, new invest- ments or expanded production do not receive any allocation. This could lead to lost investment in the short term, but avoids locking in high emissions activity Results of New Zealand general Legislation currently being considered that could be uneconomic in the future. equilibrium modelling (NZIER/Infomet- by the United States Senate proposes a It also ensures that the allocation of new rics, 2009) suggest there is no impact similar split: roughly 17% of the total capital investment across different sectors or even a small benefit to the economy value of allocation to 2050 will accrue to of the economy is efficient for the new as a whole from free allocations. This private industry (Stavins, 2009a). Trade- environment in which emissions are result hinges on the assumption that exposed emissions-intensive industries priced, thus promoting a lower carbon few mitigation opportunities exist in receive an initial allocation of 15% of total economy as a whole. the protected sectors, so introducing an units, decreasing over time in line with The 2009 ETS amendments change emissions price simply leads to output the overall cap, and phasing out to zero the free allocation from grandparenting to being curtailed, with flow-on negative after 2025. Within this cap, allocation is a production-based (also called intensity- consequences in the wider economy. Other production-based (Stavins, 2009b). based) approach, in which units are economic analyses argue that significant Under the European Union’s ETS, awarded per unit of current production. abatement opportunities do in fact exist trade-exposed industries (around 25% Under production-based allocation, new (Bertram and Terry, 2008), in which case of emissions in the scheme) receive free investments and increased production receive free allocation would clearly be welfare- allocation for 100% of their emissions if the same level of support as existing activity, diminishing. they are using best practice technology. so are encouraged. There is, however, a risk Even if we assume that free allocation There is a capped pool for allocation to of locking in uneconomic high emissions comes at no overall cost to the economy, these industries which declines with the activities, leading to inefficient allocation there can still be significant effects. Again overall reduction target (European Union, of capital between various sectors of the to quote Kerr (2009): 2009). economy. Even though firms are awarded Free allocation redistributes the cost of The proposed Australian carbon units for free, they still have an incentive to climate policy away from the owners pollution reduction scheme (CPRS) improve emissions intensity at the margin, of protected firms, who tend to have initially provides 94.5% free allocation because any efficiency improvements free higher than average incomes, toward to highly trade-exposed energy-intensity up permits that can be sold at the full market all taxpayers. It also significantly raises sectors and 66% to moderately exposed price. the overall cost of the climate policy to sectors. Both phase out at 1.3% per the economy. A policy that is fiscally annum for the first ten years, with the Cost of free allocation to the wider economy neutral can still have large damaging phase-out rate reset five-yearly thereafter Intuitively and according to economic effects on the parts of the economy (Wong, 2009).3 Free allocation is initially theory, providing protection to some and society that do not receive free around 20% of total units, but this pool is sectors means the rest of the economy will allocation. uncapped and expected to rise as industrial

Policy Quarterly – Volume 6, Issue 2 – February 2010 – Page 31 Free Allocation in the New Zealand Emissions Trading Scheme A Critical Analysis production growth outstrips the 1.3% do not actually represent a cap on New legislation declines by less than 1% per phase-out rate (Australian Government, Zealand’s total domestic emissions: under annum. Although allocation per unit 2008). the New Zealand ETS, emissions can be of production phases out at 1.3% per Economic modelling of the Australian arbitrarily high as long as additional units annum, production levels increase proposals shows that production in some are purchased offshore to cover them.5 with time, partially offsetting this. sectors, particularly aluminium, would Note that these curves ignore units • Under production-based allocation, be affected, suggesting that some free generated by (and used to cover) the the small changes in assumptions allocation may be warranted. However, growth and harvest of post-1990 plantation between the dashed and solid curves there does not appear to have been any forests. Forestry has been excluded because have significant impacts on allocations analysis on the optimal level of this support it is cyclical: at some times it generates (and hence fiscal implications).7 from the perspective of the economy as significant units, in others these need to • If the 1.3% phase-out rate continues, a whole. Interestingly, carbon leakage be repaid as forests are harvested. Over the the scheme may not be compatible is not observed in the modelling until long term it is assumed to net out to zero. with the government’s 50% emissions emissions prices of well over AU$200/ The projections represented by the reduction target, depending on how tCO2. (Australian Treasury, 2008) dashed and black lines were released by the quickly production grows in the minister for climate change issues, Nick subsidised sectors. Free allocation in the New Zealand ETS Smith (Smith, 2009a), and minister of • If New Zealand takes on a more The amended New Zealand ETS is closely finance, Bill English, respectively.6 Neither ambitions target closer to 80% aligned to the proposed Australian CRPS, of these data sets was made available to reductions by 2050, the 1.3% phase- and uses production-based free allocation. the public at the time when the legislation out rate is far too gradual. Agriculture and high emissions-intensity was open for public submissions, and the The very high level of free allocation in sectors are to receive a 90% free allocation second was only recently released under the New Zealand ETS means that unlike per unit of production; moderate intensity the Official Information Act. in overseas schemes, there is no specific sectors a 60% free allocation. Both are Several important points can be noted allocation of units for transition in the phased out at 1.3% per annum, with this in relation to Figure 1: residential or small business sectors, or to rate fixed in legislation. • The total allocation is very high fund emissions reductions programmes. Figure 1 shows the free allocation compared to overseas schemes. Under This is partly because New Zealand’s gross of units to industry and agriculture the 2009 legislation, most NZUs will emissions are now much higher than the expected under the previous and current be allocated for free to cover emissions 1990 baseline, so the entire pool of units legislation,4 compared to two target in industry and agriculture. is taken up covering just the agriculture levels for New Zealand emissions: a 50% • Until around 2020, both the 2008 and and industry sectors. The free allocation reduction on 1990 levels by 2050 (the 2009 schemes provide comparable, also comes at a considerable fiscal cost: government’s current target), and an very high, levels of free allocation. at an emissions price of $100/tCO2, free 80% reduction. Note that while the 50% Beyond 2020, the 2009 allocation allocation of 30 to 40 million units per and 80% curves give an indication of the phases out much more slowly. annum is an annual cost to the government number of NZUs that might be issued, they • The free allocation under the 2009 of $3–4 billion. Criticism has been levelled at the assumption underlying the solid and Figure 1: Long-term free allocation of units to agriculture and industry under the 2008 ETS black curves, namely that the 1.3% phase- (blue line) and two government estimates for the 2009 ETS dashed and solid, and out rate will remain unchanged when possible emissions reduction targets for New Zealand of 50% and 80% reduction the legislation will be reviewed every five on 1990 levels by 2050 (grey areas) years.8 There are two major reasons why Free Units Allocated under 2008 and 2009 ETS this assumption is appropriate. First, 70 the 1.3% rate is set in legislation and will

60 remain fixed unless a future government amends the law. The analysis presented 50 in Figure 1 is therefore of the law as it currently stands. 40 Second, the government’s communi- 30 cations relating to the 2009 amendments 50% by 2050 assume that the rate will remain unchanged, Million Units 20 including graphs (presumably based on 80% by 2050 the black curve of Figure 1) to illustrate 10 how a 1.3% phase-out rate is consistent 0 with a 50% by 2050 target (see appendix of 2010 2015 2020 2025 2030 2035 2040 2045 2050 Hood (2009)). The government’s message

Page 32 – Policy Quarterly – Volume 6, Issue 2 – February 2010 has been that, all things being equal, there and undertake emissions reductions such actively developed). These would see the is no reason that the rate need change. as energy efficiency. The proposed United allocation rising significantly. Of course, Figure 1 only shows the States legislation takes this approach, The initial level of assistance appears level of free allocation to industry and with 80% of the scheme’s proceeds being similar to that proposed in other markets. agriculture, not actual emissions levels. directed to householders over the life of To see this, consider a hypothetical New Emissions are expected to continue rising, the scheme, both directly and through Zealand ETS that includes only the and by 2030 New Zealand’s total gross programmes (Stavins, 2009a). transport (25MT emissions) and energy emissions in the dashed-line data set of Unfortunately, the government has (22MT emissions) sectors. In this market, Figure 1 reach 80 million tonnes. With not undertaken (or at least released) any 10MT of free allocation is around 20% rising emissions, New Zealand will need to economic analysis of the optimal means of total units. But the New Zealand meet its targets largely through purchasing of allocating units in the New Zealand timeframe for assistance is clearly longer, units internationally. As the international scheme, so it is unclear why the decision and likely to be overcompensating firms, price of emissions units escalates, this will was made to allocate all units to agriculture based on US experience (Stavins, 2007). become an increasingly expensive strategy. and industry. The allocative baseline (number of At some point there will need to be a clear units awarded per unit of production) is signal to investors of the need to transition Breakdown of allocation – agriculture and to be set at historic New Zealand sectoral to a low-carbon economy. industry average emissions. Firms producing At present there is no long-term Figure 2 shows the breakdown of units with better than average efficiency will stable carbon price path on which to base allocated to the agriculture and industry receive more units than they require, and investment decisions. It therefore falls sectors. vice versa for low-efficiency producers. on governments to signal the expected Particularly in sectors where only a single policy settings well into the future. The Industry plant operates, this choice of baseline current signals – that substantial free There are two obvious changes brought in sends a message that business as usual is allocation should still be in place in 2050 by the 2009 amendments. First, the initial all that is expected. – run the risk of locking in inappropriate allocation has decreased by around one However, the New Zealand legislation investment, especially where investment third. Because eligibility rules have been also allows Australian baselines to be decisions are made around long-lived changed to match the draft Australian imported directly into the New Zealand assets in the short term. legislation, fewer New Zealand firms are scheme. For example, New Zealand sectors expectedFree to Units qualify. Allocated to Industry and Agriculturecan be deemed eligible for assistance The value of free allocation 45Second, allocation remains more or less because their Australian counterparts Under the 2008 legislation, free allocation constant,40 because production increases at are, even if they would not have been Agriculture would have phased out quickly, leaving roughly35 1.3% per annum, matching the otherwise. In this case the New Zealand the government with surplus units after 1.3% phase-out in support. These data sets ETS must use the Australian baseline. This 30 2020. These could have been sold to fund clearly do not provide for any significant raises the potential of further significant tax changes, debt reduction or climate new25 entrant activity, such as expanded windfalls or costs to firms, and uncertain programmes. With the 2009 amendments, methanol20 and cement production, a coal- costs to the taxpayer. the government has instead chosen to to-ureaMillion Units 15 plant or a coal-to-liquid fuels The effect of the change in allocation Industry allocate virtually all NZUs for free to plant10 (plans for all of which are being methodology coupled with a generous industry and agriculture. 5 The forgone revenue to the government 0 resulting from the change has been Figure2010 2: Long-term2015 free allocation2020 of2025 units to 2030the agriculture2035 and industry2040 sectors2045 under2050 the estimated by the Treasury to be $110 billion 2008 (blue lines) and 2009 (black dashedYear and solid lines) ETS to 2050, assuming a modest emissions price of NZ$50 per tonne (Treasury, 2009). With Free Units Allocated to Industry and Agriculture a more plausible (IPCC, 2007; OECD, 2009; 40 Australian Treasury, 2008) emissions price Agriculture 2009 rising to NZ$100 by 2050, the cost to the 30 government approaches $200 billion. Agriculture 2008 Economic theory suggests that using any surplus units to reduce debt or 20 Industry 2008 general taxation, rather than maintaining Million Units subsidies, would have the greatest benefit 10 economy-wide. However, there would Industry 2009 also have been the opportunity to fund 0 transitional assistance for households and 2010 2015 2020 2025 2030 2035 2040 2045 2050 small businesses, support clean technology, Year

Policy Quarterly – Volume 6, Issue 2 – February 2010 – Page 33 Free Allocation in the New Zealand Emissions Trading Scheme A Critical Analysis

and costs of this support to the economy Example: Holcim’s investment in a new cement plant as a whole, rather than simply to the Holcim is considering replacing its current cement plant, increasing production agriculture sector, should be considered. and reducing emissions intensity. If the new plant is not built, incremental demand An allocation of 30 million units per would be met with imports. At a carbon price of $50 per tonne, free allocation is annum (an opportunity cost of $3 billion roughly as shown in Table 1. per annum at an emissions price of $100 per tonne) may be a poor investment Table 1: Potential value of free allocation to Holcim compared to alternatives. Existing plant + imports New plant Dr Suzi Kerr made this point in advice to the select committee: Production 500,000 tonnes at 0.93tCO2/t 880,000 tonnes at 0.75 tCO2/t It is very costly to taxpayers and the 380,000 tonnes at 0.87 economy as a whole to maintain this Imports tCO2/t high level of protection. To raise the

Holcim emissions 465,000 tonnes p.a. 660,000 tonnes p.a. taxes to pay for it we need to distort economic activity (people work and Global emissions 797,000 tonnes p.a. 660,000 tonnes p.a. save less when their earnings are taxed). In the US the cost of raising taxes is in Emissions cost to the order of 40c in every dollar. It is firm and taxpayer, Firm $2.32 million p.a. Firm $12.07 million p.a. 2008 legislation Taxpayer $20.9 million p.a. Taxpayer $20.9 million p.a. probably similar in New Zealand, i.e. it costs the economy around $1.40 for Emissions cost to every dollar worth of free allocation firm and taxpayer, Firm: $5.0 million p.a. Firm: $0.9 million p.a.10 2009 legislation9 Taxpayer $18.2 million p.a. Taxpayer: $32.1 million p.a. given to specific sectors.

Free allocation should certainly be removed as our competitors enter choice of baseline is illustrated in the wider economy, but this would need to be the agreement. It should be phased example below, that the government has demonstrated through careful analysis. out relatively quickly even if they do put forward to illustrate their preference Obviously, these costs are highly not. This is for the same reasons that for production-based allocation: Holcim’s dependent on the emissions price we do not subsidise our agriculture pending decision on a new cement plant. assumed, so the intention is not to draw even though the US and EU do. The Holcim has said it would not have concrete conclusions. Rather, this example benefits to the protected activities invested in the new plant under the 2008 is intended to illustrate that detailed cost- are vastly outweighed by the costs to legislation. Under the 2009 legislation benefit analysis of individual allocation the economy as a whole. The phase there is clearly a strong incentive to decisions could be very important where out of free allocation in the existing upgrade: note that the company’s costs large wealth transfers are involved. bill was probably already too slow on decrease substantially even though its economic grounds. (Kerr, 2009) emissions rise. Agriculture However, the incremental cost to the Returning to Figure 2, it is clear that Without detailed cost-benefit analysis taxpayer of supporting the new plant the majority of free allocation is to the it is not clear what level of support is is substantial: $14 million per annum. agriculture sector. optimal, and whether these units would It employs roughly the same number No overseas jurisdictions currently provide a better return elsewhere. It seems of people, so there are not significant plan to price agricultural emissions. irresponsible to commit up to $3 billion employment benefits. Global emissions However, there is a bipartisan political per annum of taxpayer funds without are reduced by 137,000 tonnes, but at $50/ consensus in New Zealand that matching more careful consideration. tCO2 this should only cost $6.85 million. this 100% level of cover would be Agricultural interests have argued Also consider the $18 million per unaffordable here. This is because New that there are few emissions reduction annum of free allocation to the existing Zealand’s emissions profile is unique for a opportunities in the sector, so pricing plant. If the plant’s production was developed country: agricultural emissions will simply lead to cuts in production. replaced by imports, global emissions make up nearly half of total emissions, so However, New Zealand’s experience would decrease, not increase. The plant to exclude them completely would place in removing agricultural subsidies in supports around 130 direct jobs, so $18 a significant additional burden on other the 1980s should be remembered. This million is around $140,000 per job per sectors of the economy. change, while painful for many at the time, year. Although agriculture is not given 100% brought significant benefits in the long It may be the case that these high levels cover, Figure 2 shows that the current run and demonstrated the tremendous of subsidy are necessary and desirable legislation provides a very high level of innovative and adaptive capacity present based on the plant’s contributions to the ongoing free allocation. The benefits in the sector. It would be wrong to assume

Page 34 – Policy Quarterly – Volume 6, Issue 2 – February 2010 that protecting the status quo is the best term. The current New Zealand scheme free allocations were subject to the same and only option. seems highly likely to over-compensate budget scrutiny as other government firms. Detailed cost-benefit analysis is spending, they may well not pass the test Discussion needed to find both the optimal level of of being wise use of taxpayers’ funds. As outlined above, free allocation on a free allocation, and the optimal way of The slow phase-out also fails to send production basis tends to drive investment recycling ETS revenue more generally. the signal to investors that there will need toward subsidised sectors, potentially Finally, allocation decisions have to be a transition to full market pricing in locking in high-emissions activities. One clearly not been subject to proper the medium term. way to ameliorate this is for allocation to analysis and scrutiny. Compare this One way to address these concerns be clearly transitional. Investors must be with the government’s annual budget would be to cap the pool of units available made aware that over the lifetime of their process. If, for example, a new energy for free allocation, with this pool reducing plant, the expectation is that they, and efficiency programme is proposed, it over time to ensure support is phased their competitors, will face the full price must demonstrate a very high benefit- out much more quickly. Within the of emissions. In this regard, free allocation cost ratio to proceed. Spending cap, allocation on a production basis can be thought of as bridging support decisions are balanced against all other could continue, retaining the positive for industries that are competitive now government priorities – education, health, characteristics of an intensity-based and will be competitive under global superannuation and so on – and against approach. emissions pricing, but may suffer during overall taxation and debt levels. If free The government has argued that any the transition. In the New Zealand ETS, allocation in the ETS were subject to the long-term analysis shouldn’t be taken this signalling could be achieved by same scrutiny, this would soon flush out seriously, because there will be reviews capping the pool of units available for free whether it is in fact a good investment. of the legislation. But leaving it to future allocation, with this pool declining at least Would, for example, corporate tax cuts governments to amend the scheme in line with overall target levels. provide a better return than subsidising on an ad-hoc basis creates enormous Another key issue is setting appropriate existing emissions intensive sectors? uncertainty for long-term investors (IEA, baselines, particularly in a small economy 2007). It would be better to put in place a like New Zealand’s where sectoral emissions may be far from the global average, and where there is often only Unlike in overseas schemes, there are no units one firm of any consequence per sector. The current legislation potentially creates set aside to fund transitional assistance or significant windfalls to firms, and gives programmes for the residential, small business, only weak signals for change. Moving to best-practice benchmarking (as done in electricity generation or transport sectors, or to the European ETS) would ensure that firms face a continual incentive to improve. fund tax and debt reductions. Then there are the issues raised by linking so closely to the yet-to-be- established Australian scheme, as discussed by Wilson (2009). The structure of the Conclusion framework now that sets a more realistic two economies is very different. Support The free allocation provided by the 2009 pathway for allocations into the future, so that is cost effective in the Australian legislation leaves only weak incentives for that major amendments are less likely. An economy may not be in New Zealand’s. subsidised industries to change and is likely allocation methodology with bipartisan Rigid coupling to the Australian scheme to over-compensate them for the impact political support is needed, underpinned could therefore lead to further distortion of emissions pricing; hence, it is likely to by strong cost-benefit analysis and a clear of New Zealand investment decisions, at be expensive for the wider economy while view on where global emissions pricing is a cost to the economy as a whole. If an generating few environmental gains. headed. Australian scheme is implemented, the The problem is not the production- The first scheduled review of the decision to directly import eligibility and based allocation per se; rather, it is that the scheme is in 2011. As the ETS will only be baseline regulations into the New Zealand total level of allocation is high, uncapped coming into operation at this time, there ETS effectively cedes sovereignty over and only phasing out very slowly (or for will be a temptation for this review to be these issues. industry, not at all). Unlike in overseas cursory. Instead, the review provides an The most important concern with free schemes, there are no units set aside to fund opportunity for the proper cost-benefit allocation is, however, not so much with transitional assistance or programmes for analyses to be undertaken to inform the nature of allocation (grandparented the residential, small business, electricity decisions on how ETS revenues should or production-based), but rather the level generation or transport sectors, or to fund be best allocated for the benefit of New of allocation, particularly over the long tax and debt reductions. If the legislation’s Zealand as a whole.

Policy Quarterly – Volume 6, Issue 2 – February 2010 – Page 35 Free Allocation in the New Zealand Emissions Trading Scheme A Critical Analysis

1 Providing a subsidy for a number of years allows assets to receives a free allocation of units corresponding to its target p.a. to 2030 and 1% p.a. thereafter. depreciate, so can be seen as equivalent to a compensation level. If this regime persists, the 50% and 80% curves 8 The minister called Treasury’s analysis to 2050 ‘fantasyland’ payment (Kerr, 2009). represent these free units received by the government. (Smith, 2009b). 2 This assumes compensation to all affected market 6 The dashed line data set ends in 2030 but is tracking 9 Assumes New Zealand industry average emissions of participants, not just trade-exposed energy-intensive linearly at that time, so has been extrapolated linearly to 0.81tCO2/t, estimated from production levels at Holcim and industries. 2050. Golden Bay Cement 3 The phase-out rate is set by regulation, so can be reset 7 The dashed line data set assumes agricultural production 10 This cost is low because the new plant benefits from a without passing new legislation. grows at around 0.7% p.a. and industrial production at high allocative baseline, set in part by the old, inefficient 4 All curves include a small allocation to 2018 to partially 1.5% p.a. The solid line data set has agricultural production plant. The baseline can be reset under the legislation, but cover deforestation of pre-1990 forests. increasing at 0.7% p.a. until 2020, with zero change governments will be likely to be reluctant to do so because it 5 Under the Kyoto Protocol the New Zealand government thereafter, and industrial production rising at around 1.3% would reduce the incentive for firms to upgrade.

References Montgomery, W.D. (1972) ‘Markets in licenses and efficient pollution Australian Government (2008) Carbon Pollution Reduction Scheme: control programs’, Journal of Economic Theory, 5, pp.395-418 Australia’s low pollution future, Canberra: Australian Government, NZIER/Infometrics (2009) Economic Modeling of New Zealand Climate http://www.climatechange.gov.au/publications/cprs/white-paper/cprs- Change Policy, Wellington: Ministry for the Environment, http:// whitepaper.aspx www.climatechange.govt.nz/documents/economic-modelling-of-new- Australian Treasury (2008), Australia’s Low Pollution Future: the zealand-climate-change-policy/ economics of climate change mitigation, Canberra: Australian OECD (2009) The Economics of Climate Change Mitigation: policies and Government, http://www.treasury.gov.au/lowpollutionfuture/default.asp options for global action beyond 2012, Paris: OECD Bertram, G. and S. Terry (2008) The Carbon Challenge: response, Smith, N. (2009a) Media briefing,http://www.scoop.co.nz/stories/ responsibility and the emissions trading scheme, Wellington: HL0911/S00141.htm Sustainability Council of New Zealand, http://www.sustainabilitynz. Smith, N. (2009b) Questions for oral answer, 17 November 2009, org/docs/TheCarbonChallenge.pdf Wellington: New Zealand Parliament Bovenberg, A. et al. (2003) Efficiency Costs of Meeting Industry- Stavins, R. (2007) A U.S. Cap and Trade System to Address Global Distributional Constraints under Environmental Permits and Taxes, Climate Change, Washington: The Brookings Institution Tilburg University Netherlands, http://arno.uvt.nl/show.cgi?fid=10443 Stavins, R. (2009a) The Wonderful Politics of Cap-and-Trade: a closer European Union (2009) Directive of the European Parliament and of look at Waxman-Markey, Cambridge: Harvard University, http:// the Council amending Directive 2003/87/EC so as to improve and belfercenter.ksg.harvard.edu/analysis/stavins/?p=108 extend the greenhouse gas emission allowance trading scheme Stavins, R. (2009b) Worried About International Competitiveness? of the Community, Brussels: European Parliament, http://register. Another look at the Waxman-Markey cap-and-trade proposal, consilium.europa.eu/pdf/en/08/st03/st03737.en08.pdf Cambridge: Harvard University, http://belfercenter.ksg.harvard.edu/ Hood, C. (2009) Submission to the Finance and Expenditure Select analysis/stavins/?p=117 Committee on the Climate Change Response (Moderated Emissions Treasury (2009) Climate Change Response (Moderated Trading) Amendment Bill, Wellington: New Zealand Parliament, Emissions Trading) Amendment Bill – clarification of further http://www.parliament.nz/NR/rdonlyres/6C882B6B-0972-4EFF- information request regarding cumulative Government A0F6-EB5D5789FB19/115616/49SCFE_EVI_00DBHOH_ debt, Wellington: New Zealand Parliament, http://www. BILL9597_1_A14707_DrChristinaHo.pdf parliament.nz/NR/rdonlyres/6396FE21-A7E2-4E68-B2D5- IEA (2007) Climate Policy Uncertainty and Investment Risk, Paris: EDC79B92A38D/117125/49SCFE_ADV_00DBHOH_BILL9597_1_ International Energy Agency A19789_Clarification.pdf IEA (2008) Issues Behind Competitiveness and Carbon Leakage, Paris: Wilson, P. (2009) ‘To Harmonise Or Not To Harmonise, Should That International Energy Agency Be The Question? Emissions trading schemes in New Zealand and IPCC (2007) Climate Change 2007: Mitigation. Contribution of Working Australia’, Policy Quarterly, 5 (4), pp.3-12 Group III to the Fourth Assessment Report of the Intergovernmental Wong, P. (2009) Details of Proposed CPRS Changes, Canberra: Panel on Climate Change, Cambridge and New York: Cambridge Australian Government, http://www.climatechange.gov.au/~/media/ University Press publications/cprs/CPRS_ESAS/091124oppnofferpdf.ashx Kerr, S. (2009) ‘Final comments in response to committee queries from Dr WRI (2008) Leveling the Carbon Playing Field: international competition Suzi Kerr, Independent Specialist Adviser’, Wellington: New Zealand and U.S. climate policy design, Washington: Peterson Institute for Parliament, http://www.parliament.nz/en-NZ/PB/SC/Documents/ International Economics and World Resources Institute Advice/4/d/0/49SCFE_ADV_00DBHOH_BILL9597_1_A19677-Final- comments-in-response-to.htm

Page 36 – Policy Quarterly – Volume 6, Issue 2 – February 2010 Alec Mladenovic

Electoral Finance Reform in New Zealand: A Need for a Conceptual Framework

Introduction Democracies include arrangements which facilitate collective or social decision making in the formal public arena (Cohen, 2001, p.49; Geddis, 2003, p.53).1 These arrangements, established and supported by legal systems, comprise various ‘institutions, practices, and procedures’ (Geddis, 2003, p.53). They include voting rights, rules for the organisation of elections (voter eligibility, electoral or representation systems, electoral finance) and the framework for decision making by the legislature and executive (Cohen, 2001, p.49).

The electoral system plays an important requires that they be convinced that the concerns about whether those funding role in a well-functioning and legitimate democratic process that produces such the process are able to exert inappropriate democracy. Elections provide a pivotal decisions is legitimate (Geddis, 2001, or disproportionate political influence, opportunity for the members of a pp.11-12). thereby undermining the democratic democracy to exercise collective decision An important feature of the ethos (Geddis, 2001, p.6). The familiar making. Ideally, the outcomes of elections, democratic process is the indispensable aphorism ‘he who pays the piper calls the and the social decisions that subsequently and permeating role of money (Ewing tune’ alerts us to this potentiality. In short, flow from them, should be accepted by and Issacharoff, 2006, p.1). As the 1986 money has the ability to make a lie of the the citizens as binding. That is, these royal commission on New Zealand’s democratic slogan ‘rule of the people, by outcomes and decisions, which affect electoral system commented, ‘[i]t is the people, and for the people’ (ibid.). all citizens, should be authoritative and perfectly legitimate and, indeed, highly To mitigate the ‘toxic consequences’ enforceable. For reasonable citizens to desirable that those interested in the (Geddis, 2001, p.6) of money in the consider themselves necessarily bound political process raise and spend money political process, many democracies have to further their political objectives’ (Royal introduced some form of regulation Commission on the Electoral System, 1986, for political finance (see, for instance, Alec Mladenovic recently completed studying for p.183). Money is, however, an important Alexander, 1989; Alexander and Shiratori, a Master of Public Policy within the School of determinant of political power (Alexander, 1994; Ewing and Issacharoff, 2006; Government at Victoria University of Wellington, 1989, p.10). Its prevalence and importance Williams, 2000). A well-designed and and has worked briefly as a research assistant at the IPS. in the democratic process raises public reliable regulatory regime importantly

Policy Quarterly – Volume 6, Issue 2 – February 2010 – Page 37 Electoral Finance Reform in New Zealand: A Need for a Conceptual Framework

controversial change was the introduction The National-led government’s discussion paper of significantly tighter regulation of identifies seven guiding principles: equity; freedom of third parties – that is, non-candidate and non-party political actors – wanting to expression; participation; transparency; accountability; influence election outcomes by running parallel campaigns.5 This included: legitimacy; and clarity • requiring a person to apply to be ‘listed’ as a third party with the contributes to the legitimacy of the election contest. Therefore, we find Electoral Commission if they democratic process and, hence, to the that any debate over how the electoral anticipated spending more than binding nature of high-level social process should be constructed $1,000 on advertisements relating to a decisions that emanate from it. inevitably involves having to engage in constituency candidate or more than The National-led government is deeper disputes over the fundamental $12,000 on election advertisements in currently reviewing the regulation of nature and purposes of democracy. total; electoral finance.2 Consistent with the (Geddis, 2001, p.10) • requiring a listed third party to appoint discussion above, the governmental review This article has two principal object- a financial agent; has stated: ‘It is generally agreed that ives. First, I claim that the current • limiting a listed third party’s election New Zealand needs to regulate electoral governmental review of electoral finance expenses during a regulated election campaigning and political party funding is seriously deficient in that it has failed period to a maximum amount of so that we can have confidence in the to probe adequately and define the $4,000 for election advertisements outcome of parliamentary elections and philosophical and ethical foundations for relating to a constituency candidate, the integrity of our democratic system’ regulatory reform. The review has proposed and to a maximum amount of $120,000 (Ministry of Justice 2009b, p.6).3 seven ‘guiding principles’. However, for any other purpose; and But this statement prompts the these have been weakly developed and • requiring a listed third party and the fundamental question of what particular presented without an in-depth analysis Electoral Commission to disclose principles and values characterise and of the kind indicated by Geddis. Further, information about certain donations inform the democratic system whose the review to date has not shown how received and election expenses integrity is to be protected. These the guiding principles have been used to incurred by the third party. principles and values in turn should help evaluate and justify the various proposed Furthermore, the true regulatory to determine the structural composition options for the regulatory system. There burden on listed third parties was of the relevant democracy in terms of is thus a risk that New Zealand may accentuated due to the Electoral Finance the form of the particular set of political end up with a regulatory system that is Act potentially, and in all likelihood, structures, institutions, practices and inconsistent across all aspects of electoral extending the regulated election period procedures adopted. Geddis explains this finance and that fails to measure up to the substantially beyond the previously as follows: democratic ideals that are most important regulated period of three months Adopting a stance on the meaning to its citizens. immediately prior to polling day (which of democracy and the nature of the Second, as a way of addressing such has since been reinstated in the amended voting system required to produce deficiencies, I discuss two alternative Electoral Act 1993).6 As a result, for the legitimate and binding social decisions conceptual frameworks for viewing the 2008 general election the regulated period has practical implications for the way electoral process: the aggregative vision was more than 10 months. in which actual, real world election and the conditional vision. In discussing The regulation of third parties under practices should reflect these ideals. It the conditional vision, I introduce the Electoral Finance Act was widely involves making a commitment to an and defend Joshua Cohen’s principle criticised as representing a serious affront interlocking set of argument clusters. of political equality (Cohen, 2001) as to citizens’ democratic right to free speech.7 These interdependent claims about representing democratic ideals that are Much of the political scrummaging the world that both support and rely compatible with the conditional vision. concerning the act was therefore centred on each other for their validity relate on its implications for the right of third to the function of electoral speech in New Zealand’s review of electoral finance parties to engage financially in the a democracy, the appropriate part the Background electoral process, and this was the major government should play in setting The present governmental review of cause of its ultimate rejection. Given this up the rules of electoral debate, and electoral finance follows the repeal experience, the regulation of third parties the role of voters and candidates in March 2009 of the controversial is likely to be the most politically sensitive in the democratic process. These Electoral Finance Act 2007 enacted by issue in the current governmental review. commitments support the legal the previous, Labour-led government.4 rules that are applied to regulating That act was responsible for a number of The proposed guiding principles the activity of different actors in the sweeping regulatory changes. The most The National-led government’s

Page 38 – Policy Quarterly – Volume 6, Issue 2 – February 2010 discussion paper identifies seven there is no evidence in the discussion design would ‘be weighted in favour of guiding principles: equity; freedom of paper to indicate how these principles, freedom of expression, and be simple and expression; participation; transparency; or any other criteria, have been applied easy to comply with’ (Ministry of Justice, accountability; legitimacy; and clarity in developing and evaluating alternative 2009c, pp.33, 34). Although the detailed (Ministry of Justice, 2009c, p.11). The stated options for electoral finance reform. design of the option is not provided, the aim is for these principles to ‘both guide the For instance, consider the two options discussion paper suggests some possible development of electoral finance law and proposed for the regulation of spending key features. These include third parties, be incorporated in the purpose section of by third parties on elections (Ministry while being required to identify themselves the new legislation’ (ibid.). The discussion of Justice, 2009c, pp.32-5). One option in any election advertisements, not having paper does not, however, elaborate on the is to retain the status quo. This option to account for and disclose the sources of principles. Instead, readers are directed to therefore enshrines the present, largely any political donations they receive (ibid., the government’s issues paper (Ministry laissez-faire approach to the regulation pp.33, 35). of Justice 2009b, pp.10-11) for further of third parties. It implicitly assigns an The proportionate regulatory information on the first six principles (the overwhelming importance to third parties’ scheme appears to be considerably more seventh principle, relating to clarity, was right to freedom of expression, while the sympathetic to the principle of equity. added at the discussion paper stage). principle of equity seems to have very little It implicitly recognises that money is an The guiding principles, as formulated, weighting. As the discussion paper does essential resource for political activity in do not offer a robust, coherent framework not evaluate the option against the guiding democratic states, and that the ability to for evaluating different options for electoral principles, it is not clear on what basis it control resources contributes to political reform. In particular, there appears to has been proposed or how any trade-offs influence. As such, the option implies the have been no attempt made to date either between the principles have been resolved. need for a regulatory system to impose to explore or to understand the intrinsic Moreover, the option would yield an some limits on the use of resources by meaning and role of democracy in New internally inconsistent and inequitable wealthier citizens and, hence, curtail Zealand. The development of an electoral approach within the regulatory system. political speech. However, given that process, including its foundational Compared to third parties, the spending we are not yet informed about the finer principles, ideally should take place in the of political parties and constituency details of the scheme, it is not possible context of discussion about the relevant candidates would be tightly restricted to provide a more specific assessment of democratic ideals and their implications during an election period. There is no the extent to which a principle of equity for arrangements needed to support social obvious principles-based explanation may be satisfied. Moreover, the caveat decisions which will be accepted by the provided for why third parties should that the scheme should ‘be weighted in citizenry as legitimate and binding. be largely exempt from limits on their favour of freedom of expression’ stands Without a firm philosophical or ethical election activities while direct electoral out ominously. Once again, the discussion foundation, it is very difficult to have an participants are, by comparison, tightly paper does not substantiate – by reference educated sense of the precise meanings of controlled.9 to the guiding principles, or any other relevant democratic principles, how they Under the other option – referred criteria – why freedom of expression should be weighted and how any conflicts to as the ‘proportionate regulatory should be given higher consideration. between them should be resolved. The scheme’ – third parties intending to Not presenting any reasoning diminishes inevitable tension that arises in the spend on election activities above some the option’s credibility. Additionally, the democratic process between freedom of set threshold would first need to register possible watering down of the scheme expression and equal opportunities for with the Electoral Commission. Each by not requiring third parties to account effective political influence is a prime registered third party would then be for and disclose political donations is example here.8 As a result, the immediate limited in the overall amount they could similarly concerning. This would render concern is that electoral finance reform will spend on election activities during a the scheme largely ineffective. It is easy fail to reflect New Zealand’s commitment regulated election period. This option is to imagine third-party front groups or to important democratic values. differentiated from the regulatory scheme organisations being formed to serve simply for third parties under the Electoral as repositories for political contributions Application of the guiding principles Finance Act 2007 (see above) because its by those seeking to influence the outcome The discussion paper explains that: ‘The use of guiding principles is helpful when reviewing complex and detailed matters such as electoral finance rules. Such It implicitly recognises that money is an essential principles can provide direction and resource for political activity in democratic states, ensure comprehensive improvements to the law’ (Ministry of Justice, 2009c, p.11). and that the ability to control resources contributes However, leaving aside the problems with the guiding principles discussed above, to political influence.

Policy Quarterly – Volume 6, Issue 2 – February 2010 – Page 39 Electoral Finance Reform in New Zealand: A Need for a Conceptual Framework

Conditional vision The framework must ensure that all reasonable In contrast to the aggregative vision, the participants can be satisfied that the electoral conditional vision demands from the electoral process much more than simply process is fair and just because it gives all actors counting voters’ preferences. It also expects certain standards and values that the opportunity for effective political participation attribute to the electoral process a sense of legitimacy – based on some notion of equal of an election whilst protecting their and generally not to be compromised by opportunity for participation – felt by all anonymity. other democratic ideals or, indeed, any members of the electorate (Geddis, 2001, other considerations. The United States p.7). It therefore presents ‘a “voting-plus” Conceptual frameworks for electoral finance regulation of electoral finance epitomises account of why an election is considered reform this approach. In fact, restricting to form a legitimate means of allocating In this section I address the issue of political speech in the United States for public power. Such an account requires a conceptual framework appropriate the purpose of curtailing freedom of that we broaden our concept of an election to electoral finance reform. I begin by expression is deemed by the courts to be to encompass more than an opportunity to discussing two different visions of the unconstitutional. Significantly, then, the cast a ballot for or against some particular electoral process: the aggregative vision aggregative vision is opposed to the notion individual or issue’ (Geddis, 2003, p.60). and the conditional vision (Geddis, 2001). of fairness as an overriding value in the Hence, bare-knuckled competition – of These two visions or models broadly electoral process. Instead, citizens appear the free-market kind – in the electorate, cover the debate on electoral finance in as free combatants or competitors in the together with a voting system to determine liberal democracies. Each takes a different democratic process, where they tussle majority rule, is not the sine qua non under stance on the meaning of democracy against each other, with few constraints, the conditional vision. and the preconditions for democratic to form or support a majority that will As a consequence, the structure of processes. The aggregative vision supports best serve their self-interests. While the electoral process and whether it freedom of expression as the paramount participation in the process is guaranteed is regarded by voters as legitimate is democratic principle, which is to be to individuals through formal or negative imperative. If the electoral process is so vigorously defended. By contrast, the rights that proscribe their exclusion from regarded, social decisions produced by it, conditional vision places less emphasis the process, citizens are not guaranteed though ultimately determined by majority on freedom of expression, supporting substantive or positive rights entitling vote, are recognised and accepted by the a more egalitarian view of elections. them to meaningfully or efficaciously collective as binding, whatever the actual As part of discussing the conditional engage. Therefore, under the aggregative outcomes of voting (Geddis, 2001, p.20). vision, I introduce Cohen’s principle of model, one person one vote, a competitive The spotlight, then, is acutely targeted political equality (Cohen, 2001). Finally, I politics in a ‘marketplace of ideas’ that is on ‘a wider process of public decision- defend this principle and conclude that it ‘unruly, contentious, and bare-knuckled’, making, comprised of its own particular provides a robust conceptual framework and the absence of any significant limits set of rules, institutions, and practices. for considering New Zealand’s electoral on freedom of expression represent the These rules, institutions, and practices are finance reform. hallmark of a legitimate electoral process in turn embedded in, and informed by, a (Geddis, 2001, pp.12-15). broader “vision” of democracy’ (Geddis, Aggregative vision The ‘marketplace of ideas’ belief 2003, p.60). The fundamental assertion of the assumes that curbing speech harms There are, however, implications for aggregative vision is that the raison d’être democracy in two ways. First, it reduces the design of the regulatory framework of the electoral process is to sum up (or the quantity of information available to around the electoral process. The aggregate) the votes representing the voters for selecting the optimal outcome framework must ensure that all reasonable preferences of self-interested citizens to maximise their utility. Second, it results participants can be satisfied that the residing in a pluralistic society, and nothing in unjustifiably favouring certain social electoral process is fair and just because it more. Put simply, political power is then interests among the myriad of social gives all actors the opportunity for effective given to those who have the support of the interests when, as assumed under the political participation (Geddis, 2001, majority of voters (Geddis, 2001, pp.7, 13). aggregative vision, there is no such entity p.17; Rawls, 1999, pp.197-8). Moreover, to Accordingly, the aggregative vision might as the ‘common good’. These arguments ensure its own legitimacy, the state must be viewed by some as supporting a fairly provide the justification for the state not level the playing field so that no political crude or unsophisticated mechanism for intervening in the electoral process except actor is in a position to unfairly influence collective or social decision making at the to ensure that the aggregate preferences of the outcome (Geddis, 2003, p.70). The highest level of society. voters are accurately determined (Geddis, electoral processes and regulation of Freedom of expression in the electoral 2001, p.16). electoral finance in Canada and Britain process is upheld as being sacrosanct exemplify the conditional vision.

Page 40 – Policy Quarterly – Volume 6, Issue 2 – February 2010 A principle of political equality value is to give way. In particular, if we In defence of the principle of political Cohen’s principle of political equality, accept this three-part principle then we equality which fits within the conditional vision, allow that we may need to regulate speech A significant argument for the view that prescribes norms or standards applicable to avoid certain kinds of inequalities in the government should have limited to arrangements in a democratic society opportunities for political influence. involvement in the electoral process and for making high-level binding social (ibid., pp.49-50, emphasis added) there should be a right to unrestricted decisions.10 According to Cohen, the political speech (the aggregative vision) The third norm of the principle of principle ‘applies to the framework for emerges from the belief that curtailing political equality – equal opportunities making authoritative and enforceable freedom of expression strikes at the for effective political influence – mirrors collective decisions and specifies, inter heart of democracy because it disengages the well-known standard of equality of alia, the system of rights and opportunities citizens from the democratic process opportunity (ibid., p.50).12 This standard for free and equal members to exercise (Cohen, 2001, pp.69-70). Crucial to this requires that ‘one person ought not to political influence over decisions with viewpoint is the notion of the inherent have greater chances than another to which they are expected to comply and role of individual responsibility in a attain a desirable position because of some that are made in their name’. (Cohen, democracy. Individual responsibility quality that is irrelevant to performance 2001, p.49) involves each person having the right in the position’ (ibid.). Cohen refers The principle of political equality is to decide for him or herself how much to this as a statement of the ‘concept of stated in three parts: information they need in the democratic equal opportunity’, noting that ‘different 1 Equal rights of participation, process and whether the information is conceptions of equal opportunity are including rights of voting, associa- reliable (ibid., p.70). This contingency of distinguished by the interpretations tion, and office-holding, as well individual political responsibility implies they give to “irrelevant to performance”’ as rights of political expression, that restricting the quantity of speech in (ibid.). Using Rawls’ conception of equal with a strong presumption against the process of collective decision making opportunity, ‘irrelevant to performance in restrictions on the content or is antithetical to a proper and fundamental the position’ means that the only factors viewpoint of expression, and conception of democracy. that ought to be considered relevant against restrictions that are unduly Although persuasive, this argument to attaining positions of interest are a burdensome to some individuals or may be challenged by applying moral person’s motivation to succeed and their groups; reasoning which pits it squarely against ability to perform in the position (ibid.; 2 A strong presumption in favor of the norm of equal opportunities for Rawls, 1999, p.197). equally weighted votes; and political influence. Central to this counter- In the domain of politics, ‘the relevant 3 Equal opportunities for effective argument is the question of how citizens position is active citizen in the formal political influence. This last ought to be properly regarded within the arrangements of binding collective requirement … condemns inequali- democratic process (Cohen, 2001, p.72). decision making’ (Cohen, 2001, p.50). ties in opportunities for holding The critical analysis begins by observing Those who are equally motivated and office and influencing political that the argument against restriction able to participate as active citizens in decisions (by influencing the of free speech adopts a narrow view of the formal arrangements of binding outcomes of elections, the positions the citizen’s role in a democracy (and, collective decision making should have of candidates, and the conduct hence, a narrow conception of democracy identical chances to wield influence of inter-election legislative and itself). Consistent with the élite theories (ibid.). In particular, this conception of administrative decision making).11 of democracy, citizens’ interests are equal opportunity requires that economic (ibid.) prioritised on the basis that they can status be excluded as a relevant factor in While there is an assumption that be met entirely through their role as the electoral process and that political the principle of political equality should members of an audience. Citizens are an finance be regulated if the legitimacy of the apply in its entirety to arrangements audience absorbing the messages of élite democratic process is to obtain (Geddis, relevant to democratic decision making, political competitors, rather than political 2001, p.20; Rawls, 1999, pp.197-8). in any given situation there may be actors constructively participating in the conflict between and amongst the norms political process by contributing to the underlying the principle (ibid.). Where content (ibid.).13 such tension arises, the implementation of the principle will require a weighting of the three norms: Individual responsibility involves each person the force of saying that arrangements for making binding collective having the right to decide for him or herself how decisions are to accommodate all three much information they need in the democratic components is that, when conflicts emerge, we can’t say a priori which process and whether the information is reliable

Policy Quarterly – Volume 6, Issue 2 – February 2010 – Page 41 Electoral Finance Reform in New Zealand: A Need for a Conceptual Framework

An alternative view – supported by influence is supported by principles of observed that the deprivation of power Cohen as a more accurate account of justice. John Rawls and Michael Walzer in the United States is largely caused by political sociology – casts citizens as are particularly influential here. Rawls the controlling influence of money in the having a substantially more expansive (1999, p.197) believed that measures are sphere of politics. Similarly, Geddis (2001, role in the democratic process. This view needed to safeguard ‘a fair opportunity to pp.6, 20) noted that a significant, and most leads naturally to a broader conception take part in and to influence the political unjustifiable, reason for inequalities in the of democracy. Citizens are not only an process’. Importantly for electoral finance power of social actors is the relatively higher audience for élite political actors, but also regulation, Rawls considered that the wealth possessed by some participants, and bona fide participants in the democratic familiar democratic principle ‘one person suggested that this is a major concern for process, expressing themselves through one vote’ may not provide enough democracy. And Alexander and Shiratori speech and action. They are seen more protection against the unfair exclusion of (1994, p.1) have written about the conversion sanguinely as capable, if they wish, of some members of society from the political of economic power into political power by effectively influencing political discourse forum because of the political system’s those who are more economically privileged. (Cohen, 2001, p.72; Geddis, 2001, p.20). reliance on private sector funding.14 For The repercussions for healthy democracy This account of political sociology Rawls, a just constitutional system – that (and, hence, for citizenship), both immediate was supported by Hannah Arendt. Arendt is, one based on the fulfilment of the and generational, are damaging, as Walzer asserted that human plurality is the basic principle of participation – is prevented warns: condition of both action and speech when the demands of the prevailing The endless spectacle of property/ Arendt, 1998, pp.7, 175). And it is through interests overpower the political forum power, the political success story of speech and action that human beings have (ibid., p.199). the rich, enacted and re-enacted on the means to expose their distinctness Walzer’s proposed regime of complex every social stage, has over time a (ibid., p.176). Moreover, the initiative of equality limits the mobility of each social deep and pervasive effect. Citizens speech and action is inseparable from good to its own distributive sphere. This without money come to share a what it means to be human (ibid.). But implies that the acquisition of a social profound conviction that politics this view of human beings as both speakers good should not lead to a situation of offers them no hope at all. This is a and actors in a pluralistic society requires dominance: that is, the possession of kind of practical knowledge that they citizens to be granted equal opportunities one social good belonging to its own learn from experience and pass on to for effective political influence. distributive sphere cannot be converted their children. With it comes passivity, Arendt reminds us of another into dominance over other social goods deference, and resentment. (Walzer, important consideration in thinking attached to their respective distributive 1983, pp.310-11) about the normative ideal of democracy. spheres. In the case of electoral finance, this Participatory democracy is vital in her means that citizen A’s wealth – acquired, interpretation of the concept of power say, in the sphere of the market economy Conclusion and ongoing survival of the public realm. – should not be allowed to become a The current governmental review of For Arendt the public realm is held dominant good such that it provides him electoral finance regulation in New together by the dynamic of action and or her with an advantage over citizen B in Zealand is taking place in a philosophical speech – the prerequisite for all forms of the sphere of politics (Walzer, 1983, p.298). and ethical vacuum. This calls for taking political organisation. And action and According to Walzer’s thesis, this stipulates a position on the meaning of democracy speech are made possible only by the democracy as the system of social and the nature of the corresponding proximity of human beings in the space of organisation where politics is the domain electoral process needed to ensure that appearance (ibid., pp.200-1). The danger of action and speech. The political sphere social decisions made at the highest level for democracy is disappearance of human is therefore immune to social goods that of society are perceived by the citizenry power – presenting as collective action rightly belong to, and whose influences as being legitimate and binding. In the and speech – leading to the destruction are restricted within, other distributive absence of such a framework, there is a of political communities, and democracy spheres: ‘Citizens come into the forum risk that the resulting regulation will not itself. Hence, Thomas Jefferson ‘had at with nothing but their arguments. All be consistent with the democratic ideals least a foreboding of how dangerous it non-political goods have to be deposited which most New Zealanders uphold. might be to allow the people a share in outside: weapons and wallets, titles and Further, there is the likelihood that the public power without providing them at degrees’. This represents ‘complex equality reform will not be internally consistent the same time with more public space than in the political sphere’: the opportunity for and equitable across all aspects of electoral the ballot box and with more opportunity all citizens to participate in the political finance, or across all participants in the to make their voices heard in public than forum which affects their lives is equalised democratic process. election day’ (Arendt, 2006, p.245). (ibid., pp.304, 310). The aggregative and conditional As well as being compatible with a The ideal of a broad-based democracy visions of the electoral process provide wider conception of democracy, a goal is jeopardised by the potential for wealth two opposed conceptual frameworks for of equalising opportunities for political to influence politics. Walzer (1983, p.310) electoral finance reform. As discussed,

Page 42 – Policy Quarterly – Volume 6, Issue 2 – February 2010 Cohen’s principle of political equality, 2 The governmental review was launched on 1 April 2009 8 Ewing and Issacharoff (2006, p.7) have posed this with the release of a scope paper (Ministry of Justice, dilemma in the form of the following question: ‘Where is the which fits within the conditional vision, 2009a). This was followed by an issues paper released for ideological centre of gravity in the event of conflict?’ consultation on 22 May 2009 (Ministry of Justice, 2009b). 9 The lack of consistency in this regard was not lost on the is compatible with realising the fullest A discussion paper containing the government’s proposals 1986 Royal Commission on the Electoral System: ‘In the potential of democracy, including the was then released for consultation on 28 September same way that limiting spending by candidates is illogical (Ministry of Justice, 2009c). The final part of the review if parties are not similarly restricted, it is illogical to limit potentiality of all citizens to meaningfully – the legislative stage – is now under way. New electoral spending by parties if other interests are not also controlled. engage as actors in the electoral process. finance law is expected to be passed by the end of 2010 to Supporters or opponents of a party or candidate should not take effect in time for the 2011 general election. be able to promote their views without restriction merely by Moreover, it is cognisant of principles of 3 This is essentially reiterated in the foreword to the issues forming campaign organisations “unaffiliated” to any party paper (Ministry of Justice, 2009b, p.2), where the minister or candidate contesting the election. Nor should powerful or justice. Further, the principle of political of justice, Simon Power, wrote: ‘Electoral finance law is wealthy interest groups be able to spend without restriction equality is consistent with the New Zealand central to the integrity of New Zealand’s democratic system.’ during an election campaign while those most directly The minister’s statement is repeated in his foreword in the involved are restricted’ (Royal Commission on the Electoral Bill of Rights Act 1990, which provides discussion paper (Ministry of Justice, 2009c, p.3). System, 1986, p.193). 4 The current (interim) regulatory regime for electoral finance 10 This principle is consistent with John Rawls’ ‘liberties of that ‘[e]veryone has the right to freedom is, once again, largely contained in the Electoral Act 1993 equal citizenship’ (Rawls, 1999, p.173). To be sure, a of expression, including the freedom to (as amended on 1 March 2009). principle of political equality is not the only prerequisite 5 Despite the Electoral Finance Act having been repealed, for ensuring that a system of collective decision making is seek, receive, and impart information and many of the regulatory changes it made have been retained binding. Further relevant requirements are that decisions opinions of any kind in any form’ but that in the interim regime. That said, the treatment of third be fundamentally just in accordance with some suitable parties has reverted to the largely laissez-faire approach notion of justice, and that they promote the general welfare. this right may be limited where doing so that existed before the act. This approach means that third Nonetheless, the standards established by a principle of parties are only indirectly constrained in how much they political equality will typically subordinate other factors, with ‘can be demonstrably justified in a free may spend on advertising that specifically supports, or the exception of the most basic precepts of justice (Cohen, and democratic society’.15 appears to support, the election of a candidate or a political 2001, p.49). party. Positive advertising of this kind must first in effect 11 It may be arguable, at least prima facie, that the second Implementing the principle of be authorised by the candidate or party being promoted by part of the principle (equally weighted votes) forms a the advertising and, as a result, be accounted for within the subset of the third part (equal opportunities for effective political equality, in particular the norm candidate’s or party’s election spending limit. Third parties political influence). Although Cohen does not clarify this, of equal opportunities for political are unrestricted in how much they may spend on other my interpretation is that the two parts should be viewed as forms of parallel campaigning, such as negative (‘attack’) mutually exclusive, for the following reason. The second part influence, implies that the role of money advertising or issue advocacy. is in my view equivalent to the familiar democratic notion of 6 The Electoral Finance Act required that where a general ‘one person one vote’. However, satisfying this notion should in the electoral process should be tightly election is held in the year in which Parliament is due not imply that the third part necessarily holds. For instance, regulated, despite the effect of reducing the to expire, the regulated period is the longer of the period unequal opportunities for effective political influence on the beginning on 1 January of that year and ending with the part of the constituents of a society due to, say, differences quantity of political speech. In particular, close of polling day, or the period beginning three months in the holdings of wealth, are a valid concern despite an it requires proper and thoroughgoing before polling day and ending with the close of polling day. electoral system that mandates equally weighted votes. 7 It appears that anger generated by the Electoral Finance Act 12 It also corresponds with Rawls’ principle of (equal) regulation of the expenditures of third is slow to dissipate in some quarters, particularly in regard participation (Rawls, 1999, pp.194-5). to the effects on the rights of third parties. For example, 13 For an early discussion of an élite theory of democracy, see parties, as is the case in Canada and an editorial in a leading newspaper commented: ‘Labour’s Schumpeter (1987, chapter 22). Britain. Electoral Finance Act was an anti-democratic disgrace. One 14 The Royal Commission on the Electoral System came to of its worst features was curtailing the rights of those who the same conclusion, noting that this requires that electoral wanted to spend their own money throughout an entire finance should not be ‘completely uncontrolled’ (Royal 1 I would like to thank Jonathan Boston, Andrew Geddis and election year in trying to gain a particular outcome’ (‘Caped Commission on the Electoral System, 1986, pp.7, 183). Paul Harris for their helpful comments on earlier versions of crusader’s plan flawed’,Dominion Post, 2 October 2009, 15 New Zealand Bill of Rights Act 1990, sections 14 and 5. this article. p.B4).

References Ministry of Justice (2009a) Review of Electoral Campaigning and Alexander, H.E. (ed.) (1989) Comparative Political Finance in the 1980s, Political Party Funding: topics to be considered, scope paper Cambridge: Cambridge University Press released 1 April, Wellington: Ministry of Justice Alexander, H.E. and R. Shiratori (eds) (1994) Comparative Political Ministry of Justice (2009b) Electoral Finance Reform: issues paper, Finance Among the Democracies, Boulder, Colorado: Westview Press released May, Wellington: Ministry of Justice Arendt, H. (1998) The Human Condition, second edition, Chicago: Ministry of Justice (2009c) Electoral Finance Reform: proposal, University of Chicago Press discussion paper released 28 September, Wellington: Ministry of Arendt, H. (2006) On Revolution, New York: Penguin Books Justice Cohen, J. (2001) ‘Money, politics, political equality’, in A. Byrne, R. Rawls, J. (1999) A Theory of Justice, revised edition, Cambridge, Stalnaker and R. Wedgwood (eds), Fact and Value: essays on Massachusetts: Harvard University Press ethics and metaphysics for Judith Jarvis Thomson, Cambridge, Royal Commission on the Electoral System (1986) Report of the Royal Massachusetts; London: The MIT Press Commission on the Electoral System: Towards a Better Democracy, Ewing, K.D. and S. Issacharoff (eds) (2006) Party Funding and Campaign Wellington Financing in International Perspective, Oxford; Portland, Oregon: Schumpeter, J.A. (1987) Capitalism, Socialism and Democracy, sixth Hart Publishing edition, London: Unwin Paperbacks Geddis, A. (2001) ‘Democratic visions and third-party independent Walzer, M. (1983) Spheres of Justice: a defense of pluralism and expenditures: a comparative view’, Tulane Journal of International equality, New York: Basic Books and Comparative Law, 9, pp.5-107 Williams, R. (ed.) (2000) Party Finance and Political Corruption, Geddis, A. (2003) ‘Three conceptions of the electoral moment’, Australian Basingstoke: Macmillan Press Journal of Legal Philosophy, 28, pp.53-78

Policy Quarterly – Volume 6, Issue 2 – February 2010 – Page 43 CLIMATE CHANGE 101: An Educational Resource by Andy Reisinger (co-author: Lenny Bernstein)

Climate change is widely recognised as the mostly from the findings contained in most important issue now facing humanity. the Fourth Assessment Report of the Proposals to reduce emissions or to adapt Intergovernmental Panel on Climate proactively to future climate changes often Change. But it also highlights more recent result in intense public debate about the scientific developments and illuminates urgency, feasibility, and cost, as well as the key issues that underpin the current the appropriate balance, of responses international negotiations for a new global to climate change. A better and much agreement on climate change. This book broader understanding of the causes and is intended as an educational resource for effects of climate change, together with the anyone seeking a robust scientific overview options for mitigation and adaptation at of the complex and interdisciplinary the global scale, is critical for such societal challenge that climate change represents for discussions to be fruitful. Climate Change the global community. 101 – An Educational Resource provides a clear, succinct, and measured summary of An Institute of Policy Studies and New Zealand Climate Change Research Institute co-publication our current knowledge of climate change, by Andy Reisinger (co-author: Lenny Bernstein) its potential impacts, and the scope for Publication November 2009 Format A4 Paperback, pp 303 reducing greenhouse gas emissions and ISBN 978-1-877347-34-4 Price - $45 (including P&P within New Zealand) adapting to inevitable changes. Place your order by email, phone, fax or mail to Institute of Policy Studies, Victoria University of Wellington Climate Change 101 draws its substance Email [email protected] Telephone +64 4 463 5307 Fax +64 4 463 7413 PO Box 600, Wellington, New Zealand An invoice will be issued with your order

Onward with Executive Power Lessons from New Zealand 1947-57 By Harshan Kumarasingham

Onward with Executive Power – Lessons entrenched the ‘elected dictatorship’ from New Zealand 1947-57 includes new available to post-war prime ministers and exciting research on constitutional, and single-party governments. Onward political and policy developments during assesses the lessons of the Fraser- the late 1940s and 1950s, a critical Holland era for contemporary New stage in the evolution of New Zealand Zealand politics and highlights how as a modern, independent state. The many of the central issues of the period was characterised by a significant immediate post-war years remain with evolution in New Zealand’s relationship us and are still unresolved. with Britain, the passing of the Statute of Dr Harshan Kumarasingham Westminster, the first transfer of power completed his Ph.D on the Westminster between Labour and National, the strong System from Victoria University of leadership styles of Fraser and Holland, Wellington, which won the Sir Desmond the abolition of the Legislative Council, Todd Memorial Prize. a landmark waterfront strike, and an ambivalent attitude towards full national independence. Importantly, too, the An Institute of Policy Studies publication by Harshan Kumarashingham period had major ramifications for the Publication February 2010 Format – A5 paperback, pp 194 conduct of politics during the remainder ISBN 978-1-877347-37-5 Price $27.00 (including P&P within New Zealand) of the century, certainly until the recent Place your order by email, phone, fax or mail to: era of proportional representation. Institute of Policy Studies, Victoria University of Wellington Email: [email protected] Telephone +64 4 463 5307, Fax + 64 4 463 7413 In particular, it underscored and PO Box 600, Wellington, New Zealand. An invoice will be issued with your order.