If Australia ratifies Kyoto then we'll suffer the same economic headaches as New Zealand

If Labor is successful in this weekend's Australian election and then keeps its commitment to ratify Kyoto then we'll have started down a road that has, predictably, started to really affect the New Zealand economy.

Higher energy costs are leading to increased inflation and higher interest rates.

I confidently predict that Labor's energy/climate policies will drive Australian interest rates over 10% within the first term of a Labor government.

WELLINGTON - New Zealand policies aimed at tackling global warming from next year could become another headache for the central bank, with higher energy costs threatening to heat up inflation pressures.

An emissions trading scheme, which will cap the amount of greenhouse gases companies can emit or make them pay if they cannot, will result in higher fuel and electricity prices.

Analysts say this will flow directly into consumer prices, adding as much as 1 percentage point to inflation, which the central bank is already battling with record high interest rates of 8.25 percent - the highest in the industrialised world.

Longer term, this could raise an even bigger concern for the Reserve Bank of New Zealand, the central bank. "They are probably more concerned that people might use this to increase prices and therefore raise inflation expectations. Then you get into a higher inflationary cycle," said Adolf Stroombergen, chief economist at research think tank Infometrics.

The central bank, which has lifted interest rates by a total of 1 percentage point this year, said in its October policy statement that the emissions trading scheme posed an inflation risk.

The central bank is widely expected to keep rates at record levels well into next year to combat the inflationary threat of rising commodity prices and increased government spending.

But some analysts say higher energy costs will boost the case for rates being on hold for longer than expected and could even prompt another rate rise.

"The central bank is very mindful of medium-term inflation pressures and that anything that might surprise on the upside, whether it be real or policy-related, is going to make their job of reducing inflation all that more difficult," said Craig Ebert, senior economist at Bank of New Zealand.


BIG HIT IN 2009

New Zealand is a net emitter of greenhouse gases. Under the mandatory cap-and-trade scheme, to be phased in over the next six years, groups or companies that exceed their limits on greenhouse gas emissions will have to buy credits from those using less than their permitted level.

The first stage of the scheme starts next year, but the biggest impact on energy prices is expected to come in 2009 when petrol and diesel suppliers will be required to participate.

"There is an energy cost embedded in just about anything that's part of the supply chain of business," said Phil O'Reilly, chief executive of industry lobby group Business NZ.

"Inevitably, if businesses can pass that price on to consumers they will definitely do that. That's the nature of economics," he said.

The central bank's most recent forecast, which did not take into account the impact of the climate change policies, put annual inflation at 3 percent in the year to March 2009 and 2.6 percent in the following year.

The central bank is required to keep inflation within a target range of 1 percent to 3 percent on average over the medium term.

The country's high interest rate was a key factor that drove the currency in July to its highest level since it was freely floated 23 years ago.

Since then the New Zealand dollar has fallen 6.5 percent after the turmoil in the global credit sector curbed investors' appetite for risky assets.

Petrol prices will rise as a result of firms' passing on rising energy costs to consumers, but the extent of the expected increase will largely depend on the price of carbon credits.

In a report released in September, the Ministry of Environment said a carbon credit price of NZ$15 a tonne would add around 4 NZ cents to the pump price of a litre of petrol.

Westpac Bank predicts a carbon credit price of NZ$25 will add 0.5 percentage point to the CPI in total between 2008 and 2011 while NZ$50 a tonne will increase the key index by 1 percentage point over that period.

The government has not said what the price of the credits will be, and analysts expect them to be set around or slightly lower than those in the European market.

One unit of carbon credit, the equivalent to a reduction in emissions of one tonne of carbon dioxide, is currently being traded around 25 euros (NZ$48) on the European Climate Exchange. (1 euro=NZ$1.93) (Editing by Neil Fullick)

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