The emissions trading scheme will take a toll on economic growth, incomes and jobs, but the cost will be less if the taxpayer keeps picking up the bill for the trade-exposed sectors' emissions, the New Zealand Institute of Economic Research says. A day after the Sustainability Council released research concluding that in the short term households and small businesses will bear the brunt of the scheme's cost, the institute concludes that in the longer term it is the export sector which will bear the largest cost. In principle the institute favours people facing the costs of what they do and it likes markets. But it says the scheme as designed is not the least-cost way for New Zealand to take responsibility for its emissions. That is because emission reduction opportunities in New Zealand are generally more expensive than elsewhere in the world.

The scheme allows those companies with obligations under the scheme to import credits generated by certified emission reductions overseas. But the institute argues it would be less costly for the Government to import the credits, because the cost would be spread across the whole tax base and not hit the productive sectors so hard. After putting the scheme's design parameters and a $40 carbon price into its mathematical model of the economy and cranking the handle, the report has found that by 2012 gross domestic product would be $900 million or 0.5 per cent lower than under business-as-usual. If instead the Kyoto obligations were entirely met by the taxpayer the hit to GDP would be much smaller, around $100 million. Households would have an average $600 less to spend that year. If taxpayers foot the bill they would have $300 less.

And there would be 22,000 fewer jobs, compared with 1500 fewer if the taxpayer pays. Asked why households are affected so much, one of the report's authors, John Stephenson, said it was because businesses and farms have employees and owners. "You can't draw a stark line between household and business impacts." By 2025, when as the scheme stands the initial grandfathering of emissions from the smokestack and agriculture sectors will have been entirely phased out, the impacts are significantly higher. By then the economy would be $5.9 billion or 2.1 per cent smaller than it would otherwise be. Agriculture would be hardest hit - enough to cause dairy land prices to fall 40 per cent and sheep and beef properties 23 per cent. But if the trade-exposed sectors continue to be covered to 90 per cent of the 2005 emissions by a free allocation of emission units, the GDP forgone would be cut from 2.1 to 1.2 per cent.