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Financials

NZ govt faces voter ire as CO2 scheme steps up

* Power firms, transport enter NZ’s emissions trade scheme

* Anger on scheme could dent govt’s poll popularity

* Trade in carbon credits muted, to grow slowly -brokers

WELLINGTON, July 1 (Reuters) - The world’s second national carbon trading scheme ramps up from Thursday with the inclusion of sectors covering half of New Zealand’s greenhouse gas emissions, but anger over the scheme could hurt the government.

Rising electricity prices and higher fuel costs have worried some voters, farmers and businesses, which fear the higher costs could hurt their competitiveness.

Brokers say a modest price cap on carbon permits and limited supply mean trading in the scheme will initially be modest.

Nonetheless, the government says the scheme, the only other national scheme outside Europe, is a crucial first step in curbing the growth of New Zealand’s greenhouse gas emissions, which have risen more than 20 percent over the past two decades.

The government, which faces elections next year, says it is balancing the need for a price on carbon emissions to meet New Zealand’s target under the U.N.’s Kyoto Protocol, while defending the need to act now.

Critics have called for a delay given the United States and Australia have struggled to win support for similar schemes.

“I think the market will mature with time, but the government has been cautious in allowing a carbon market to evolve by putting a NZ$25 ($17) fixed-price option into the scheme,” Climate Change Minister Nick Smith told Reuters.

From Thursday, the energy, transport and industry sectors, together responsible for about 51 percent of the country’s total emissions, come under the scheme. Forestry was the first sector to enter in 2008.

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For a factbox on the working of the scheme: [ID:nSGE65S01Q]

For New Zealand’s emissions profile: [ID:nSGE65S00Z] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

HIGHER COSTS

Power generators and transport firms will face higher costs because they need to pay yearly for their carbon pollution, although the government has cut these costs until at least 2013. Exporters can seek free permits to ease the pain of further carbon costs and worries their goods will be less competitive.

Despite the low price cap and phase-in steps, the government has still faced criticism from greens wanting much stronger steps and farmers and businesses wanting it scrapped.

Agriculture doesn’t enter the scheme until 2015, meaning it is effectively being subsidised until then. Despite this, the powerful farmers’ lobby is still opposed to the scheme.

“There’s clearly some opposition from farmers,” said Geoff Keey, political adviser to Greenpeace New Zealand, but he felt the pressure on the government would come from other areas.

“I think that over time the anger might well come from households on limited incomes who face increased power bills and start to realise firms in the agriculture sector are not paying their fair share.”

Smith's ruling National Party has been riding high in the polls since winning a general election late in 2008, but the emissions trading scheme (ETS) is a sensitive issue that might cost it support ahead of the next poll, due by end-2011. NZPOLL

“Unfortunately for National, this issue will not go away,” analyst Muriel Newman of thinktank the New Zealand Centre for Political Research said in an Internet comment.

National Party supporters and MPs were well aware their constitutents’ growing anger over the ETS could well see the party pay the price at the ballot box next year, she added.

The ETS will raise the cost of fuel and electricity for consumers by an average of around 3 percent, prompting the competition watchdog to warn against using the ETS as an excuse for price gouging. Prime Minister John Key has been forced to step in and defend the cost of the scheme.

For the market itself there is little excitement.

Limited supply of credits, low prices and slow progress on talks for a successor to the Kyoto Protocol mean lean trading is predicted with companies expected to be cautious, brokers say.

“I think you’ll see some players start to trade on an ongoing basis, but the end-game is the April-May period next year when people start to sort out their surrender obligations,” said Stuart Frazer of consultancy Frazer Lindstrom.

Australia's Westpac Bank WBC.AX, which has been buying carbon credits to package and sell to polluters, said there has been a gradual lift in activity.

“It’s just going to ramp up from here on in, now that we have both sides of the market obligated,” said Lloyd Cartwright, head of New Zealand financial markets for Westpac.

The longer-term prospects for New Zealand’s scheme have been helped by neighbour and largest trading partner Australia moving to revive the debate on pricing carbon emissions. [ID:nSGE65N08D]

But the future of New Zealand’s scheme was not tied to Australia, Smith said.

“Climate change policy and the ETS is always going to be difficult,” he said. “I think New Zealanders will see the government’s approach as fair and balanced”. (NZ$1 = 68 U.S. cents) (Editing by David Fogarty and Clarence Fernandez)

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