What will the Kyoto Protocol cost New Zealanders?

13 July 2005

What will the Kyoto Protocol cost New Zealanders?

There has been a huge amount of interest in New Zealand’s commitment to the Kyoto Protocol recently, given the new found knowledge that signing up to this international agreement to reduce greenhouse gas emissions might actually cost us some money between 2008-2012.

Depending on the price of carbon it could be anything from $500 million (at $15.00/ tonne CO2 ) to $1.2 billion at recent international prices to make up the projected shortfall of 36 million tonnes from our target to keep emissions at 1990 levels. And not to forget that the government’s own predictions show a worst case which would double the cost (a shortfall of around 62m tonnes).

Whatever the liability, at least the emissions forecast blow-out has focused the debate on the costs and benefits of taking action. In a recent article, Murray Ward, a climate change consultant who was involved in developing New Zealand’s international position on climate change said “it is naïve to believe that addressing the problem will be costless, but that does not necessarily mean taking mitigation action is costly”.

We believe it is time to recognize emission reductions in New Zealand will be costly because we have very little capacity to reduce emissions.

The reason we have limited capacity to reduce emissions is because nearly 50% of our emissions are from agriculture, (belching livestock) and 20% of our emissions are from transport. That is a massive 70% of our emissions coming from two sectors where there are no easy answers or near term emission reduction opportunities in a growing economy – apart from reducing livestock numbers or cars on the road. Clearly for a country that’s economic wealth and growth is underpinned by agricultural exports, reducing livestock numbers would be a very costly option.

With regard to growing motor vehicle emissions, this is a problem the whole world is struggling to control. Should we restrict the importation of second hand cars from Japan to lower the age of our motor vehicle fleet, thereby increasing the speed of the introduction of new cleaner motor vehicle technology? What will this cost motorists?

Other options in transport include better roads, smaller vehicles, fewer vehicles, more public transport – all expensive one way or another for a small population to fund in a geographically spread out country. Its time we had an honest debate and had the cost/benefit analysis of the transport options put in front of us.

The challenge for New Zealand is that we have the emissions profile of a so called ‘developing country’ like Argentina or Brazil, rather than the developed countries we get lumped in with in the Kyoto Protocol. Argentina and Brazil’s emissions are dominated by agricultural emissions like ours and Brazil, like New Zealand, has very low greenhouse gas emissions from electricity generation due to extensive use of hydro power.

Having a large amount of renewables in our electricity generation system is great (70% if you count hydro, wind, biofuels and geothermal) but again presents a challenge because most credible electricity supply forecasts predict we will get more carbon intensive not less, having already largely exploited our renewable options.

The industrial and manufacturing sector accounts for only 13% of greenhouse gas emissions in New Zealand, so even if there are some low cost abatement opportunities here, the sector is not a big contributor to our overall emissions.

With regard to our large energy intensive industrials (and there are not many in New Zealand) we have reason to believe that most are operating close to or at World’s Best Practice (WBP) in emissions intensity already and this is being borne out as they go through their WBP studies with the Climate Change Office in order to qualify for a Negotiated Greenhouse Agreement.

There may be less of the so called ‘low hanging fruit’ in energy efficiency than policy types were hoping for. If this proves to be the case we need to be realistic and factor this into the cost of action – which means that buying emission reduction credits through Kyoto Protocol flexible mechanisms might be cheaper than domestic action – though both will be expensive.

We do not believe the carbon tax will reduce emissions in New Zealand and therefore it is a bad policy move. It will take around $400 million from the economy on an annual basis and achieve very little in emission reductions.

It is our understanding that the original purpose of the carbon tax was to be a tax to change behaviour. Moving the point of obligation for the tax as far up the supply chain as possible (oil, gas, coal suppliers) might make for greater administrative ease, but it breaks any link between the tax and changing behaviour. A tax has very little chance of influencing behaviour it if is invisible to the end user and they have no alternatives anyway. The tax will not be explicit like a GST on the end consumer’s bill.

The cost of their electricity and fuel will simply increase. If they do want to minimise their exposure to the tax and chose ‘greener alternatives’ what choices do they have? You can not pull up at a petrol station and fill up with biofuels at present in New Zealand.

Anyone purchasing electricity gets whatever is in the mix at the time of dispatch and the tax will apply to all electricity. The carbon tax does not make electricity from renewables more attractive, it just makes all electricity more expensive, with windfall gains going to renewable generators when our electricity generation system is already dominated by renewables.

Only if the carbon tax suppresses or cuts demand will there be a swift reduction in emissions. And if this happens our standard of living will be severely cut back, and imports will necessarily increase from countries that are more competitive than New Zealand because they have no obligations to put costs or caps on their own greenhouse gas emissions.

While New Zealand needs to contribute to global efforts to reduce emissions and use our energy as efficiently as we can, we need to be pragmatic about how much we can achieve in the absence of new technology breakthroughs when half our country’s emissions are from agriculture. Introducing policies that will incentivise emission reductions and encourage new technology uptake will be important.

The International Energy Agency’s 2003 Review on Energy Policies of IEA Countries states To date the vast majority of fiscal measures have been set up to support the development of emerging low carbon technologies rather than to impose direct cost on fossil fuel sources. We believe we need more carrots and less sticks in New Zealand when it comes to implementing effective policy for reducing greenhouse gas emissions.

ENDS

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