Brian Fallow on the economy

Brian Fallow is the Herald's Economics Editor

Brian Fallow: NZ set adrift after cutting Kyoto ties

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Climate Change Minister Tim Groser has opted out of Kyoto Protocol.  Photo / NZPA
Climate Change Minister Tim Groser has opted out of Kyoto Protocol. Photo / NZPA

The Government's climate change policy is a shambles and a disgrace. Unless, that is, you are happy for the costs of the inevitable adjustment to a low-carbon future to be needlessly increased and pushed onto the young, in which case it is doing a great job.

This year has seen it water down further an already pretty aqueous emissions trading scheme (ETS).

It also opted not to commit to a legally binding emissions reduction target for the next eight years under the Kyoto Protocol - a decision which blew up in its face at the Doha conference last week.

The ETS represents almost the totality of the Government's response to climate change. It has also, usefully, boosted research into mitigating emissions which arise from the bodily functions of livestock, but it has done nothing to encourage biofuels or marine renewables.

The ETS was enacted in the dying days of Labour's ninth year in power - no moral high ground there - and was immediately moderated with various transitional measures by the incoming National Government.

This year it went further, extending indefinitely those transitional measures, deferring indefinitely the inclusion of agricultural emissions (half the national total) from the scheme and, crucially, rejecting calls to limit New Zealand emitters' ability to use units bought from the international carbon markets to meet their ETS obligations.

Climate Change Minister Tim Groser justified that on the grounds that New Zealanders should not have to pay more than"the international price" for carbon, as if it was the 1980s and he was talking about the price of cars.

The problem is that this is a very different kind of market and one that at the moment is yielding prices close to zero.

One of the better ideas embodied in the Kyoto Protocol is the Clean Development Mechanism (CDM).

The idea is that it makes no difference to the global climate where emission reductions occur or who pays for them.

CDM allows climate-friendly projects in developing countries which would not otherwise occur to earn credits, certified by the United Nations, which rich countries with Kyoto obligations can buy instead of undertaking more costly reductions in their own emissions.

Money and technology flow to the developing countries, while the costs of meeting an emissions target in the developed economy are reduced. Win, win.

The market has, however, been undermined by insufficient environmental rigour on the supply side and on the demand side by a decision by the European Union to severely limit European emitters' access to the market to meet their obligations under the EU ETS.

The CDM market has more than a billion tonnes of excess supply and prices have collapsed.

The net effect of all this in New Zealand has been policy settings which flash a "go for your life" carbon price signal at any landowner contemplating deforestation or dairy conversion.

That may change, however, as a result of the Government miscalculating the international effects of its decision not to sign up for a commitment under Kyoto's second commitment period which will run for eight years starting in the new year.

Instead it will register its target, which it has yet to set, under the overarching treaty, the UN Framework Convention on Climate Change.

This might not be legally binding like Kyoto, with a financial penalty for failing to meet it, but it will be "politically binding", the Government says. New Zealand's word is its bond.

In which case, one might ask, why not go all the way with a second Kyoto commitment?

That would limit a future Government's options, is the reply.

Reconciling those propositions would fry a logician's synapses.

The first question, when the Government opted not to go the Kyoto route again, was whether it would imperil New Zealand's access to the international carbon markets created by Kyoto.

That was possible, Groser acknowledged, but unlikely.

It would be perverse to exclude a group of countries which includes Japan from the demand side of a market already swamped with supply.

But that is exactly what the annual UN climate change conference in Doha decided to do.

For New Zealand the implications are two-fold and serious.

First it will affect the emissions target we adopt for the period to 2020.

The Government has tabled a conditional pledge to cut emissions to between 10 and 20 per cent below 1990 levels. The mid-point would represent a cut of about a third in gross emissions from current levels, an infeasible target which would require the excess to be covered by credits from new forests or the purchase of UN offsets.

So one of the conditions around the offer is continued access to international carbon markets.

That condition will now go unmet, so the country's emissions pledge for the period ahead is liable to be embarrassingly less ambitious than it would otherwise have been.

The other effect is on the domestic carbon market. New Zealand companies with obligations under the scheme - mainly oil and power companies, plus a handful of smokestack industrial concerns - face a flip from being able to meet 100 per cent of their needs from ultra-cheap imported carbon, to not being able to meet any of it from those sources.

Not immediately. The Government is confident they will still have access to the international market next year and the year after, ahead of the "true up" in 2015 when Kyoto countries settle their obligations for the first commitment period, 2008 to 2012.

But then what?

On the supply side, Kyoto forest owners may see higher prices and sell. Or, demoralised by having been on the wrong side of the same market instability, they may opt to keep their carbon in the bottom drawer, to cover their obligations upon harvest.

The Government will now be even keener to link the New Zealand ETS with Australia's. But Australia is not due to have one until 2015 and it is by no means a given that it will then, so ferocious is the Coalition's opposition to carbon pricing.

Even if Australia does have an ETS in 2015 it might have to choose between linking with New Zealand or with the deep and liquid European market, in which case it would be rational to opt for the latter.

This means the other potential source of supply to the New Zealand carbon market - units auctioned by the Government - becomes critical.

It would be a de facto carbon tax, setting the price.

Designing such an auction system is a tricky business, the Europeans found.

It is not a task for which officials at the Ministry for the Environment or Environmental Protection Agency are best suited.

All of this will gladden the hearts of the "told you so, pointless money-go-round" brigade.

It leaves us going down the carbon-intensive economy road.

Sure, there is plenty of traffic going the same way.

But it is the road to nowhere - at least, nowhere we would want to be.


Debate on this article is now closed.

- NZ Herald

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