Brian Fallow: National urges Kyoto caution

COMMENT

The National Party says it will scrap any carbon tax on the statute books when it next takes office.

It will also pull out of the Kyoto Protocol in 2013 if the Government has committed New Zealand to climate change policies tougher than our major trading partners beyond that point.

The policy, tabled in Parliament last week, has been greeted with scorn by Climate Change Minister Pete Hodgson, who sums it up as "Do nothing then throw in the towel".

He accuses National of hiding behind the skirts of Washington and Canberra.

National's environment spokesman Nick Smith insists National is not anti-Kyoto. "We are saying we are prepared to do our bit in line with our major trading partners.

"Effectively we are saying we don't want to be the first guys off the block, nor the last."

Underlying National's policy is the belief the Kyoto Protocol's first commitment period (2008 to 2012) will give New Zealand a free ride because of forest sink credits, but Kyoto will bite later.

Under the climate change treaty agreed in Kyoto in 1997, New Zealand is committed to keeping net emissions of the greenhouse gases implicated in global warming at 1990 levels, on average, over the first commitment period.

However, it is not yet clear that there will be a first commitment period.

Because the United States and Australia have pulled out and developing countries have no obligations in the first commitment period, Kyoto will only come into force if Russia ratifies it.

Assuming it does, New Zealand should have no difficulty meeting its obligations.

That is because Kyoto's rules allow countries to claim credits for the carbon dioxide taken out of the atmosphere by "Kyoto" forests, those established since 1990 on land not already forested.

However, planting of new forests has declined sharply since the 1990s.

"I have looked at some of the reports on the sensitivity in the different commitment periods of different rates of planting and I am quite confident NZ will be in credit in the first commitment period through to 2013," says Smith.

"The reason for our great deal of caution beyond that, is in the second commitment period [2013 to 2018] there will be huge pressure on New Zealand because the free ride that we have gained from our substantial forest plantings of the 1990s will be running out."

National's problem is that negotiations on the second commitment period are due to begin next year.

In practice, Hodgson says, international negotiations next year are more likely to focus on how to persuade Russia to ratify, and what happens if it does not.

Nonetheless, Smith feels entitled to fire a warning shot across the Government's bows that if it were to commit New Zealand to a tougher deal than Australia or the US would face, a National-led Government would take New Zealand out.

Never mind "clean green", the costs would be too high.

Both Australia and the US have elections pending and opposition parties with more progressive views on climate change than the arms-folded, it's-all-nonsense, Kyoto-is-ruinous positions of the incumbent governments.

But even were John Kerry (who worries about America's energy security) to replace George W. Bush (the son of the Texan oil patch) getting a substantial shift in policy past Congress would not be easy.

And what would count as obligations at least as onerous as New Zealand's?

As deep or deeper reductions than New Zealand's from 1990 baseline levels? "We haven't been specific about that," Smith says.

The geopolitical hurdles to be cleared before National would commit to a second commitment period do not end there, however.

It would "insist" major developing countries such as China, India and Brazil also made some commitments to reducing emissions. On the face of it, this departs from the position agreed internationally before Kyoto - that because most man-made CO2 in the atmosphere came from developed countries, they should move first.

Smith believes a consensus is emerging that the second commitment period has to include some commitments from the major developing country emitters. By some estimates, developing countries will have overtaken developed ones in current emissions, though not historic ones, by 2020.

Assuming New Zealand did not withdraw, rendering the rest of the policy moot, what would National do about the Government's domestic policies on Kyoto?

Scrap the tax on the carbon content of fossil fuels for one thing. Hodgson has said the Government is considering introducing legislation for a carbon tax before the next election.

The aim would be to remove some uncertainty over the level and coverage of the tax, although it would not take effect until 2007 or 2008.

Uncertainty about a carbon tax is frequently cited as a chilling effect on investment in thermal electricity generation.

The Government has already put a ceiling on such a tax of $25 a tonne of CO2 equivalent, which would equate to about 7c a litre on petrol, and says the extra revenue would be "recycled", possibly through offsetting tax cuts elsewhere.

Smith has a couple of problems with a carbon tax.

One is the risk that down the track it could come to be seen as a useful extra source of revenue, regardless of its efficacy in combating global warming.

The other is the risk it will not make much difference to emissions and the Government will have to cover the cost of them anyway.

National prefers European-style tradeable emission permits.

The details of how to devolve Kyoto obligations to companies is work yet to be done. It would require the resources of Government, Smith says, which suggests a hiatus between a change of Government and the implementation of such a policy.

In general, though, there is a trade-off between the compliance and transaction costs of such a system and the benefits flowing from its economic efficiency.

National would not immediately reverse the Government's policy of retaining ownership of the credits generated by Kyoto forests.

Nor would it sell them. It would either bank them to square accounts with other governments at the end of the second commitment period or devolve them to the owners of Kyoto forests if a domestic emissions trading regime had been established.

At the moment, the quid pro quo for the Government's "nationalising" of forest sink credits is that it accepts the liability under Kyoto rules if forests are felled but not replanted.

"The big worry I have with New Zealand's position with forest credits is that while the forests are in credit, there is a huge incentive to nationalise them," says Smith.

"It is likely that at some time in the future, when the relative economics of forestry vis a vis dairying or lifestyle blocks changes, the Government will then do an about face and force the liability on to the landowner.

"This is why we would much prefer to have a tradeable emission permit system as quickly as possible within the Kyoto system and let the market sort it out."

Hodgson says the intention is for the carbon tax regime to devolve into an emissions trading regime when the international carbon market has developed sufficiently.

In the meantime, it puts something like the international cost of emissions into the economy (with the notable exception of the agriculture sector) and begins the process of adjusting to a carbon-constrained future.