Simon Carlaw: A nyet from Russia to NZ's benefit

The Kyoto Protocol has always been a flawed agreement. If it goes ahead - now a big "if" - it is unlikely to achieve much except constrain growth and place big chunks of the economy under central command.

The benefits, if any, to be gained from the protocol will be dwarfed by the costs of imposing it.

Danish authority Bjorn Lomborg, speaking in New Zealand this week, will no doubt reiterate the disparity between the costs and benefits of the undertaking. Suffice to say that the disparity has been enough to keep the United States, Australia and other countries from inflicting the protocol on their populations.

Now it looks as if Russia may also buck the protocol.

In theory, Russia would seem set to inherit large numbers of carbon credits since its struggling economy emits much less greenhouse gas now than in 1990, the base year against which Kyoto figures are set.

But, like other countries, Russia may have calculated it has more to lose than gain from the protocol.

Even if its foot-dragging is aimed solely at extracting EU concessions, this itself reflects poorly on the protocol - another international undertaking skewed by unequal treatment of its partners is not what the world needs right now.

The fact that the Kyoto Protocol can come into force only if Russia ratifies, because of the thresholds involved, and the fact that Russia isn't advertising its intentions, make the short- to medium-term future extremely uncertain.

Uncertainty is the enemy of business. Enterprises can't plan or commit resources with confidence if the rules are unclear or likely to change.

New Zealand companies contemplating investment in thermal electricity generation or any other undertaking that creates greenhouse gases will hardly be rushing to invest. The effects on our ability to keep generation levels up and avoid electricity shortages in coming winters are ominous.

Russian inaction casts doubt on proposed carbon trading schemes and associated initiatives. Carbon credits could end up as "funny money" with no value.

The proposed scheme in New Zealand, where companies engaging in additional emission reductions will be rewarded with carbon credits - four million are available - has been cast into doubt.

Negotiated greenhouse agreements, where large emitters of the gases will be exempted from carbon taxes in return for agreeing to adopt "best-practice" undertakings, are now also in doubt.

Of additional concern is the lack of firm policy on exemptions or other treatment for "second-tier" or small- and medium-sized enterprises - the majority of businesses in New Zealand. It would seem as if it is okay for these companies to go on hold until the Government gets round to considering what should be done.

But the problems caused by Kyoto Protocol uncertainty are less than those we will face if it is actually implemented.

Since 1990, New Zealand's greenhouse emissions have risen by a third. Stopping the increase and rolling back to the levels of 1990 would require negative economic growth for 10 years starting now.

On present performance, and without any increase in emissions from economic growth, we would have to give up a third of our energy use. This would mean energy rationing or large energy price rises, or both.

New Zealand companies competing globally would lose market share - the constraints and costs would make them uncompetitive.

Achieving 4 per cent annual GDP growth - the minimum required to meet the Government's objective of regaining a place in the top half of the OECD - would be impossible.

You can't get 4 per cent annual growth while cutting energy use by a third.

The Government would have to choose between the Kyoto target and its growth target. Of the two, the Kyoto target is the unrealistic one.

Of course, the protocol's flaws do not mean action should not be taken on greenhouse gases.

There is international support for the view that excessive emissions of greenhouses gases are polluting and harmful. Enough common ground exists around this view for countries to be able to take co-operative action.

What they don't need is a punitive, taxing, growth-destroying regime such as Kyoto.

For New Zealand's part, given international uncertainties and the vulnerability of our economy, we would be better off without carbon charging and costly bureaucracies. With a better regime than Kyoto in place, we could enter real climate-change partnerships with Australia, the US and other countries, engendering further Kiwi innovation, wealth-creating opportunities and a cleaner environment.

* Simon Carlaw is Chief Executive of Business NZ