There are still no economically or technologically viable means of reducing those emissions, the institute says.
Reflecting that, and agriculture's importance to the economy, the Government hints at exemption.
Climate Change Minister Pete Hodgson, replying to a parliamentary question last week, said it was his view and that of other ministers "that the idea of taxing the agricultural industry into submission is not one that is likely to gain currency".
But exempting agriculture, or any other sector, increases the burden on sectors that are not exempt.
New Zealand's economy is relatively emissions-intensive. Unlike other developed countries, its emissions, per unit of GDP, have increased since 1980.
"New Zealand's greenhouse gas emissions are largely produced by sectors which are key drivers of the economy. By contrast, in most other [developed] countries the bulk of emissions comes from mature, low growth sectors," says the report.
Transport represents an unusually high proportion of energy consumption in New Zealand, about 40 per cent against 25 per cent in Australia, the United States or Britain.
Given that demand for fuel is comparatively insensitive to price, that would make economic incentives to reduce emissions less effective in New Zealand, the institute says.
The electricity sector is also unusual in that generation is about two-thirds hydro, which involves no greenhouse gas emissions.
But the proportion is falling. The Ministry of Economic Development forecasts that by 2020 14 per cent of generation will be coal-fired, compared with about 5 per cent now, while the shares of gas and hydro will fall to 15 and 52 per cent respectively.
This contrasts with Europe, where the switch from coal to gas is making electricity less emissions-intensive.
On the trade front, dairy exports face threats from the United States, which is only now beginning to expand as a dairy exporter, and from the growing dairy industries in Latin America. Both would be outside the Kyoto Protocol until at least 2012.
"The key risk to the New Zealand dairy industry, however, is that European countries will protect their dairy farmers from the effects of the Kyoto Protocol. International dairy prices are heavily influenced by European subsidy levels."
Quotas limit the competitive threat from other exporters to the main destination markets for lamb and beef. "The increase in production costs from climate change policies is more likely to be borne in the form of reduced profit margins than through loss of market share."
For paper exporters, the US has a strong presence in most markets and there would be major competitive threats from Singapore, Korea, Taiwan, Indonesia, Brazil, Chile and South Africa, the institute says.
Kyoto creates a distortion for the forestry industry, it says. It puts a value on the carbon taken up by growing trees, but imposes a cost on processing the trees once harvested.
This creates an incentive to grow trees in Kyoto countries but process them in non-Kyoto countries, especially if the latter are major markets or near major markets.
The risk is that this will lock New Zealand into the low end of the forestry value chain.
Kyoto, in short, would represent a terms of trade shock, the institute says. "Past experience suggests that, to some extent, such a negative terms of trade shock will be absorbed by a lower real exchange rate." That would protect producers to some degree, but also cut households' international purchasing power.
The institute also argues that by setting absolute caps on emissions, Kyoto discriminates against countries like New Zealand which, through immigration, have higher population growth rates than other countries.
New Zealand's population in 2020 is estimated to be more than 20 per cent higher than in 1990, Kyoto's year zero. In the European Union the increase is forecast to be only 1.7 per cent.
During the 1990s New Zealand's carbon dioxide emissions grew on average by 1.3 per cent a year, slightly above the developed country average of 1.1 per cent .
But in per head terms New Zealand's average COinf2 growth was zero, compared with 0.2 per cent for developing countries as a whole.
New Zealand industries are particularly vulnerable to competition from countries outside the protocol. The institute estimates that collectively their emissions will exceed those of Kyoto countries some time between 2010 and 2015.
What incentive, it asks, will they have to join the protocol for its second commitment period, which starts in 2013? Why would they forgo the competitive advantage it gives them?
Also, the protocol's provision for "clean development mechanisms", where a Kyoto country can gain credits for contributing to atmosphere-friendly projects in non-Kyoto countries which would not have occurred otherwise, provides a way of facilitating technology transfer to developing countries, without their undertaking any Kyoto obligations.
Given these perverse incentives, there has to be a risk that the economic distortions between Kyoto countries and the rest of the world will persist beyond 2012.
nzherald.co.nz/climate
Intergovernmental Panel on Climate Change (IPCC)
United Nations Environment Program
World Meteorological Organisation
Framework Convention on Climate Change
Executive summary: Climate change impacts on NZ
IPCC Summary: Climate Change 2001
