Doha decision spiteful, says consultant

A decision at the Doha climate conference which excludes New Zealand from international carbon markets will have little effect on consumers and emitters over the next two years, market sources say.

Beyond that it is likely to mean that the planned auctioning of New Zealand units by the Government will be what drives the carbon price for the local economy.

The annual United Nations climate conference opted to restrict access to the buyer's side of the international carbon market set up under the Kyoto Protocol to those countries (mainly European but also Australia) which undertake legally binding commitments under the treaty's second commitment period, which begins in the new year.

When Climate Change Minister Tim Groser announced last month that the Government would not be doing that, he acknowledged the risk it could shut New Zealand out of those markets.

He thought that outcome unlikely, however, since it would also exclude the world's third-largest economy, Japan, from the demand side of a market which is already massively oversupplied and where prices have collapsed.

The Government is confident New Zealand emitters will still be able to access the market until 2015, when countries with obligations under Kyoto's first period, which ends in two weeks, square accounts with one another.

The European Union severely restricts European emitters' ability to use Kyoto offsets to meet their obligations under its emissions trading scheme. Australia and South Korea will too.

But the New Zealand Government has rejected calls to follow suit, despite a flood of cheap imported carbon which has crowded out domestic supply, notably from the forest sector, and rendered the ETS toothless.

"It doesn't help arrest the price slide, that's for sure, excluding anyone," Nigel Brunel of OMF Financial said.

"That is why a lot of people thought anyone who wanted to buy a UN offset should have access to them."

Stuart Frazer of climate change advisers Frazer Lindstrom said there was an "element of spite" to the decision.

It would undermine investment in climate-friendly projects in developing countries which give rise to the units traded and increase pressure from them for direct funding.

The Government has yet to finalise an emissions reduction target for the 2013-2020 period.

The offer it has on the table - a 10-20 per cent reduction from 1990 levels - is conditional, among other things, on continued access to international carbon markets.

If that condition cannot be met, Frazer said the target was likely to be less ambitious.

Recent legislation amending the ETS provides for the Government to boost domestic supply by auctioning New Zealand units.

If international units are not available as the marginal source of supply setting the price, the design of the auction programme becomes critical to the carbon price emitters and consumers will face, according to both Frazer and Brunel.

The Green Party's climate change spokesman, Kennedy Graham, supports the decision to exclude from the Kyoto markets not only Japan, Russia, Canada and New Zealand, which have not signed up for a second commitment period, but also the United States, which never ratified the first one.

"I see there is an argument to make the market as deep and liquid as you can, to link the regional markets en route to a global market," he said.

"But I would hold that up, on economic grounds, until those developed countries which are not taking on legal obligations are prepared to do so, because to reward that is economically short-sighted.

"It is only when the developed countries convince the other five billion people in the world that we are prepared to take the lead that you will start to get the rapprochement between north and south and a proper global agreement."