The Government faces two big decisions next year affecting the cost and effectiveness of climate policy over the next 15 years.

It has to decide what commitment to make in the negotiations on an agreement to govern global action on climate change through the 2020s.

And it has to decide what steps it is prepared to take to render the emissions trading scheme fit for purpose.

At this point we can be confident of two things: the Government will claim it has "got the balance right" between the environment and the economy; but judging by its record to date, it will do no such thing.


The momentum behind the international negotiations, which resume in Lima early next month, is mounting.

The Europeans are offering an emissions cut of 40 per cent from 1990 levels by 2030.

The Obama Administration says the United States intends to reduce net greenhouse gas emissions by 26 to 28 per cent from 2005 levels by 2025, which would be a 10 per cent cut from the levels it expects to have reached by 2020. How achievable this is with a hostile Republican Congress is debatable, however. Commitments the Clinton Administration made at Kyoto in 1997 were dead on arrival at Capitol Hill.

Chinese President Xi Jinping announced last week that China expects its emissions to peak in 2030 and will try to reach that peak earlier. This is an important advance on earlier goals which were expressed relative to business as usual, or in terms of the emissions-intensity of China's (rapidly expanding) economy.

Among them, China, the US and Europe account for around 60 per cent of global emissions.

So what about New Zealand?

Our long-term target is to reduce emissions to 50 per cent of 1990 levels by 2050. That would be around 30 million tonnes of carbon dioxide or its equivalent in other greenhouse gases.

But officials forecast emissions will be around 85 million tonnes by 2020, en route to about 100 million tonnes by the mid-2020s.

By then the "Kyoto" forests - those planted since 1989 on land not previously forested, and which generate carbon offset credits while the trees are growing, but a liability when they are harvested - will have flipped from being a net sink of carbon to a net source, adding to underlying growth in emissions. We are rapidly approaching the point when we cannot hide behind those trees any more.

The rising emissions track is entirely unrestrained by the Government's principal policy instrument, the ETS. Most of the country's emissions are exempt under one provision or another and the effective carbon price incurred by those who do incur one has been a few cents a tonne in recent years.

Or as the Ministry for the Environment puts it in its briefing to the incoming (in fact continuing) Minister for Climate Change Issues, Tim Groser, "The current settings and weak price signal neither incentivise behaviour change nor prepare us for a transition to rising future carbon prices."

The Treasury in a report to its ministers last month argues that New Zealand's objective in the post-2020 negotiations should be a target that imposes a roughly equal cost to other countries as a percentage of gross domestic product.

It estimates that, even if New Zealand does not improve on its current pledge of a 5 per cent cut from 1990 levels by 2020 in the commitment it makes for the 2020s, our emissions are on track to exceed the target by more than 300 million tonnes over that decade.

The overshoot has to be either reduced by domestic action to cut emissions or covered by buying carbon credits generated elsewhere in the world if that is cheaper (as the atmosphere doesn't care where emission cuts occur or who pays for them).

But either way it will cost.

The range of carbon prices the Treasury has used to estimate that dollar liability is unfortunately redacted from the public version of this report. But it would be surprising if the estimate for the 2020s decade were less than $10 billion.

A key decision policymakers face is whether to continue to exempt from the ETS the agricultural gases, methane and nitrous oxide, which arise from the bodily functions of livestock and which comprise nearly half New Zealand's emissions.

Exempting them constitutes a subsidy at the expense of either taxpayers or energy consumers.

It is capitalised into farm land prices, just as expectations for the dairy payout, the meat schedule and the continued absence of a capital gains tax are.

The extent of that largesse to vendors of farms will only rise as carbon prices rise.

But recent comments by Prime Minister John Key indicate that he wants to let that sleeping cow lie.

The ETS is due to be reviewed next year. The Government has yet to decide who will conduct the review and what its terms of reference will be.

But obvious questions include whether the agriculture exemption should continue, whether the buy-one-get-one-free concession on transport fuels and for thermal power generators should continue and at what pace the generous free allocation of carbon units to trade-exposed emitters should be whittled down.

There is a two-way interaction between that review and the determination of a post-2020 target. The latter is key to how much work policymakers want the ETS to do. And it will depend on the level of ambition the big players demonstrate in the international negotiations next year.

Conversely, the extent to which the Government is willing to see carbon prices rise must influence how ambitious or otherwise New Zealand's target is.

While the ETS review will presumably invite submissions, the setting of a post-2020 target may or may not involve public consultation.

"That is a decision for ministers," Treasury Secretary Gabriel Makhlouf said.

Makhlouf was in the room at the G20 summit in Brisbane last weekend when world leaders debated the issue.

"It was pretty clear the world is very focused on climate change and what to do about it," he said.

The question is, did John Key get the same message?

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