Brian Fallow: Kyoto - should we stay or should we go?

Debate over New Zealand's membership of the Kyoto Protocol, the international treaty to combat global warming, has been revived by new Government estimates of the likely cost.

Kyoto countries which exceed their agreed allocation of rights to emit greenhouse gases will have to buy additional rights, commonly called carbon credits, from other Kyoto countries which have more than they need.

New Zealand had been expected to have a surplus to sell, but if the revised estimates are right it will be a buyer.

Even at the relatively low price of $15 a tonne of carbon dioxide, the figure the Government used to set the initial level of the carbon tax due to come into effect in 2007, the revisions mean taxpayers will be $1 billion worse off between 2008 and 2012.

The National Party says it will review New Zealand's membership of Kyoto if it leads the next government.

"We have a reluctance for New Zealand to withdraw from agreements that have been signed because it is not good for our name internationally," said National's environment spokesman, Nick Smith. "But we now have to weigh up whether to withdraw, given the scale of this error."

National's policy has been to scrap the carbon tax but to remain in Kyoto for the first commitment period (2008 to 2012) and to be guided beyond that by what major trading partners such as the United States and Australia, the only OECD countries outside Kyoto, do.

"This new information shows the economy will take a hammering during that period so we will have to review that position," Dr Smith said.

National's leader Don Brash told Parliament on Tuesday that to justify participation in the protocol National would need to be convinced global warming was occurring, that it was due to human activity and that the sacrifices were commensurate to any potential gain.

On the first two points, at least, Dr Brash could look to a statement earlier this month signed by the US National Academy of Science, the Royal Society, and equivalent academies in the other six largest industrial countries plus China, India and Brazil. These bodies are the guardians of the scientific method.

Climate change is real, they said, and it is likely most of the warming in recent decades is due to human activities. "The scientific understanding of climate change is now sufficiently clear to justify nations taking prompt action".

Murray Ward, a veteran of international climate change negotiations and now a consultant, warns of a backlash and damage to New Zealand's clean, green image if it pulled out of Kyoto.

During last month's foot and mouth scare we were reminded agriculture is the backbone of the economy, he said.

"Yet the same talking heads seem oblivious to, or dismissive of, any reputation shock that would occur if New Zealand thumbed its nose at the world community and walked away from Kyoto."

If New Zealand does not renege, the Government will have to find hundreds of million of dollars to buy carbon credits to square accounts with other Kyoto countries at the end of 2012.

Julia Hoare, who heads PricewaterhouseCoopers' climate change team, says without a crystal ball it would be impossible to know the future international price of carbon or the value of the New Zealand dollar.

But even a best-case scenario would result in payments of $375 million and it could be as much as $2 billion.

"If we take a $1.2 billion estimate as the most likely, this would amount to a cost of around $900 for each household."

In principle this burden could be spread across the whole tax base.

But the whole point of Kyoto is to begin to reflect the environmental cost of greenhouse gas emissions in energy prices, providing an incentive to develop and adopt more climate-friendly technologies.

That suggests that future finance ministers would want the mounting cost of complying with Kyoto to be passed on through the carbon tax to the petrol pump and the power bill.

The carbon tax has been set at a rate of $15 a tonne of carbon dioxide, which would add about 4c a litre to petrol and 1c a kilowatt hour to electricity, equivalent to a 6 per cent increase for the average residential power consumer.

On current policy that could be pushed up to a maximum of $25 a tonne (6c a litre on petrol) by 2012.

Catherine Beard of the Greenhouse Policy Coalition, a group representing large emitters, said, "There is a risk with the blowout the Government would be prepared to drift up towards the $25 cap more quickly than they might have otherwise."

The GPC does not believe the carbon tax will reduce emissions significantly.

"And it will impact mostly on a sector, electricity, which is responsible for not a lot of the emissions." Electricity is already mainly generated from renewable sources and the big growth in emissions is coming from transport and agriculture, she said.

The GPC expects the fiscal blowout to trigger a review and more rigorous analysis of the costs and benefits of the Government's climate change policies.

"If there is a lot more honest scrutiny in terms of costs and benefits then those choices can be put in front of the public and we can have a much more rigorous debate about New Zealand's response to climate change, given that we have to contribute to global emission reductions but equally given that we don't produce a lot of emissions," she said.

New Zealand had sailed into embracing Kyoto without doing that analysis because the assumption was that forest sink credits would see us right anyway.

Kyoto's rules allow credits for the carbon dioxide taken out of the atmosphere by forests planted on land not previously forested ("Kyoto forests").

More than a third of the recent change to New Zealand's net emissions outlook is because the benefit from forest sink credits has been revised down by 24 million tonnes or 25 per cent. Most of that, 15 million tonnes, is because pine trees planted on land previously covered with scrub are not now to be counted as eligible for credits.

But it also reflects a collapse in the rate of new planting of commercial forests and an increase in deforestation, which creates a liability under Kyoto's rules.

Roger Dickie of the Kyoto Forest Association said the forestry industry could rescue the Government from its predicament by doubling the size of New Zealand's Kyoto forest estate by 2012.

"However for this to happen the Government must devolve the forest sink credits to their rightful owners - those who risk their capital to plant trees."

On that model polluting industries would have to buy credits to cover any overshoot between their emissions and some agreed target.

On current policy large industrial emitters whose international competitiveness would be at risk if they were subject to the carbon tax can do a negotiated greenhouse agreement with the Government, which exempts them from the tax in return for a commitment to move to world's best practice in emissions for comparable plants.

Catherine Beard said she did not expect the blowout in the cost of Kyoto to have impact on that process, because it delivered emission reductions - the object of the exercise.

Dr Smith said National would scrap the carbon tax but is non-committal about what policy it might adopt to reduce emissions.