By BRIAN FALLOW
As business people try to get their heads around what the Kyoto Protocol might mean for them, they face a frustrating lack of hard, quantified information.
To some degree this is inevitable.
We don't know what the world price of "carbon"- tradeable permits to emit greenhouse gases - will be, and we won't know until there is a market to discover it.
And we don't yet know how the Government will divide up the costs of complying with Kyoto among sectors of the economy, or what policy instruments it will use to implement the treaty.
Broad consultation on those questions begins in earnest next March. Talks have been going on for some time with the sectors most affected.
The Government has appointed a negotiator, Brian Roche, to explore the terms of one-off negotiated greenhouse agreements with major emitters whose viability might be threatened by one-size-fits-all measures like a carbon tax.
But as a preliminary, and necessarily highly conditional, attempt to inject some numbers into the debate, a study by PA Consulting Group looks at what the impacts on different sectors of the economy might be if emissions were subject to a tradeable permits regime (like fishing quota).
It assumes the initial stock of permits would be allocated by a competitive tender, rather than doled out gratis by the Government on a grandfathered basis. That is one of the key policy decisions to be taken.
And it assumes the permits would be internationally tradeable.
Broadly, such a regime would require anyone whose activities create greenhouse gases to hold a permit covering the emissions.
This is considered economically efficient because it means permits will end up in the hands of those who value them most. The lowest-cost measures to reduce emissions are taken first, regardless of where in the world that might be.
Energy prices would rise.
PA's base case assumes an international carbon price of $20 a tonne of carbon dioxide equivalent ($US30 a tonne of carbon). The effect on gas prices would be a 30 per cent rise at the wholesale level, PA calculates, or 20 per cent for industrial gas consumers, 10 per cent for commercial customers and 6 per cent residential.
At worst, with permit prices at $60 a tonne, the increases would be 60 per cent for industrial gas users, 20 per cent for commercial and 18 per cent for residential.
The effect on electricity prices, at a permit price of $20, would be a rise of 16 per cent at the wholesale level, flowing through to a 10 per cent increase for industrial users, 9 per cent for commercial and 8 per cent residential.
For coal, which produces twice as much carbon dioxide for a given amount of energy as natural gas, the impact is more severe. But because most of New Zealand's coal is exported, it would not be subject to a permit liability within New Zealand.
Overall, an increase in industrial and commercial energy costs of 10 to 20 per cent would inevitably erode New Zealand's competitiveness against non-Kyoto countries, PA Consulting said.
The effect on heavy industry would be greatly reduced if permits were grandfathered - if emitters were responsible only for the increase in their emissions since 1990.
If the iron and steel industry had to buy permits at $20 a tonne to cover all its 1999 production, it would have amounted to around 6 per cent of turnover, PA says.
Given Glenbrook's comparatively small size and a world steel industry with massive over-capacity, a cost increase of around 6 per cent of turnover would call into question primary steel production there, PA believes. It would leave the rolling mills dependent on imported billets from one of BHP's lower-cost Australian or Asian plants.
But if its 1990 production was grandfathered and it only had to buy permits to cover the increase from that level, it would be less than 1 per cent of turnover.
Grandfathering would also reward Comalco for improvements in processes at the Tiwai Point aluminium smelter since 1990.
Carbon dioxide and other greenhouse gases are produced as part of the chemical reduction of alumina.
Permits to cover the more-than 500,000 tonnes of CO2 produced would increase the smelter's costs by the equivalent of 1.5 per cent of 1999 turnover.
But grandfathering 1990 levels would reduce the cost to 0.2 per cent, even though there has been a big increase in the smelter's output since then with building of a fourth potline. That has been largely offset by a reduction of 14 per cent in carbon dioxide emissions per tonne of aluminium.
As well, Comalco would be exposed to an increase in electricity costs in what is a very energy-intensive process.
Even though it buys its power from the all-hydro generator, Meridian, its contract price is linked to wholesale market prices.
PA estimates that if Comalco had to bear the full brunt of a $20 carbon price on its energy costs, at current world aluminium prices its costs would rise 7.6 per cent. At $60 a tonne they would rise 22.7 per cent.
For the cement industry, the increase in costs would be 2.6 per cent or 0.8 per cent if grandfathered to 1990 levels.
Transport fuel prices would also rise if the Marsden Point refinery and fuel importers were required to hold emission permits.
At a permit price of $20 a tonne, PA estimates the impact on prices at the pump to be 4.3c a litre for petrol and 5c for diesel.
At $60 a tonne, it would be 13c and 18.2c respectively.
"The increase [at $20 a tonne] is significant enough to be noticed, adding about $300 million a year to the national cost of oil products, but relatively insignificant when compared to fluctuations resulting from changing crude prices and exchange rate fluctuations," PA says.
Demand for transport is inelastic: price increases generally result in only small shifts in demand. These increases are not considered large enough to have any significant impact on transport or fuel choices.
One of the toughest policy choices the Government faces is whether, and if so how, to subject the agricultural sector to the cost of its share of national emissions, about 55 per cent of the total. The main sources are methane belched by sheep and cattle, and nitrous oxide from soils.
PA Consulting based its analysis on the assumption permits would be auctioned and the "point of obligation" where permits had to be held would be the processing companies.
The effect on product costs varies widely. For the base case of $20 a tonne, dairy farmers would face a 5.5 per cent increase, beef farmers 10.2 per cent, sheep farmers 15.9 per cent for lamb and 17.5 per cent for wool, and deer farmers 21.5 per cent for venison and 14 per cent for velvet.
"In general, from direct permits alone, the impact on the agricultural sector is significant.
"When the cost increases from oil and energy are added also, the prognosis for the industry looks bleak."
Climate Change Minister Pete Hodgson said this week the farming sector would have to bear its share of the costs of responding to climate change, just as it would share in the benefits.
He is enthusiastic about the prospects of science coming to the rescue by finding ways of reducing agricultural emissions.
"If you invest successfully in research to reduce agricultural emissions, three things happen: first, you make or save money by reducing emissions, when emissions have a price attached.
"Second, you improve food conversion efficiency, and therefore productivity. And third, you stand to make money if the research produces valuable intellectual property in New Zealand ownership."
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
Alcohol lobbyists gave input on FASD plans, with some submissions fully redacted.