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Climate change

  • The economic and fiscal effects of climate change are uncertain and are not explicitly modelled in these projections.
  • The Emissions Trading Scheme (ETS) is assumed to be broadly fiscally neutral over time.

Climate change represents a key area of uncertainty. Potentially, climate change could affect New Zealand in two main ways: the effects of physical change in the global climate; and the effects of New Zealand's international climate change commitments and domestic policy.

The physical effects of climate change could be significant. International models predict the consequences for New Zealand will be temperature increases and more marked seasonality, including increased rainfall in the west and drier conditions in the east during winter and spring. Climate change will, by and large, not create new risks, but may change the frequency and intensity of existing risks and hazards.[51] The 2007 Stern Review indicated that 2 to 3°C warming could result in the equivalent of around a 0 to 3% loss in global GDP, though the relative effects on New Zealand's economy from physical climate change are likely to be less.[52] Physical climate change in other countries may have an impact on New Zealand; for example, by increasing migration, or shifting trade balances.

New Zealand ratified the Kyoto Protocol in 2002, committing to an emission target of 1990 levels for the first commitment period of 2008 to 2012. Current negotiations for future climate change commitment periods could have significant economic and fiscal implications. The economic implications include the direct costs of meeting an emission target through mitigating emissions or purchasing carbon credits, and the wider growth implications for different sectors of the economy. Economic modelling by the New Zealand Institute of Economic Research (NZIER) and Infometrics has indicated that the total economic costs of a 2020 target of between a 10 and 20% reduction below 1990 emission levels could be around 2.5% of GDP from 2020.[53] There may also be expectations for government to provide additional funding to mitigate emissions and adapt to climate change, both here and in aid for developing countries. In the long term, the Government has a goal of a 50% reduction in net emissions below 1990 levels by 2050.

The ETS is the government's primary mechanism for achieving emissions reductions domestically. Recent ETS amendments are likely to leave the Government with a net fiscal cost over the first commitment period (2008 to 2012), although the Government has indicated an intention to make the scheme fiscally neutral over the medium to long term.

The introduction of an ETS, and hence a price on carbon into the economy, is expected to have different impacts on different sectors in the economy. There could be significant adjustment costs under certain circumstances, particularly if areas of traditional strength in the New Zealand economy (eg, agriculture) are particularly affected. Overall, the net costs of adjustment will depend on the degree of innovation in the economy, which a price on carbon should stimulate.


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