Natural resources

New Zealand has plentiful, clean water; clean air; productive soil and a climate well-suited to humans, trees, livestock, and agriculture; long coastlines and significant aquaculture resources; significant mineral and petroleum reserves; and extraordinary biodiversity on our land and in our water bodies. The World Bank estimates that New Zealand ranks eighth out of 120 countries, and second out of OECD countries, in natural capital per capita. We are outranked only by petroleum-exporting countries.[107]

The discussion in this section draws on the Treasury (2013). Long-Term Challenges and Opportunities in the Natural Resource Sector: Three case studies. Background paper for the 2013 Statement on the Long-Term Fiscal Position. Available at www.treasury.govt.nz/government/longterm/fiscalposition/2013.

Although it is only one aspect of the overall value of our natural resources, the pure economic value we derive from those resources is significant. In 2011, export revenue from the primary industries amounted to over 70% of total merchandise export revenue. Agriculture directly contributes over 6% and may indirectly contribute over 15% to our GDP.

The way we use our natural resources affects our economy, and accordingly affects the Government's financial position. There are also more direct ways in which natural resources affect the Government's financial position. For example, the Government incurs expenses for natural resource management and regulation, collects royalties for the extraction of petroleum and minerals, and owns the conservation estate.

For now, we will focus on three case studies: climate change; oil and gas; and fresh water.

Climate change

Climate change could have fiscal consequences for New Zealand in two ways:

• the effects of a changing or less predictable climate could affect our economic performance and living standards, and
• future international agreements on climate change, and the domestic policies that we use to achieve those commitments, could require direct financial transfers.

Average temperatures could be 1^oC higher by 2040 and 2^oC higher by 2090, relative to average temperatures in 1990.[108] Weather patterns and events could change or become more frequent. As an island nation with an economy that relies on primary production we are more vulnerable to climate changes and weather events than some other countries.

There is little we can do directly to stop climate change from happening. New Zealand emits only 0.2% of global greenhouse gas emissions. In common with most other countries, our mitigation policies will contribute most effectively to a global reduction in emissions to the extent that they encourage larger-emitting countries to take action.

International agreements to reduce carbon emissions will also have a fiscal impact. Negotiations are currently underway on an international deal on emission reductions that would come into force by 2020. Although we can't be sure yet, that deal may involve New Zealand's committing to reducing its greenhouse gas emissions to a certain level by a certain date. If we did not reach that target, the Government would most likely have to pay a financial penalty.

It will be challenging for New Zealand to reduce its greenhouse gas emissions from business as usual. In many countries most emissions come from fossil fuel use and industrial processes, where there are some straightforward ways of reducing emissions. But over 70% of New Zealand's electricity comes from clean, renewable energy sources and nearly half of New Zealand's emissions come from the agricultural sector and there are fewer options for reducing emissions from livestock and soil. The fact that our population is still growing adds a further level of complexity.

There are nevertheless ways we could lower our emissions. When the opportunity arises, government and the private sector can tailor investments in energy and transport infrastructure towards lower-emitting outcomes. But there will be economic growth consequences of aggressive action to lower emissions, as well as inequalities, as the costs of emission reduction will fall disproportionately on some industries, socio-economic groups, and generations. These costs will need to be balanced against the potential financial cost to the Government of meeting future emission reduction commitments.

Oil and gas

In 2009, the oil and gas industry (exploration, production, supply chain) directly contributed to 1.5% of New Zealand's GDP. Accordingly, royalties and taxes from the industry make up a significant revenue stream for the Government - around 0.2% of GDP. It could be an even more significant revenue stream in the future, depending on two factors:

• how much oil and gas we choose to extract, and
• how and how much the Government charges in rents, taxes, or royalties.

There is some uncertainty around the extent of our oil and gas reserves, but we think they are quite significant - the challenge is whether oil and gas can be extracted profitably and in a way acceptable to New Zealanders. It seems likely that we can enable more extraction in the future and that the oil and gas industry will be able to contribute more to government revenues.

The Government could also increase royalty rates or change the fiscal regime altogether. However, this could also discourage exploration, meaning that the overall amount the Government collects could stay the same or even decrease.

Whether we want to encourage a bigger role for the oil and gas industry, particularly in the light of climate change concerns, is another question. Oil and gas are finite resources, so extracting them now means there will be less in the future. And we might not want to pay the environmental price of increased extraction.

Fresh water

New Zealand has a lot of useable water. This is one of our great advantages, both economically and in terms of our quality of life more generally, especially in a world where there are likely to be severe water shortages in some areas. The OECD ranks New Zealand fourth among OECD countries for volume of fresh water per capita. And water is very important to our economy, as a key input to primary production. In 2004, charges for water supply by local authorities, value-added from irrigation, and value-added from water in hydroelectric power generation amounted to nearly 1.4% of GDP.

Despite this, some regions experience problems with both the quantity and quality of water available. We are already using some economic tools to increase water quality and improve availability, like trading schemes for nutrient discharges and transfer and trade of water permits in Canterbury. In a number of regions, people already pay for water (although this charge is for reticulation and other services, rather than for the water itself).

Managing current and future pressures on our freshwater resources, whether through market-based mechanisms or rules and regulations, will be crucial to the economic performance of many of New Zealand's regions.