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Climate change

Responding to future climate change obligations will be one of the most pervasive influences on New Zealand’s business environment. It has the potential to have sizeable impacts on the growth and structure of the economy and is likely to impact adversely on some of our most productive sectors such as agriculture.

Current policies were designed in a relatively benign environment when New Zealand appeared well placed to meet its Kyoto commitments in the 2008 to 2012 period. Unfortunately, that environment has now changed. Emissions are growing faster than expected, and decisions will soon have to be taken around negotiations on future international commitments. In addition, implementation of the suite of current policies has proven to be difficult in practice.

  • Current measures make only a limited contribution to meeting our Kyoto obligations but at a relatively high cost. While the carbon tax tilts the playing field in favour of renewable electricity generation, at its current level the tax will induce almost no change in transport use and it is not clear that negotiated greenhouse agreements (NGAs) will deliver material emissions reductions.
  • There is a significant risk that, once implemented, current policies will make it difficult to put in place any future policies required to efficiently achieve more substantial reductions in emissions should these be required. The carbon tax as currently designed is distortionary because it excludes methane and nitrous oxide, which primarily arise from the agriculture sector. NGAs have high transaction costs and are proving to be difficult to achieve in practice.

It may not be appropriate, therefore, to continue to pursue current policies.

Over the next 12 months the Government will need to make decisions about any further emission reduction obligations that New Zealand might adopt beyond 2012, and the policies required to achieve any such further reductions. These decisions should be based on reliable information on the impact of policies required to achieve any further emissions reductions. Decisions should also be informed by how New Zealand can achieve its long-term obligations at least cost.

Figure 5: New Zealand’s greenhouse gas emissions are rising rapidly
Figure 5: New Zealand’s greenhouse gas emissions are rising rapidly.
Source: Ministry for the Environment

The Government will be receiving a review of climate change policy from officials by 31 October 2005. This review is expected to report on the scope for further emissions reductions, and the impact of alternative climate change targets and policies on other Government objectives, including growth. The review’s analysis is not completed and we cannot anticipate its detailed conclusions, but in our view development of an optimum policy should include consideration of the following elements:

  • Increased reliance on price-based measures – either through emissions trading or a reconfigured carbon tax, applying to as many greenhouse emitters as possible, and with no or few exemptions. The effect of such price-based measures will be to bring about structural change in the economy towards activities with lower carbon emissions. In the medium term, it is likely that it will be most efficient for New Zealand to adopt some form of emissions trading.
  • Devolution of a very large part of New Zealand’s climate change obligations to firms and individuals, and allowing markets to determine the most efficient way for New Zealand to meet its emission reduction goals. This could include the devolution of forest sink credits, and all international obligations for deforestation to the forestry sector.
  • A strategy for appropriate use of international emissions trading and the other Kyoto flexible mechanisms. Using emissions trading early would allow New Zealand to buy the time to plan for long-term mitigation strategies.

In the short term, we expect that it will not be cost-effective for New Zealand to bridge the entire shortfall in our 2008 to 2012 target against our current Kyoto obligations by further domestic policy action. Rather, the total cost to New Zealand will almost certainly be lower if the Government were to use international emissions trading to purchase ‘Kyoto units’ to meet some of the shortfall. In addition, because New Zealand’s greenhouse emissions account for only approximately 0.2% of global emissions, any binding commitment we make to reduce emissions will only be beneficial if it encourages major emitters, such as the United States, India and China, to take credible action on climate change.

In the medium term, the Government has two basic strategic options.

First, the Government could relax its existing goal to move New Zealand towards a permanent downward carbon path by 2012, and await the outcome of international negotiations on a post-2012 climate change regime.

The second option would be for the Government to accept that more stringent climate change targets are inevitable in the long term, and that sustainable policies should be established to allow New Zealand to move towards these targets at least cost.

In both cases we consider that the carbon tax as it is currently designed and the associated NGAs should be reconsidered with some urgency. The choice between these two strategic approaches will depend on a range of considerations. Important ones are New Zealand’s foreign policy objectives, and the impact of more ambitious emissions reduction targets on other Government objectives ranging from growth to labour market participation. The acceptability of more ambitious emission reduction targets will depend in part on the timeframe over which these are to be achieved.

Recommendation

  • Clarify longer-term strategic climate change goals and timeframes and reconfigure current climate change policies to align with these goals
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