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Briefing to the Incoming Minister of Finance 2008: Medium-term Economic Challenges

Better management of natural resources is critical to economic development

New Zealand is experiencing pressure on our natural resources such as water and our share of the atmosphere's ability to absorb greenhouse gases. These pressures are both national and international in nature:

  • Pressures from consumers for environmentally friendly production are growing, along with New Zealanders’ expectations for environmental outcomes.
  • Demand for freshwater in some areas exceeds sustainable levels and intensive land use is degrading water quality.
  • International action on climate change is spreading and becoming more pressing.

The priorities for better managing natural resources are climate change commitments and management of water resources

Meeting these challenges will require difficult trade-offs across differing priorities. For example, the Government may need to reconsider its views on how to achieve protection goals on private land, and on the potential for alternative uses of the conservation estate if it wishes to promote further renewable energy development such as wind farms. These trade-offs may involve risks to current levels of economic activity and potential growth.

Climate change commitments

Policies on emissions need to focus on negotiating an equitable international climate change commitment for New Zealand that recognises our unique emissions profile and adopting domestic policies that meet this target at least cost. The most important decision on climate change will be whether to commit to a new international climate agreement, which is due to be finalised in December 2009. The agreement is likely to include binding emission reduction targets for developed countries, specific mitigation “actions” required from developing countries and increased financial support for countries facing high costs of adaptation. New Zealand's negotiating strategy needs to involve a clear understanding of the costs imposed on New Zealand by a future emission reduction target and identify our bottom lines. These bottom lines must include recognition of our unique emissions profile when setting our target, and agreement to a level of stringency that is appropriate relative to other countries' targets - in particular the major emitters such as the USA and China, but also the advanced developing countries, such as Singapore, South Korea and regions of the Middle East.

Major emission reductions are required globally to stabilise greenhouse gas concentrations in the atmosphere

Global emissions reduction scenarios
Global emissions reduction scenarios.
Source: IPCC

International climate change commitments will shape the costs New Zealand faces

New Zealand's emission profile is dominated by agriculture

Emissions profile of Kyoto annex 1 countries
Emissions profile of Kyoto annex 1 countries.
Source: 2007 submissions from parties to the Kyoto protocol

The international commitment that New Zealand negotiates generates the economic cost for New Zealand of its climate change policy. The Emissions Trading Scheme (ETS) then determines how this cost is spread between emitters and taxpayers and acts to minimise the cost by giving an incentive to emitters to abate emissions where it is cost-effective to do so. It is not possible to mitigate the costs of a given international target by providing generous treatment to emitters under the ETS as this does not reduce the cost but simply transfers it to taxpayers. While the proposed ETS design is sound, some changes would be beneficial. The scheme ought to be revenue neutral with any net revenues returned through reductions in other taxes over time. The scheme should also allow emitters to use units that are compliant under Kyoto to meet their obligations under the scheme.

Mechanisms are needed that manage water resources more effectively and improve water quality

By pricing emissions, New Zealand has made many of the emissions reductions policies introduced prior to the ETS redundant. Productivity may be compromised if businesses are required to comply with layers of emissions reductions policies that are not required. These policies are warranted only where they target a market failure that is not addressed by the ETS. Policies such as the thermal moratorium, biofuel standards and vehicle-fleet fuel-economy standards do not meet this test - they are costly and unnecessary when an ETS is in place. Research expenditure, particularly in agricultural emission mitigation options, is a valuable complementary measure. Energy efficiency programmes have some justification but funding provided needs to be conditional on rigorous assessment of costs and benefits, ex-post reviews of effectiveness and comparison with other government expenditure priorities through the Budget process. The recent expansion of expenditure in these areas by a further $1 billion over the next 15 years was not based on this type of analysis and we recommend it be reconsidered.

Managing water resources

There are signs of escalating pressures on water quality

Trends in dairy cows, fertiliser application and nitrogen levels in rivers
Trends in dairy cows, fertiliser application and nitrogen levels in rivers.
Sources: MAF and The National River Quality Network

Increasingly, the economic value of water is being recognised. The challenge for policy is to develop mechanisms that allow society to gain the most long-term value from this resource. Water is a major input to production in pastoral agriculture as a direct input and a sump for pollutants. New Zealand has not priced water for either of these functions in the past and in some cases sustainable limits have yet to be agreed.

The National Policy Statement (NPS) on Freshwater Management under the Resource Management Act 1991 (RMA) is currently being developed. This includes the efficient use of water as a policy objective (among other objectives) and provides for the “transferability of resource consents for the use of water”. Policy development along these lines would produce a market price for water, and therefore result in more efficient allocation among different uses. It will also be necessary to take interim action on allocation and reallocation, in light of the pressure evident in particularly water-stressed regions of New Zealand. The potential impact of limited new allocations of water on the scope for economic growth is significant, but the risks to current land users from measures to improve water quality are even greater. Sound regimes and new approaches to mitigating the effects of land use on water are a high priority.

The way Māori interests in water will be integrated in any governance regimes developed for water will need to be considered carefully. Recent settlements such as those for the Waikato River have established arrangements for iwi that work through or alongside the RMA and Local Government Act 2002. While there are benefits from this approach, such as integrated management of the river ecosystem, it also generates uncertainty and costs for resource users. Greater clarity of objectives and property rights will maximise economic opportunities and minimise costs. Engagement with Māori on these issues at both national and regional levels would assist the Government in taking forward the wider debate on the use of this increasingly scarce resource.

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