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Climate Change - Challenges for New Zealand in an Economic and Wider Context

Delivered on behalf of John Whitehead on 23 June 2007 at the 42nd Otago Foreign Policy School, Environmental Governance and State Autonomy in a Changing Climate, Salmond College, Dunedin.

Speech

Good morning.

It’s a pleasure and a privilege to speak to you today. The focus of this year’s Foreign Policy School and the calibre and diversity of my fellow speakers – as well as those attending – underscore the significant shift we’ve observed on climate change issues in recent years.

In July last year I covered climate change in a speech to a business audience about future economic challenges. To be honest with you, at the time, I patted myself on the back a little bit for being bold – confronting the economic implications of climate change for New Zealand, and making a strong call for action.

But in the space of just 11 months, I've been heartened to see climate change and sustainability reach into the national consciousness – discussed and debated in all corners of society and the economy, on a daily basis.

No longer do we characterise climate change as simply an environmental issue. At the Treasury, we’re acutely aware of the important economic implications. A changing climate will impact on households and firms, as well as governments – now, and in the future. It will change behaviours, and poses strong moral questions. Increasingly it informs domestic and foreign policy, for New Zealand and most other countries. It is a defining issue, worldwide.

And “global warming” is, by definition, a global problem. It requires a global solution. But that doesn’t mean a “one size fits all” solution. New Zealand has unique characteristics and special considerations which translate to unique and complex challenges for us in developing our response to a changing climate, at home and on the world stage.

Those challenges are great – but the opportunities and benefits of New Zealand showing leadership are also great.

Today I will discuss briefly the nature of the climate change issue for New Zealand, and emphasise some of our unique characteristics. Against that background, I will go on to consider New Zealand’s policy approach. The economic implications of climate change are much wider than the direct cost of pricing emissions, and we need to combine a well-designed economic response – such as an emissions trading scheme – with complementary measures by households, firms and government. A combination of measures which is cost-effective, efficient, and creates opportunities at home but, at the same time, is integrated with international action in a way which recognises New Zealand’s unique interests.

But first, why me – why the Treasury? The Treasury is the Government’s lead adviser on economic and financial policy, and its ultimate goal is a higher standard of living for all New Zealanders – a concept broader than current consumption, and encompassing a wide range of factors. To achieve higher living standards, we focus on three key outcomes: economic growth, macroeconomic stability, and state sector performance.

We are also one of the Government’s three Central Agencies, sharing responsibility with the Department of the Prime Minister and Cabinet and the State Services Commission for strategy, leadership and co-ordination across the state sector.

The Prime Minister has confirmed that sustainability headlines the Government’s agenda and will be a core part of its approach to policy. Climate change is at the heart of the sustainability agenda, and is central to the Treasury’s own objectives – particularly economic growth. Higher living standards cannot be achieved if our environment is compromised by climate change. Higher living standards cannot be achieved if our economic growth is compromised by climate change.

The Treasury’s work reaches to the heart of the Government’s climate change policy development, concentrating on the economic implications and working alongside other agencies to develop solutions – including the Ministry for the Environment and the Ministries of Agriculture and Forestry, Foreign Affairs and Trade, and Economic Development, as well as the other Central Agencies.

We also are one of six agencies leading the state sector to carbon neutrality and, most recently, the Treasury has taken a leadership role with the Ministry of the Environment in the policy design work for an economy wide emissions trading scheme. But more about that later.

As the Government’s lead economic advisor, the Treasury follows the economics of climate change closely. At the same time, we must consider climate change in a wide economic context – recognising that the implications encompass both direct and indirect costs on the economy.

Framing the problem in basic economic terms is a good place to start. For an economist, the issue can be put quite simply: climate change is an example of a “tragedy of the commons”. Where a clear property right to a common resource does not exist, no individual has an incentive to manage the use of that resource, and over-exploitation will occur. The capacity of the atmosphere to absorb greenhouse gases is exactly such a resource.

An economist would also argue that if the damage caused by greenhouse gas emissions is left out of market pricing, participants have an incentive to consider only private benefits, with social costs and benefits – so-called “externalities” – ignored.

And as we know, the social costs of unabated climate change are substantial – impacts on the planet and human civilisation could be severe.

Over time, more detailed work has been carried out to quantify those costs – no small task. As I’m sure you know, a major review of the economics of climate change was commissioned by the UK government in 2005 and in October 2006 Sir Nicholas Stern, of Her Majesty’s Treasury, published his team’s review.

The Stern Review drew on scientific evidence to predict the economic impacts and risks arising from uncontrolled climate change – impacts and risks arising from the flooding, declining crop yields, heat stress, malnutrition and disease which come hand in hand with rising temperatures, and which hit the world’s poorest countries earliest and hardest.

Using data from sources like the 2001 report of the Intergovernmental Panel on Climate Change (this year’s IPCC data having not been released), the Stern Review predicts that the impacts and risks associated with uncontrolled climate change could equate to as much as a 20% reduction in GDP per head, now and in the future – depending on assumptions regarding non-market impacts and the weighting of impacts on the poor.

The Review goes on to consider the costs and opportunities associated with mitigation, and appropriate policy responses. In a nutshell, it advocates that the benefits of strong, early action considerably outweigh the costs.

The Stern Review is an important step in climate change economics, but it recognises that estimating the economic costs associated with climate change is a challenge. Intuitively this makes sense, given the extended timeframes involved, not to mention the numerous uncertainties and sensitivities. Difficult and complex judgements and assumptions are required. And in some quarters, the Review has been criticised in relation to the integrated economic model it used to assess the costs of climate change, and the discount rate used to convert those costs to present-day dollars.

Being from the Treasury, I’m interested in things like discount rates, so let me touch on this briefly.

For a long-life problem like climate change, the choice of discount rate has a big impact on the cost-benefit analysis which helps determine how much action should be taken today, to mitigate the effects of a changing climate in the future.

The discount rate represents the rate at which society is willing to substitute present consumption for future consumption. Some would argue that today's generation has a moral obligation to protect future obligations, and a discount rate of zero would ensure intergenerational equity by preventing today's generation from ignoring the long-term environmental and other consequences of their actions.

On the other hand, this view ignores the fact that the wealth and abilities of current and future generations are not identical. Continued productivity improvements and capital accumulation mean that future generations are likely to enjoy a higher standard of living than current generations. It follows that positive discounting doesn't discriminate against future generations, but is necessary for an equitable allocation of resources in the other direction. Most economists would argue that a positive discount rate is justified, because it promotes intergenerational equity and fairness for current generations.

But even if you accept some discounting, as most economists do, fixing an actual number is difficult.

In converting the costs to GDP of unabated climate change to present-day losses in welfare, Stern used a low discount rate. This was material to Stern’s results and has been strongly questioned, with a survey of leading economists suggesting that a higher rate – around 6 per cent – is more appropriate. At 6 per cent, the projected damage in the year twenty-one-hundred, discounted back to today, is significantly less severe than predicted by Stern.

Various methods for determining a discount rate exist. Most involve estimating a social rate of time preference, and often a risk-free rate such as a government bond rate is used as a proxy. Critics have argued that those methodologies would not support a discount rate as low as Stern’s.

These and other debates are healthy and necessary as the discipline of economics grapples to come to terms with a long-run issue like climate change – described by Stern as “the greatest and widest-ranging market failure ever seen”. But to a large extent, for New Zealand, the debates are a distraction.

Climate change has become the reality. It’s already affecting the views and actions of consumers, firms, sectors and governments around the world, and will continue to do so. As the world acts, so must we act – and react. Doing nothing is not an option.

To encourage a shift from business-as-usual and attempt to control the impacts of climate change, one of the firm and widely agreed recommendations from Stern and other studies is a response in the form of carbon pricing – through emissions trading, taxation or other regulation. A strong case is also made for intensive development of new technology, and removing barriers to behavioural change.

On the issue of price, a study conducted by the Netherlands Environment Agency in 2007 found that to stabilise concentrations of greenhouse gases in the atmosphere at 550 parts per million would require a price of 46 US dollars per tonne of CO2 equivalent by 2030. To reach 450 parts per million, the price would be closer to 109 US dollars.

Another study, conducted this year by the global consultancy McKinsey, asserts that about half as much – 55 US dollars – could stabilise greenhouse gases at 450 parts per million. However, the McKinsey study assumes that almost all required reductions will occur in the developing world. Because the majority of emissions to date have been generated by the developed world, forcing reductions in the developing world is seen by many as a morally inadequate response – and a politically difficult one.

The different approaches and conclusions in these and other studies illustrate the complexities inherent in the economics of climate change. The methods used to model global impacts over a long-term horizon, and the moral and ethical positions taken, make a big difference. More work is important, but shouldn’t delay action today.

Modelling the impacts of climate change in the shorter term – and in New Zealand alone – is a less daunting exercise. As part of the Government’s 2005 Review of Climate Change, various scenarios were modelled. One, which priced carbon at 13 New Zealand dollars a tonne, predicted that GDP would fall by 0.04% in 2010. Another scenario illustrated that at 51 New Zealand dollars, GDP would decrease by 0.24%.

Those figures reinforce another clear message from Stern and other commentators: the cost of pricing emissions at levels consistent with our Kyoto commitments need not have a huge impact on GDP.

Currently, our Kyoto liability for the first commitment period is estimated to be around 540 million New Zealand dollars. Let me pause and take you through that figure.

Slide one - Kyoto liability – CP1 “likely scenario”
Slide one - Kyoto liability – CP1 “likely scenario”

It’s been projected that we will emit 398.5 million tonnes of CO2 equivalent in the first commitment period, which covers the five years from 2008 to 2012.

Take away from that our “assigned amount units” under Kyoto – the amount of CO2 equivalent we’ve been allocated for free, which is 5 times our 1990 emissions. This is 307.6 million tonnes.

This leaves 90.9 million tonnes of emissions beyond 1990 levels – but we must add to that the carbon we will release from cutting down forests, projected to be 21 million tonnes.

The upside is that 78.2 million tonnes will be absorbed by the qualifying forests left standing.

This leaves us to account for 33.7 million tonnes, but the Government promised 7.5 million tonnes’ worth of its assigned amount units to a number of New Zealand companies undertaking projects to reduce New Zealand’s emissions in the future – such as windfarms and other renewable energy projects. That 7.5 must be added back – taking the balance of total excess emissions to 41.2 million tonnes.

Work is underway at the Treasury and Ministry for the Environment to update the carbon price and quantum figures for this year’s accounts, but using a carbon price estimated by experts to be US 9 dollars 65 per tonne of CO2 equivalent, the liability at current exchange rates is projected to be $537 million dollars.

537 million dollars is no small sum, but it represents only a very small proportion of our forecast GDP for those 5 years – less than 0.1%.

Still, the direct costs of reducing emissions must be considered alongside indirect costs, which are potentially much wider. Emissions trading or some other form of carbon pricing is, conceptually at least, a straight-forward economic response to the simple economic problems I described earlier – the “tragedy of the commons”, and the failure to price externalities. But is it enough?

I would argue that a sound economic response is necessary, but not sufficient, to deal with climate change and its implications for New Zealand. Climate change, as I said earlier, is a defining, pervasive, global issue. It is important to consider the direct costs of pricing carbon – but there are other considerations, and special considerations for New Zealand.

And in formulating our domestic and foreign policy on climate change, we must take that wide range of factors into account.

Climate change and the world’s reaction to it will bring risks, and it will bring opportunities. Successful New Zealand businesses will respond to both – and the Government is working to create an environment which encourages and assists them to do so.

Let me talk a bit about risks. One example is food miles, which has received a lot of attention recently.

This advertisement for Country Life English butter, targeted at English consumers, pretty much sums it up. “Before Anchor butter reaches your table” it proclaims, “it’s frozen and shipped over 11,000 miles from New Zealand”. And just look at that thirsty, dirty tanker.

But what the ad hides with its quaint images of the English countryside is that shipping New Zealand agricultural products half way across the world, as a general rule, is significantly more carbon efficient on an entire life-cycle basis than production by English and European farmers for their home markets.

I don’t wish to dwell on the food miles debate – but it serves to highlight two very important issues for New Zealand.

First, consumers – in England, and our other export markets –care about green issues. We can understand that – so do we. Second, the reactions of carbon-conscious consumers may have unfavourable and, in some cases, unfair consequences for New Zealand.

The first issue – a heightened environmental awareness – can in many areas of our economy be turned into a positive. Astute businesses are already capitalising on the environmental friendliness of their products – our wine industry, for example, is an early leader. We must continue to realise the great potential for New Zealand to sell itself and its products as clean and green, low-emission, sustainable, carbon neutral – and step up the campaign.

The second issue – areas where New Zealand goods and services are negatively perceived from an environmental perspective – is harder to address. Obviously, reducing our carbon footprint is an overarching goal, and reduced emissions should be pursued in those areas as much as possible. But – as is the case with food miles – where the debate is one-sided, misinformed, or presenting a narrow view, we have a strong incentive to weigh in and push our side of the story. To do so is not only beneficial to our economy, but environmentally responsible.

Again, taking and seeking opportunities to engage on these issues at an international level is vital. Just last week Helen Clark reinforced to a Trans Tasman Business Circle audience in Melbourne the need for New Zealand and Australia to work together on food miles and other issues of mutual interest, including new technology.

As consumers become more and more conscious of environmental issues – and more and more educated – the risks will only become greater and more numerous. Our clean, green image is of huge value to our economy, but it can be eroded. We must be fast and smart in mitigating the risks.

And as I’ve already alluded to, there are moral and ethical factors overlying all these economic considerations.

I won’t deliver a sermon on the ethical and moral issues, of which we’re all aware to a greater or lesser extent. Suffice to say that New Zealand cares about the environment, and what it means for our unique national identity. We care about future generations and we care about how our actions impact on the rest of the world, particularly poorer countries. Most of us feel morally compelled to do our bit and be part of the solution to a global problem.

What I will comment on are the characteristics of New Zealand which create particular issues for our response to climate change – each of which involves difficult economic, moral and other judgements, and requires hard thinking in formulating appropriate policy.

First, let me state the obvious: New Zealand is a small country. As a proportion of the world’s total emissions, at 0.3% we barely register.

Slide three - Per capita emissions
Slide three - Per capita emissions

That doesn’t mean we as New Zealanders have anywhere near a perfect emissions record. This graph illustrates that New Zealand’s emissions, on a per-capita basis, closely follow big emitters like Australia and the United States. It also shows that the average New Zealander emits almost twice as much as our British counterpart, almost three times as much as our Swedish counterpart, and nearly five times as much as our Chinese counterpart.

Clearly, these figures can and should be improved. But our actions at home, alone, can have only a limited impact on global emissions.

The flipside is that global action – or inaction – on climate change will affect us. We are highly susceptible to the environmental effects of climate change, and just as susceptible to the economic effects. The latest IPCC report identifies impacts on New Zealand, including water security and drought risks and increased coastal flooding and storm events. This will be familiar to residents of the East Coast of the North Island, who have recently experienced the worst droughts on record, with Gisborne coming close to running out of water.

We’re not just small, we’re isolated – and depend on exports to drive our economy. But the energy required to shift goods and people to and from New Zealand is an issue for us – again I mention food miles.

We have ratified Kyoto and stand behind our commitment to reduce emissions. But compared to fellow Kyoto signatories and other industrialised countries, New Zealand’s emissions profile is unique. Because our economy depends heavily on agriculture, methane from ruminant animals, and nitrous oxide from fertiliser and animal waste, dominate our emissions profile.

Slide four - Emissions profiles
Slide four - Emissions profiles

The prominence of agriculture is shown in this slide – which compares the emissions profiles of New Zealand, the UK and Canada. The underlying figures are taken from the 2005 Greenhouse Gas Inventory that Kyoto countries provided to the UN in May this year. Fellow Kyoto ratifiers the UK and Canada are good comparisons, because sector categories and measurement methodologies are consistent with New Zealand’s.

You can see that for New Zealand, agriculture – the green wedge – contributes almost 50 per cent of our emissions. For Canada, agriculture is just 8 per cent of emissions and for the UK even less at 6 and a half per cent.

On the other hand, if you compare emissions from the energy sector, which includes transport, for Canada and the UK they make up a massive contribution – 84 and 86 per cent respectively. For us, it’s only 42 per cent.

Land use and forestry issues are also significant for us. In the absence of policy intervention, deforestation forecasts for the first commitment period could be up to 40 million tonnes or more, representing around ten per cent of total emissions. But the potential for forests to offset our emissions is even more significant.

This is shown in the next set of graphs – the hatched wedge shows the size of the forestry offset. It’s much more significant for New Zealand than for the UK or Canada.

Slide five - Emissions profiles
Slide five - Emissions profiles

Finally, these bar graphs show the proportion of renewable and non-renewable electricity generation for each country. Although there is potential for New Zealand to expand generation of renewable energy, New Zealand’s options for emissions reductions in the energy portion of the pie are limited compared to other industrialised countries, because we already have a large base of renewables in our electricity supply. While Canada is also endowed with some hydroelectric resources, this is certainly not the case for the UK.

Slide six - Emissions profiles
Slide six - Emissions profiles

Similarly, cost-effective methods to reduce agricultural emissions – which is by far the biggest piece of our pie – are limited, at least for now.

On the other hand, we have an entrenched love affair with our cars, and there is definitely room to improve our record on public transport – although our population is widely dispersed, which makes it more difficult.

I note finally that New Zealand’s pristine environment is closely linked with our national identity. From an economic point of view, its value for our brand – in tourism, and the world’s appetite for our goods – should not be underestimated.

From this brief overview of New Zealand’s characteristics, two very important and related conclusions emerge:

  • First, New Zealand must engage internationally on climate change issues, and we must have a strong voice. The world’s decisions will affect us, and it is vital that we affect the decision making process as much as possible. Obviously, this includes high-level international agreements – including a way forward post 2012.
     
    But important decisions about our goods are made every day, by increasingly carbon-conscious consumers the world over. How we are perceived in world markets is becoming increasingly important – we can’t take our “100% pure” image for granted. We must advance our position on all fronts.
  • Second, through Kyoto we are committed to reducing our emissions. To fail in meeting our Kyoto obligations would hit our reputation and credibility hard. Domestic opportunities to reduce emissions should be pursued with vigour, especially where strong co-benefits for our environment and economy exist. But realistically, domestic reductions alone are unlikely to be cost-effective for New Zealand, and we will need to look offshore for reductions opportunities.

So let’s talk about some of the policies that can help reduce our domestic emissions.

To achieve a reduction in emissions, a government can follow two general approaches – regulation, or introducing an economic instrument. All things being equal, a government will make a choice based on which approach (or combination of approaches) achieves the required level of emissions reductions at the lowest possible cost to the economy.

An economist will tell you that the least-cost response is where responsibility for emissions abatement is allocated in such a way that the marginal costs of abatement are equated across all the groups involved. In other words, those who can reduce their emissions cheaply should do a lot, and those for whom reduction is expensive should do less.

Let us first consider a regulatory approach. Designing regulation to insert a carbon price into every consumption and investment decision impacting on emissions would be a daunting task.

A least-cost response would require the regulator to know the cost each emitter faced in reducing its emissions. Only then could the regulator dictate – through rules and regulations – precise reduction targets for each emitter. With a large number of emitters, each with different characteristics, obtaining the required amount of high quality information would seem impossible.

This isn’t to say, however, that targeted regulatory interventions in the case of market failure and some other circumstances aren’t justified. However, the information requirements for a least-cost response reinforce why the second approach – an economic instrument – is so powerful.

An economic instrument has the advantage of automatically allocating responsibility according to the marginal abatement costs of emitters. It provides an incentive for those individuals within the economy with the knowledge and ability to reduce emissions to do so. Emitters are likely to have much better knowledge of their emissions abatement costs than a regulator – but just as importantly, they are best placed to search out the best ways to reduce their emissions.

The Government has announced it will be pursuing an economic instrument approach as part of its response to reduce emissions – an economic instrument in the form of an emissions trading regime. As you may be aware, officials are working intensively on options for such a scheme, and firm decisions are still to be made. It’s not appropriate for me to discuss those options in any detail, but let me make a few observations.

First, a quick emissions trading 101. Currently in New Zealand, everyone has a right to emit CO2 into the atmosphere, subject to regulatory constraints like emissions standards for cars and the regulation of land use under the Resource Management Act. By creating an emissions trading regime, we would be formalising the right to emit, and enforcing those rights. Participating emitters would report emissions in a manner which could be monitored and verified, and then ensure they had permits to match.

The Government would allocate a given level of permits to emitters, who could then trade those permits.

Emitters with emission reduction costs lower than the market price of permits would reduce emissions, and sell surplus permits. Emitters with reduction costs higher than the market price would purchase permits and continue to emit. In this way, trading would result in emissions reductions being made by emitters who can do so most cheaply.

The attractiveness of a trading scheme as a primary policy response is in little doubt amongst economists. And others are getting on board. Recently the Government released a number of discussion documents on domestic climate change policy, which included consideration of a trading regime. Feedback was generally positive – most respondents agreed that trading was likely to be the most efficient response.

Of course, an alternative to emissions trading is a tax-based system – a carbon tax. A tax-based system would have much in common with a trading scheme, but trading is currently preferred for three reasons.

First, it’s becoming the norm internationally – other countries are developing trading schemes and Kyoto itself is a cap-and-trade system. There are strong reasons to reflect international policy settings in a domestic context.

Second, a trading scheme is much more flexible than a tax – trading allows the price to adjust automatically, while taxes are inherently sticky. A given level of tax won’t guarantee a desired quantity, and many factors can influence the nature and speed of any adjustment.

Third, as I mentioned, consultation has shown wide, but not universal, support for trading.

And fundamentally, the science is telling us to control the quantity of our emissions. An emissions trading scheme can give us certainty as to quantity, while a carbon tax gives certainty only on price. From an environmental perspective, a quantity-based instrument is preferred.

Agreement on an emissions trading scheme at a conceptual level, however, is only the first step. The detailed design and implementation of a trading scheme is a complicated and difficult exercise.

A particularly complex decision is how to allocate permits – free, or by auction? In either case, emissions will be reduced by broadly the same amount and at the same aggregate price. On the other hand, considerations of equity weigh heavily on the decision. Emitters may claim that they have made significant investments based on the previous state of the world, and should be gifted their current emissions. Environmentalists would counter that allocating free permits rewards firms who pollute most.

There is no simple answer to these issues. Policy makers must weigh the arguments and make an informed judgement.

Another high-profile issue is how different sectors are integrated into the trading framework. Trading schemes that have been introduced or proposed in other countries typically include only a few sectors. Often they concentrate on stationary energy, because for many countries, that’s the biggest source of emissions – along with transport, which is usually subject to significant taxes. I understand Helen Stokes and Vicky Pollard will be giving us insights into emissions trading from the UK and EU’s perspectives after lunch.

But as I said earlier, the agricultural sector contributes almost half of New Zealand’s emissions. The Government could pursue international models and focus on energy, but we must ask – how could a carbon pricing regime equitably exclude agriculture, and how effective would it be?

For this reason, the Government is considering an emissions trading scheme which, over time, will encompass all gases, all sectors – and rightly so. Still, accommodating agriculture in an economy wide scheme will be a challenge.

An emissions trading scheme will affect different players in the economy differently. Putting a price on carbon changes the relative competitiveness of firms – specifically, emissions-intensive firms become less competitive. When you think about it, that is the desired outcome – but the reality is that some firms will reduce output as a result.

If you accept the principle of carbon pricing, it is in New Zealand’s interests to allow a loss of production for businesses whose abatement costs are clearly higher than the price of carbon.

Similarly, if our competitors refuse to enter the international regime and face a carbon price, it is not in our best interests to protect New Zealand firms competing with firms from those countries.

In a way this is similar to issues in trade – New Zealand attempts to maximise its economic performance, even though it operates under a sub-optimal set of trade rules. A key element of New Zealand maximising its economic performance has been removing subsidies within the New Zealand economy, regardless of the behaviour of trading partners.

In contrast, a loss of production will be a concern where there are long-term regrets associated with firms closing or substantially reducing production levels. For example, if countries are expected to commit to reductions in an international framework within the foreseeable future, it may not be in our interests to allow a loss of production for New Zealand firms who could compete effectively in those markets when the playing field has levelled.

Finally, a crucial component of scheme design is its ability to link with trading schemes internationally.

Frankly, it is very unlikely that New Zealand will comply with its Kyoto commitments, at reasonable cost, without trading internationally. Earlier I outlined why economic instruments generate least-cost responses. The same argument applies equally to international trading – if emissions reductions are cheaper in other countries, an economist would argue that it’s sensible to focus reduction efforts in those countries. A scheme which linked internationally would recognise this principle, and would allow New Zealand emitters to engage to some extent in this “emission reduction out-sourcing”.

It was announced during the Prime Minister’s visit to Australia last week that New Zealand and Australia will seek to co-operate on emissions trading through a joint officials committee. But as we know, Australia’s emissions profile, and its international position on climate change, are very different from our own – and any joint efforts on sharing information and developing common standards and verification procedures must occur in that context.

Such are the complications in designing an effective scheme for New Zealand. An emissions trading scheme – an efficient, economy-wide economic instrument – is an essential element of New Zealand’s response to climate change, and officials are working hard to make it a reality.

However, an emissions trading scheme will not be the only policy response. More can be done – by firms and households, as well as by Government.

One of the Government’s objectives is to lead by example, and it has announced a range of measures to help build a sustainable New Zealand.

By 2012, the Treasury, along with five other Government agencies, will be carbon neutral, with the balance of the public sector on the same path. The Treasury already has an impressive record of energy efficiency and waste reduction – all-purpose rubbish bins are disappearing across Wellington, and I’m sure I’m one of many public servants here today forced to manage their non-recyclable waste in a receptacle the size of my fist!

The Government is enhancing state sector procurement polices to drive the market to supply more sustainable goods and services. It’s partnering with business to improve market access for sustainable goods and services and make firms’ operations more sustainable. Households will also benefit from policies designed to make homes better to live in and cheaper to run, but with a much smaller carbon footprint.

Further initiatives include a biofuel sales obligation, incentives for afforestation, and grants for energy efficient investments by homes and business.

The Government is doing what it can to advance sustainability and, most importantly, encouraging firms and households to do the same – by providing leadership and creating the right environment. The incentives provided by an emissions trading scheme will help.

I spoke earlier about some of the risks we face in New Zealand – food miles, for example. But let’s not forget the opportunities. New Zealand business is already identifying those opportunities, and we can go much further.

Agriculture is a major issue for New Zealand, but it also opens the door for us to lead the world on emissions-reducing technology for the agricultural sector. Research on nitrogen inhibitors and other methods to reduce pastoral greenhouse gases is underway, and will hopefully lead to technology which not only reduces our own footprint but can be sold to the world.

Biofuels is another area where New Zealand is well-placed to lead, partly because biofuel production in New Zealand doesn’t involve the same trade-offs it does for some other economies. The Government is supporting growth in the biofuel industry, including through a 3.4% biofuel sales obligation by 2012. There are significant opportunities for innovation in this area.

I should emphasise that, while New Zealand should be ambitious about opportunities to innovate and develop new technology, we are a small country, and a huge amount of technology is and will be developed offshore. We need to be smart about scouting for that technology, and picking it up and applying it as quickly as we can. Again, engagement on an international level – by businesses and relevant government agencies – is essential.

I’ve spoken today about a number of different climate change implications for New Zealand – from weather patterns to consumer preferences to production opportunities. Let me quickly draw on two of these factors to illustrate some of the interactions.

First, scientists tell us that in the future, New Zealand will be wetter in the west and drier in the east. Second, world markets are already adapting to climate change – the recent increase in demand for dairy products, for example, has been driven in part by substitution of animal feed products in the United States towards biofuel production.

New Zealand can respond with increased dairy production, and this is already occurring – including in some eastern areas such as Canterbury. But, as we know, less rain on the east coast going forward will mean tighter constraints on water. Given our focus on sustainability, an issue we will face is managing those increasing constraints while still responding to world markets. And what will increased dairy production mean for our agricultural emissions?

My point is that climate change will pull New Zealand in a number of directions, and it may well become as important in an economic context as trade policy, labour markets, exchange rates. The challenge is to be nimble, smart and flexible in our approach.

Every New Zealander can play a part in tackling and adapting to climate change. Every industry. Every household. Every government department. And we must be outward-looking. Our domestic responses are important – and, obviously, where we exert the most control. But again, climate change is a global problem requiring collective global actions and solutions. Those actions and solutions will have an impact on us, and it’s essential that our short-term domestic policy settings can cope with changing international agreements. It’s also important that we influence those international agreements. We need to adopt policy positions that enhance our credibility within the international community, and support our standing in international negotiations going forward.

I am no expert on foreign policy or international engagement – although you will hear from many such experts at this conference. Still, I offer a few thoughts about the way forward for New Zealand in the international arena.

New Zealand is small, but not too small to make a difference. If enough countries simply rely on others to solve the climate change problem, the problem will never be solved. Every country can make a contribution.

New Zealand’s position should encourage an effective, long-term framework to stabilise greenhouse gases in which all the world’s major emitters – in developed and developing countries – take action.

Kyoto’s contribution has been hugely significant, but its current form and membership cannot deliver this result. To be effective, it is likely that any future international agreement on climate change will be more complex and more nuanced than Kyoto. It must deal with important social, economic efficiency and equity considerations across the developed and developing world. It will relate strongly to energy demand, energy supply, and the development and use of technology.

In the context of broad international agreement which encompasses major emitters, New Zealand must underscore its willingness to make a strong commitment – and encourage other countries to follow suit.

These sentiments, combined with credible domestic action, will help secure us a place at the negotiating table and ensure that our views carry some weight. This, in turn, will allow us to advocate for appropriate treatment of our particular unique circumstances.

We need to ensure that a post-Kyoto framework takes into account our unusual emissions profile – the role of agriculture and forestry especially. We need to clarify future rules on Land Use, Land Use Change and Forestry, and leverage our leading position on agricultural emissions to advance research in that area.
To do this we must grasp the opportunity to engage internationally, and focus on engagement which will have the most impact in advancing our interests. We are already party to Kyoto – but APEC and CHOGM are other fora where climate change issues are being pursued. Thanks in part to our Prime Minister’s efforts, emissions trading is on the agenda for September’s APEC meeting in Sydney.

Where we can, we should encourage action in fora we’re not a part of – like the G8. Climate change is firmly on the G8’s agenda – with some signals in the right direction coming out of the group’s summit in Germany earlier this month. The commitment of G8 countries to climate change solutions will be crucial – the eight members account for roughly 43% of the world’s emissions, and that excludes China and other large emerging economies.
In underscoring the need for New Zealand to advance its own interests, I don’t need to remind you that we’re facing engagement and negotiation with countries ever mindful of their own interests. It is challenge enough to bring some of those countries to the table at all, let alone in a way which takes sufficient account of the New Zealand perspective.

So in addition to influencing formal international groups, we should strengthen strategic bilateral climate change partnerships with other countries, including Australia. We should continue to engage in international technology partnerships, and explore others.

And that’s just engagement between officials. New Zealand businesses should be engaging with their global counterparts, and the Government must facilitate this where we can.

Our approach to international engagement should be concerted, and it should be strategic. But crucially, our voice will be strongest only when we “walk the talk”. When we can demonstrate our progress towards Kyoto compliance. When we can show that New Zealand Government, firms and households are committed to sustainable action. When we integrate effectively with the international effort.

Speaking of engagement, I’m conscious that today’s dialogue should go both ways. Let me conclude the formal part of my address with the following observations:

  • Climate change is a global problem, but it will have particular impacts for New Zealand, and particular implications for our economy – implications which go beyond the direct costs of reducing our emissions.
  • New Zealand is committed to reducing emissions, but how we reduce emissions is a complex issue. An effective economic solution is essential – and an emissions trading scheme will be effective. But its design will be a challenge.
  • It’s unlikely that New Zealand can achieve cost-effective emissions reductions without pursuing at least some of its reductions offshore, and this reality must influence the development of our responses.
  • An emissions trading scheme must complement other action – by Government, households, and firms. We have a lot to lose in a carbon-conscious world if we don’t wake up to the risks. But with smart and comprehensive action, we can manage those risks, and maximise opportunities.
  • Our action – and the perception of our action – in the international space is crucial. To step up to the climate change challenge we must engage effectively and strategically with the world – with other governments in key international fora, and with our export markets.
  • And having a strong voice requires a reputation to match. New Zealand needs to build and then assert its credibility – to steer a sustainable course for the planet and steer a course for New Zealand which recognises our unique interests and minimises the negative impacts on our economy.

Thank you.

[ENDS]

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