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5  Conclusions

This paper examined the nature of the least disruptive changes in the New Zealand economy that are necessary to achieve a target annual rate of reduction in emissions, using a cost function that depends on the sum of the squares of the proportionate changes in final demands. The paper followed the methods first developed by Proops et al (1993), and concentrates on changes in final consumer demands and changes in the quantities and mixture of fossil fuels used by industries. A situation in which emissions are achieved by reducing all final demands would imply an increase in aggregate unemployment and a negative growth rate of GDP. To overcome this problem, constraints on GDP and employment growth were imposed, implying that the final demands of some industries need to increase while other industries decline.

The magnitude of an industry’s required change in final demand was found to be determined by the relative efficiency by which they could achieve the stated constraints. The carbon intensity of an industry’s output was balanced against its employment weight and value of final demand. The small orders of magnitude which resulted from these calculations suggest that reducing carbon dioxide emissions is economically feasible. That is, reductions can be achieved while maintaining acceptable levels of key macroeconomic variables if structural change can be encouraged in the areas indicated by this study. Further employment was found to be essential in achieving the growth constraint. Consequently, the addition of an employment constraint was found to make a negligible difference to the changes in final demand. Raising the magnitudes of the constraints was found to increase the spread of the distribution, thereby increasing the costs of adjustment. An increase in the carbon constraint of one percentage point was found to increase this cost more than increasing each of the growth constraints by 0.5 percentage points.

The required changes in the fuel use coefficients were also small, with only two industries required to reduce specific fuel demands by more than 1 percent to achieve a 1 percent reduction in carbon dioxide emissions. Again, this supports the conclusion that such reductions in carbon dioxide emissions are feasible.

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