1  Introduction

This section begins by looking at New Zealand’s motivation for re-examining our greenhouse gas emission reduction policies. It goes on to briefly outline the policy New Zealand currently plans to use to meet its obligations under the Kyoto Protocol. It concludes with a short discussion of the concepts and basic designs of an emission tax and a permit system.

1.1  Motivation

New Zealand aims to be on a permanent downward emissions track by 2010. This is not looking likely based on current inventories and projections. Thus the government needs to review the policies it uses to encourage emission reductions. All climate policies will be reviewed in 2005 and 2008. Although the current broad market-based instrument is a charge, the possibility of moving to an emissions trading system is not precluded by politicians.

The Kyoto Protocol covers six greenhouse gases, carbon dioxide (CO₂), methane (CH₄), nitrous oxide (N₂O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulphur hexafluoride (SF₆), and carbon dioxide sinks. An efficient policy to address global warming would tax (make liable) carbon dioxide emissions from forest harvesting and deforestation and subsidise carbon sequestration as well as tax the other greenhouse gases: methane, nitrous oxide, SF₆ and HFCs. The different gases would be taxed at different rates, depending on their estimated effects on global climate change. Adding carbon sequestration and other greenhouse gases increases the complexity of the system. They primarily differ because of measurement issues, differences in the uncertainty about costs and difficulties in choosing an appropriate point of assessment. There is a trade-off between complexity and efficiency. There is no reason why the policy cannot be developed incrementally with new sinks and sources being added as their impact on efficiency becomes greater than their cost in terms of administration and complexity. Initially, if New Zealand is considering a low level of regulation, the additional economic benefits may not be justified given the increase in political and administrative difficulty. The policy chosen should however be designed in such a way that the extension of the system is facilitated. In this paper we focus on carbon dioxide emissions. We talk a little about carbon sequestration, methane and nitrous oxides in Section 6.2 but do not touch on specific issues relating to SF₆ or HFCs.

This paper considers two central regulatory options for carbon dioxide emissions: taxes and an emissions trading system. It aims to provide an up-to-date overview of key issues involved in the choice among market-based instruments for climate change policy. Specifically, it examines the potential net benefits from shifting to a permit system for emission reduction, and the preconditions necessary for this change. It also draws out the implications of New Zealand’s specific circumstances and current climate policies for future policy development.

1.2  Current New Zealand Policy

In October 2002, the New Zealand Government confirmed the policies that will assist it to achieve its obligations under the Kyoto Protocol.[2]

1. An emissions charge, principally in respect of greenhouse gas emissions from fossil fuels. This may be replaced by emissions trading.
2. The Projects to Reduce Emissions programme, which provides internationally tradable credits for projects that will reduce New Zealand’s greenhouse gas emissions.
3. Negotiated Greenhouse Agreements (NGAs), which provide relief from all or part of the emissions charge to firms or industries that would otherwise suffer reduced international competitiveness, in return for the commitment to reduce emissions intensity to world’s best practice levels.
4. A partnership agreement between the Government and agricultural sector groups on voluntary research into agricultural greenhouse gas emissions.
5. The Government has retained sink credits and associated liabilities allocated to New Zealand under the Kyoto Protocol in recognition of the carbon sink value of post-1990 forest plantings. These credits will be retained and managed by the Government, at least for the first commitment period. The Government has also assumed the liability created by the Protocol for deforestation, up to a specified cap of 10% of forests expected to be harvested during the Protocol's first commitment period.
6. Forest owners who establish new permanent ‘non-harvest’ commercial forest sinks will receive fully tradable Kyoto Protocol compliant emission units in proportion to the carbon sequestered in their forests.
7. A ‘New Zealand Communities for Climate Protection’ (CCP) programme in partnership with the International Council for Local Environmental Initiatives and councils. The CCP programme will reduce greenhouse gas emissions by improving energy efficiency and conservation, enhancing sustainable transportation and urban design, and reducing landfill emissions.
8. The Resource Management Act 1991 (RMA), which requires that all resource and planning decisions take into account their impact on the environment.
9. A voluntary policy approach to synthetic gases. The government has an agreement with industry to limit leakage of SF₆. There is also a voluntary handling, education and recovery programme for refrigeration and insulation uses of HFCs and PFCs.
10. Other policies that include:
    1. the National Energy Efficiency and Conservation Strategy;
    2. the New Zealand Transport Strategy;
    3. the New Zealand Waste Strategy;
    4. the Growth and Innovation Framework;
    5. research;
    6. a public awareness and education programme;
    7. a Sustainable Energy Framework.

New Zealand has established climate change partnerships with Australia and the United States to enhance dialogue and practical cooperation on climate change issues.

The current package of policies has several drawbacks. It leads to economic inefficiency because the incentives to abate differ across sectors of the economy. It is also administratively complex, with a central emissions tax, negotiated exemptions from this tax, and numerous additional schemes.