Brian Fallow: Rising oil prices bring Kyoto targets closer

The Government has updated its estimate of how far short New Zealand will fall from meeting its target under the Kyoto Protocol and this time the news is better - thanks to the expected impact of higher oil prices.

It's an ill wind, I suppose.

The latest estimate is that New Zealand's net emissions over Kyoto's first commitment period (2008 to 2012) will exceed its cap by 41 million tonnes of carbon dioxide equivalent.

That is better than the 64 million tonnes that was the projection last December, mainly because of higher energy prices.

"Higher oil prices in particular have meant people are expected to use less fuel, resulting in lower carbon emissions," Climate Change Minister David Parker said.

"There have also been reductions in the net balance deficit because of better projections of the heavy-industry sector and some refinements of the nitrogen fertiliser application projections."

But 41 million tonnes would still mean the country will be adding about 13 per cent more a year to the levels of greenhouse gases in the atmosphere on average over that period than in 1990, Kyoto's baseline year.

Returning to 1990 levels was the goal New Zealand signed up to at Kyoto and, to the extent we fall short of that, the Government has to buy carbon credits on the international market to cover the difference.

Estimates of the net position have swung around markedly during the past few years.

In 2003, it was expected New Zealand would be 55 million tonnes in the black, with a corresponding surplus of credits to sell.

In 2004, that was whittled down to a 33 million-tonne surplus, which was revised to a 36 million-tonne deficit in the middle of last year. That was pushed out to a 64 million-tonne deficit in December to take account of the impact of the decision to drop a broad-based carbon tax and as a result of revising the deforestation liability from 6 million to 21 million tonnes.

The Ministry for the Environment says a wide margin of error surrounds the latest estimate of 41 million tonnes. It could be as much as 76 million tonnes or as little as 1 million.

One reason to think it might be higher is deforestation. Under Kyoto's rules, when a forest is felled but not replanted, the carbon in those trees is deemed to have been emitted and the country is accountable for it, just as it earns credits when the land use change is in the other direction.

A survey of forest companies' deforestation intentions last year indicated emissions from this source could be as high as 38.5 million tonnes.

But the latest estimate of national emissions sticks with 21 million tonnes. It is a highly political number. Under current policy that is the maximum the Government has said it (ie the taxpayer) will pay for. So there is potentially significant unfunded liability for deforestation emissions over and above the 21 million-tonne cap.

However reluctant the Government may be to recognise it in its books, it is at the moment a potential cost to the taxpayer since it is the Government that will have to settle up with other Kyoto countries after the end of the first commitment period.

And no arrangement exists to pass on the cost to forest owners.

They are naturally unimpressed by the idea they should have to pay because of a decision to plant trees in the early 1980s, long before Kyoto and indeed before climate change was widely recognised as an issue.

The forestry sector on balance is still expected to contribute a net 57 million tonnes on the positive side of the ledger, to help offset the growth in emissions from other sources.

That is because the credits from "Kyoto" forests - those planted since 1990 on land not previously forested - exceed the deforestation liability by nearly four to one. In exchange for which what do the forest owners get? The thanks of a grateful Finance Minister perhaps but that's it.

The biggest change in the latest projections is to the assumed international oil price.

A year ago, the assumption was oil would be around US$35 a barrel during the projection period. Now they are picking US$60. That should be enough of a rise to burn off some demand for petrol and diesel.

The impact is expected to reduce emissions by 14.5 million tonnes over the five years of the first commitment period or about 4 per cent of what they would otherwise have been.

But hang on. In December, we were told dropping the carbon tax would mean 13 million tonnes more of emissions. The tax was to have been based on a carbon price of $15 a tonne and would have added only 4c a litre to the price of petrol and diesel at the pump.

Now we are told that a near doubling of the assumed oil price is equivalent to a price on carbon emissions of $150 a tonne. That is a much louder price signal, the carbon tax times 10.

But supposedly it will save only 14.5 million tonnes in emissions. It does little more than reverse the effect of dropping the carbon tax.

Granted, the tax would have applied not only to transport users but to the electricity sector and, up to a point, industrial emitters as well.

But there does seem to be a bit of an asymmetry in the elasticities here. At least it is another reason to treat these estimates with caution.

The Treasury will put a dollar value on a 41 million-tonne shortfall when it updates the Government's financial statements in September.

December's deficit of 64 million tonnes was costed at $562 million or $8.78 a tonne. That was based on a carbon price of US$6 a tonne and an exchange rate of US68.4c.

Since then, the exchange rate has fallen 6c, making credits more expensive in New Zealand dollar terms and the carbon price will no doubt have to be revisited as well.

The estimates do not include any impact from climate-change policies designed to reduce emissions.

That is because we don't have any. We have work programmes instead.

Nine years since Kyoto, four years since the decision to ratify the treaty and little more than a year before its first commitment period begins, it is an absurd position to be in.