By BRIAN FALLOW
Against the odds, an international agreement to tackle global warming has survived the withdrawal of the largest emitter, the United States.
After last month's conference in Bonn, it is now likely that New Zealand will proceed with its stated intention of ratifying the Kyoto Protocol next year along with enough other countries to ensure the protocol comes into force, creating binding obligations and enforceable property rights.
How much this will cost us depends on two things we don't yet know: what mix of policies the Government adopts to give effect to the international obligations it is undertaking and, crucially, what the world price of "carbon" or emissions quota will be.
But it is likely that the cost will be a lot lower than it might have been.
That is because the Europeans at Bonn abandoned efforts to limit the extent to which countries can use international trading to meet their Kyoto obligations and because the Americans, who would have been much the largest net buyers, will be out of the market.
The central idea of the Kyoto Protocol is that countries take responsibility for the greenhouse gases they emit above an agreed cap (in NZ's case 100 per cent of its 1990 levels).
But the protocol is also intended to give countries a lot of flexibility in how they meet those targets.
In particular it envisages a market in "carbon" (rights to emit greenhouse gases, akin to fishing quota) so that countries or companies can meet their obligations by buying quota surplus to someone else's requirements, if that is cheaper than physically reducing their own emissions. The idea is to ensure that environmental outcomes are achieved at the lowest cost.
Since 1990, the protocol's base year, a lot of smokestacks have gone cold in the former Soviet bloc, creating a stock of excess quota which could be sold on the international market.
Forests planted since 1990 on land not already forested also create "sink" credits in this system, reflecting the carbon dioxide they take out of the atmosphere, at least while they are growing. About a third of NZ's plantation forests qualify.
By the protocol's first commitment period, 2008 to 2012, NZ's annual gross emissions will be about 7 million tonnes of carbon dioxide, or the equivalent in other greenhouse gases, over its agreed cap.
But at the same time its "Kyoto forests" will mop up about 26 million tonnes a year, making NZ as a whole a net seller into the international carbon market.
The importance of the Kyoto Protocol in the long term is that it sets up a mechanism whereby the environmental costs of fossil-fuel consumption can come to be reflected or "internalised" in the prices of those fuels.
Without that it is difficult to see alternative sustainable technologies being competitive against the existing 19th century ones.
But because of the compromises needed to salvage the agreement, is it not only a very small step in that direction?
"Yes and no," says Pete Hodgson, the minister responsible for climate change matters.
"No, because the price of carbon is likely to be less than the fully internalised costs, because the United States isn't in, because the developing countries aren't in, and because the targets are so modest.
"But yes, because it begins a new financial market. So there will be a much greater awareness that carbon has any price at all and, progressively as it gets introduced, it will start to dawn on people that the price of carbon is likely to rise, not fall."
Officials working on greenhouse policy options have been assuming an international price of $20 to $30 a tonne of carbon dioxide equivalent. Applied to the transport sector that would add between 4.5c and 6.5c a litre to petrol prices.
But such prices are almost certainly too high, because they are based on overseas modelling that assumed that the US would be a participant, and the biggest net buyer, in the market. It will not be. In addition, Japan gained concessions at Bonn which will lighten its obligations, though they stay tougher than New Zealand's.
The numbers will have to be crunched again, but it seems likely that at least in the early years of the Kyoto regime, the price signals will be pretty faint.
There is already an embryonic derivatives market in carbon, based on the assumption that a physical market will eventually emerge.
But forward trading in carbon will stay thin, and prices accordingly unreliable, until Governments make what will be difficult decisions about how the national burdens of compliance with Kyoto are to be divided between sectors and within them.
Locally, the Government has already begun a consultation process with representatives of the energy sector, the agricultural sector and major industrial emitters.
Among the issues is what measures should be taken before 2008 to provide price signals, so that investment decisions taken between now and then take Kyoto into account.
One option would be a carbon tax. The Government has said it will make no decision about whether this would be a good idea until it sees the outcome of the McLeod review of the tax system as a whole, which is due mid-October. In any case no major new taxes would be introduced before the next general election.
The McLeod committee's preliminary view seems to be if you wanted to adopt a carbon tax it would have to be for greenhouse policy reasons, not tax policy reasons. As indirect taxes go, a carbon tax is seen as inferior to GST.
If there were to be a carbon tax, the rate at which it was struck is likely to reflect expectations of the international carbon price, discounted for the fact that the first commitment period is still seven years off.
The Ministry for the Environment has commissioned a study from economic consultancy Infometrics on what the Macro-economic effects of a low-level carbon tax would be.
Its central scenario assumed a carbon charge of $8 a tonne of carbon dioxide. That would raise about $270 million in revenue, of which $30 million would be paid by households directly.
But the net fiscal benefit would be only $178 million because it would cost about 2300 jobs, cutting income taxes and boosting unemployment benefit payments accordingly.
The results are different if the revenue from a carbon tax is used to reduce other taxes. For example, if the revenue were used to cut petrol tax (which brings in $630 million a year) the Infometrics modelling points to less inflation, less pressure on wage rates and more jobs.
With the exception of the electricity generation and energy-intensive industries, the carbon charge represents only a small shock to the wider economy, Infometrics concludes. Changes in industry gross output are usually less than 1 per cent either way.
The Government has appointed Brian Roche to begin negotiating greenhouse agreements with major emitters.
"If the major emitters say, 'We are fearful of a carbon tax and we want exemption from any carbon tax which might be forthcoming,' then his job is to say, 'Okay, then what's your price? What have you got to offer that is better than business as usual? What are you going to do for us more than usual cost-effective abatement measures?'," Mr Hodgson said.
"They want to play the game because they do not want, and quite properly, the Government saying, 'Well we can't do anything nasty to drivers because they vote, and we can't do anything nasty to farmers because everyone likes farmers, so we are going to take industry and get all our gains out of that small proportion of emissions'."
Industrial processes, manufacturing and construction combined account for only 11 per cent of NZ's greenhouse gas emissions.
Transport accounts for 15 per cent and 60 per cent comes from the agricultural sector, especially the methane belched by sheep and cattle.
Research and development, not tax, offers the best prospects for reducing that, Mr Hodgson said.
"I don't think a flatulence tax is a do-able thing. I wouldn't know how to strike it."
* Tomorrow in Forum: Two views on what the Bonn conference means for New Zealand.
Intergovernmental Panel on Climate Change (IPCC)
United Nations Environment Program
World Meteorological Organisation
Framework Convention on Climate Change
Executive summary: Climate change impacts on NZ
IPCC Summary: Climate Change 2001
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