Brian Fallow: NZ's climate change policy assumptions put in doubt

New Zealand will not be able to cut emissions of greenhouse gases enough to meet its Kyoto Protocol targets without significant and futile damage to the economy, a new report says.

The report by the economic consultancy Castalia was commissioned by the Greenhouse Policy Coalition, which represents large industrial emitters of the gases blamed for global warming.

A major review of climate change policy is under way within the Government after revised estimates last June of the country's net position in Kyoto's first commitment period, 2008 to 2012. It is now thought likely to exceed by 36 million tonnes the target of returning to 1990 levels.

Under Kyoto's rules that would have to be covered by buying carbon credits from countries with a surplus. The price is anyone's guess but at the $15 a tonne the Government used to strike the level of the carbon tax due to come into effect in 2007, it would be about $500 million.

The Castalia report's author, Alex Sundakov, argues that climate change policy has been built upon some rickety assumptions:

* That energy use in New Zealand is generally inefficient, so substantial reductions in emissions could be made at little economic cost.

* That the economy was evolving away from energy-intensive activities to services, where emissions are low.

* If all else failed, there would be enough credits generated from Kyoto forests to cover the rise in emissions.

Kyoto forests are those planted on previously unforested land since 1990. The protocol's rules allow credits for the carbon dioxide withdrawn from the atmosphere by those trees as they grow.

One of the main reasons officials now believe New Zealand will be a net buyer rather than a net seller of credits is that the benefit from Kyoto forests has been revised down; the other reason is that projections of energy use have been revised upward.

Sundakov takes issue with the assumption that because the economy is by international standards energy-intensive (using a lot of energy for a given amount of economic output) it is, therefore, energy-inefficient.

Instead, it reflects a preponderance of energy-intensive industries such as dairy processing and a relatively low population density.

And it is the strength of the traditional export industries that has driven the rise in incomes in recent years, he says, as the rise of China has bid up prices for commodities and pushed down the cost of manufactured imports.

In that sense, the shift towards a more service-oriented economy is a product of the strength of the primary sectors, not a substitute for it.

Sundakov says the structure of the economy limits the scope for reductions in emissions.

Nearly half of them arise from the bodily functions of cattle and sheep. But the agriculture sector is off limits under present climate change policy, meaning the rest of the economy has to achieve twice the national target for emission reductions.

The big smokestack industries also get special treatment.

This is on the grounds that if the Marsden Point oil refinery or the Tiwai Point aluminium smelter were put out of business by climate change policy the demand for the fuels and metal they produce would simply be met from other plants overseas. It would be an economic own goal with no benefit to the atmosphere.

Commercial transport is also vital if the economy is not to literally grind to a halt. Emissions from freight transport have been growing by about 9 per cent a year since 1990, Sundakov says, a combination of economic growth, increased concentration of agricultural processing which means milk and livestock for slaughter have to be carried longer distances, and congestion in Auckland.

If you add up those sectors - agriculture, heavy industry and commercial transport - it leaves only the household sector and small and medium businesses to bear the brunt of emission reductions.

But Sundakov says per capita electricity consumption has been growing relatively slowly, compared with the United States, despite high economic growth rates.

"That suggests there may be few easy opportunities to achieve policy-induced improvements in efficiency."

And about half the future generation projects in the pipeline use fossil fuels, which implies the proportion of non-renewable generation is likely to rise.

Likewise, consumers' preference for more and bigger cars as their incomes rise is tending to offset improvements in fuel efficiency.

Sundakov says household and business emissions between them represent 36 per cent of the national total. But on official projections national emissions, even net of removals by Kyoto forests, are expected to exceed the target by 35 per cent.

"In other words, even if we were to try to meet our targets through a substantive attempt at emission reductions (as is expected under the Kyoto Protocol) the emissions from the target categories would need to be almost entirely eliminated. This is clearly not plausible."

Sundakov says price-based policy measures like a carbon tax or carbon trading are only effective in triggering a switch to cleaner technologies if those alternative technologies are close to being commercially viable. Otherwise, they only act to suppress demand and thereby economic growth.

"We believe a more sensible alternative to the carbon tax could be a suite of policies to encourage compliance with world's best energy efficiency standards for new capital investment," he said.

"Allowing more rapid depreciation of machinery for tax proposes may contribute more to reducing the growth in emissions than any punitive measure impacting on existing assets."

Greenhouse Policy Coalition executive director Catherine Beard said: "Even Britain's Tony Blair has recently conceded that technology is the answer to the problem and that no country will willingly sacrifice its economic growth. The [US-led] Asia-Pacific partnership represents nearly half the world's population and 40 per cent of global emissions. They are investing in technology solutions. We need to ask, is this a more effective path for New Zealand to take?"