By BRIAN FALLOW
New Zealand's economic growth will slow if it signs the Kyoto Protocol on climate change, says the New Zealand Institute of Economic Research.
In a study commissioned by the Greenhouse Policy Coalition, which represents large emitters, the institute concludes that the New Zealand economy would adjust to climate change policies primarily by shutting down or reducing production in the emitting sectors.
Its Macro-economic modelling puts the cost of adjustment to the Kyoto Protocol at 4 per cent of gross domestic product, spread over five years.
While there would be a one-off boost to GDP before 2008 from the sale of the carbon sink credits from post-1990 forests, growth would turn negative with the introduction of climate change policies, then have a period of catch-up before settling on a new trend growth path.
The institute estimates that trend growth rate at 1.5 per cent a year, compared with 2.5 per cent now.
Many of New Zealand's competitors and trading partners will be out of the Kyoto system, at least through the first commitment period from 2008 to 2012.
"This suggests New Zealand should be extremely cautious about enforcing any emission abatement on its domestic economy in the absence of a global regime."
The institute says leading by example could prove not only costly but counter-productive, if it shows the economic costs of climate change policies and leads other countries to resist joining global action.
Its analysis emphasises the energy-intensive nature of the New Zealand economy in general and its export trades in particular. It says that of the economic growth New Zealand achieved during the 1980s and 1990s, a third can be attributed to technological change or productivity growth, 24 per cent to increasing the stock of capital, 21 per cent to growth in the labour force and 22 per cent to increased energy supply.
This reflects the high-energy nature of primary production and the processing of farm and forest products, while much of New Zealand's manufactured exports consists of two energy-intensive commodities, aluminium and methanol.
To the extent that future energy use is constrained by higher costs, economic growth will have to rely on either higher productivity growth (which has proved elusive) or greater inputs of capital or labour. But the institute says the population is ageing and New Zealand is already heavily dependent on imported capital, limiting the extent to which that can be increased.
In more detailed modelling, the institute looks at the impacts, economy-wide and on individual sectors, of different policy options New Zealand might adopt if it ratifies the protocol.
The 10 scenarios considered differ on whether or not New Zealand participates in international trading in emission rights, three different international prices if it does, and whether agriculture and other sensitive sectors (steel, aluminium and cement) are excluded.
It also considers the option of the Government using the sink credits from post-1990 forests to cover New Zealand's international obligations from Kyoto, but doing nothing domestically to curb emissions. That is the least-cost option.
The most expensive options are those in which there is no international trading or in which the world price of "carbon" (rights to emit greenhouse gases) is high.
The lower-cost options are those in which agriculture and the steel, aluminium and cement industries are exempted, or the international carbon price is low. Even then, the model finds there would be a loss of economic output of 1 to 3 per cent.
And that may be optimistic. The model assumes a smooth reallocation of resources between sectors: as emission-sensitive sectors decline capital and labour become available to fuel growth in other sectors.
In reality, the institute says that while decline occurs rapidly, the reallocation of resources can take considerable time.
Among the most sensitive industries is dairying. Methane belched by sheep and cattle is New Zealand's largest source of greenhouse gases. But even if no attempt is made to tax that, dairying would be hurt because of the energy-intensive nature of milk processing.
The Glenbrook steel works is considered the most vulnerable to a carbon tax, especially in the absence of a similar tax in Australia, Asia or the United States. Its opportunities for further improvements in efficiency or for fuel switching appear minimal, the institute says.
Energy Minister Pete Hodgson said the analytical limitations of the report meant its conclusions should be read with caution.
"An independent review commissioned by the Department of Prime Minister and Cabinet from Infometrics economist Adolf Stroombergen notes that 'it is not at all clear that the scenarios present a plausible picture of the economic effects of policies to reduce emissions'."
Mr Hodgson said the report assumed New Zealand's present level of inefficiency in energy use must continue and overlooked the greenhouse gas emission reductions that even partial success for the National Energy Efficiency and Conservation Strategy would achieve.
"Most incredibly, the report's conclusion that New Zealand should meet its Kyoto Protocol obligations entirely with carbon sink credits, while doing nothing to reduce emissions, completely ignores the political reality of our position in international climate change negotiations."
"This approach would demolish New Zealand's credibility in negotiations and make it extremely difficult to get targets for the second commitment period that were remotely achievable," he said.
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
Hydro storage in New Zealand is now above the long-run average, thanks to heavy rain.