Brian Fallow: Chorus of disapproval greets Kyoto plan

LAST year New Zealand slipped, imperceptibly to most of us, from one era into another.

The ratification of the Kyoto Protocol last month commits New Zealand to embarking on a transition - which will take decades - from reliance on fossil carbon to renewable energy sources, in order to mitigate global warming.

Under Kyoto, a country's right to emit greenhouse gases, currently untrammelled, will be rationed.

It sets up systems to hold countries accountable for their emissions and ways to let them reduce emissions in the least-costly way.

New Zealand's commitment is that its average net emissions of greenhouse gases between 2008 and 2012 will be no greater than they were in 1990, Kyoto's year zero.

The Government's case for ratifying Kyoto was that it would:

* Contribute to reducing the long-term risks of climate change for New Zealand's climate-dependent economy.

* Allow New Zealand to make a gradual transition towards becoming a low-emitting economy, rather than facing more abrupt adjustment in the future if action is delayed.

* Avoid the risks of being seen internationally as a free-rider, undermining the country's clean, green image.

* Enable the country to cash in on the credits arising under Kyoto's rules for the carbon dioxide absorbed by "Kyoto forests", that is, plantations established since 1990 on land not already forested.

On a business-as-usual basis New Zealand is projected to emit 50 to 75 million tonnes more greenhouses gases than it is allowed under the protocol in the first commitment period, 2008 to 2012.

But the forest sink credits are estimated to amount to 110 million tonnes, which would allow New Zealand to be a net seller into the international carbon credit market. Not to ratify, argued Climate Change Minister Pete Hodgson, would be to set fire to a cheque coming our way.

Ratification was vehemently opposed by most business groups (the exception being the Business Council for Sustainable Development).

In part that reflected a belief, prevalent in Canberra too, that Kyoto cannot survive without the United States, which walked away from the agreement, and without Third World emitters, which are outside its ambit and lack any obvious reason to join. By 2020 that could mean two-thirds of world emissions were outside the protocol, an intolerable degree of free-riding.

Why incur costs which would undermine the competitiveness of exporters or those exposed to import competition, and discourage investment for the sake of an agreement that is unlikely to endure?

It was argued, too, that the structure of the New Zealand economy meant Kyoto would impose disproportionate costs compared with other developed countries.

The New Zealand Institute of Economic Research, in a report commissioned by business groups opposed to Kyoto, said: "New Zealand's greenhouse gas emissions are largely produced by sectors which are key drivers of the economy. By contrast, in most other [developed] countries the bulk of emissions comes from mature, low-growth sectors."

Agriculture is responsible for more than half of New Zealand's greenhouse gas emissions, from belching sheep and cattle and from nitrous oxide wafting up from soils.

Transport represents an unusually high proportion of energy consumption in New Zealand, about 40 per cent against 25 per cent in Australia, the United States or Britain.

Given that demand for fuel is comparatively insensitive to price, that would make economic incentives to reduce emissions less effective in New Zealand, the institute said.

Kyoto created a distortion for the forestry industry that could lock New Zealand into the low-value end of the value chain.

It puts a value on the carbon taken up by growing trees, but imposes a cost on processing the trees once harvested.

This creates an incentive to grow trees in Kyoto countries but process them in non-Kyoto countries, especially if the latter are major markets or near major markets.

These were not arguments a Government, especially one focused on winning a second term, could ignore.

The way out of its dilemma was to use forest sink credits to shield sensitive sectors of the economy.

The policy package released for consultation in April and finally approved by the Cabinet in October includes a tax on the carbon content of fuels. But it will not come in before April 2007 and it will be capped at a level that would add 6c a litre to the cost of petrol, 7c a litre to diesel and about 9 per cent to an average residential power bill.

Gas and coal prices would also rise, by 24 and 44 per cent respectively, for industrial users.

But large emitters, whose competitiveness would be jeopardised by a one-size-fits-all carbon tax - such as those in the aluminium, steel and wood pulp industries - will be able to negotiate their own agreements.

All up, the tax would cost a typical household about $5 a week. That would do little to alter behaviour, critics said, because rises in petrol and electricity prices make little difference to the amount people consume.

The point seems to be to put a carbon tax on the statute book. Its rate can always be ramped up later (as income tax was) in line with more stringent emissions targets.

Revenue from the carbon tax and from the international sale of forest sink credits would be "recycled", Climate Change Minister Pete Hodgson said.

That might take the form of tax cuts. But some of the money could also be used to finance projects such as wind farms, which would reduce emissions more than would occur in a business-as-usual scenario.

Farmers would not face a carbon tax on the greenhouse gases emitted by belching sheep and cattle or from agricultural soils, because they can reduce emissions by cutting stock numbers only. But the agricultural sector would be expected to spend $20 million a year on research into reducing emissions.

The forestry sector would get a "no gain, no pain" deal under which the Government kept both the assets and the liabilities created by Kyoto.

The Government would retain ownership of the forest sink credits but, on the other hand, owners would escape any liability for a carbon tax upon harvesting the trees.

This addressed two of the concerns the forestry sector had raised.

One was that Kyoto's distinction between pre- and post-1990 forests would distort harvesting decisions. The other was that it created a barrier to exit in cases where land now under a plantation forest might be more productively used in some other way, such as dairying.

The policy package was greeted with a chorus of disappointment from environmentalists. Greenpeace spokesman Robbie Keman said: "Avoiding action now to tackle climate change is delaying the inevitable."

Greens co-leader Jeanette Fitzsimons said the Government was putting industrial growth first and the global climate second. A carbon tax should have been introduced immediately.



But the Council of Trade Unions, which had been worried about job losses, said the policy addressed most union concerns.

Federated Farmers welcomed confirmation that there would be no "flatulence tax", but its president, Alistair Polson, said farmers would be affected by higher transport and energy costs.

Research might provide a solution to ruminant methane emissions, but there were no silver bullets on the horizon and there was a risk of consumer backlash at manipulating livestock digestive systems.

The year ended with the release of a consultation document spelling out the Government's approach to the negotiation of deals for large emitters under which they escape the carbon tax but are required to move over an agreed time frame to world's best practice in unit emissions.