Brian Fallow: Emission cost all smoke and mirrors

Presented with the Government's 2020 carbon emissions target this week the inevitable question people ask is: "How much is this going to cost us then?"

The only honest answers are: "Who knows?" or "It depends" or "It's too soon to say."

Certainly the off-the-shelf answer helpfully provided by the Government's spin machine - $26 a week at the mid-point of the target range - needs to be treated with a whole lot of caution.

It is based on some general equilibrium economic modelling done for the Ministry for the Environment by Infometrics and the New Zealand Institute of Economic Research, the fruits of which have been pretty systematically misunderstood and misused.

You might say they provide the politicians and lobbyists with a set of screwdrivers which then get used as chisels - or weapons.

The biggest uncertainty in all this is what level of ambition about tackling global climate change will emerge from the big United Nations conference coming up in Copenhagen in December, intended to thrash out a successor agreement to that reached in Kyoto 12 years ago.

It is entirely dependent on what kind of deal is struck at or before Copenhagen between the big boys - the United States, Europe and China.

That will depend on where on the scale, between the status quo and what is environmentally needed, the centre of gravity of emissions targets will be.

We only get to decide where we position ourselves among the also-rans. In our case it is liable to be a smaller reduction than the Australians, as they start from an even uglier position than we do, but more than the Japanese who have been doggedly improving their energy efficiency for decades.

The outcome from the international negotiations will drive the levels of supply and demand in the international carbon markets, and therefore world prices for carbon.

That is key because the target range the Government announced is a "responsibility target".

It is an indication of how much of a contribution to reducing global emissions over the next 10 years New Zealand is prepared to make, regardless of whether it is achieved by reducing domestic emissions, increasing the plantation forest estate or buying carbon (credits for emission reductions which occur somewhere else in the world).

Not only is the future path of world carbon prices unknown, there is also a lot of disagreement about an abatement cost curve for New Zealand - how much emissions could be cut in different sectors like households, industry, transport and agriculture, for what sort of cost.

How much tree planting will occur in New Zealand over the next 10 years is another imponderable.

The owners of new forests planted on land not already forested can opt to earn credits for the carbon their trees sequester while they grow. The catch is that if they do they will be liable for the release of that carbon deemed under rules to occur when the trees are harvested.

Who knows what carbon prices will be in 30 years time? But that is not the only factor that could drive a revival in afforestation.

Relative prices are likely to have shifted by then at the expense of building materials with a lot of embedded emissions like concrete and steel, to the benefit of timber where it can be substituted for them. And trees may well be viable as a source of biofuels.

In the light of so many imponderables to be dogmatic about the potential costs of any given emissions target is absurd.

What the models are really designed to do is give a sense of the relative impacts of different options or scenarios. The key word is "relative".

Instead the media tend to concentrate on the absolute numbers that the models spit out and treat them as forecasts, which they are not.

In this case the modellers were asked to estimate the effects on the economy in 2020 of various combinations of emissions target and carbon price - all else being equal.

It is hardly a surprise that they conclude that the more ambitious the target and the higher the carbon price, the greater the cost will be.

How much weight can be put on the results of these if-then exercises depends on how accurately the mathematical innards of the models reflect the relationships between the economy's moving parts.

The bigger the changes being looked at, the less the past relationships used to estimate those equations are likely to hold good.

Crucial too is how plausible the assumptions being held constant through the modelling runs are.

In this case the models assume, among a lot of other things, that the price of carbon has no effect on what technologies are used or on the rate of afforestation.

These are, admittedly, hard to get a reliable handle on. But if there were no effect the whole cap and trade exercise would be a waste of time.

The models compare the costs of different scenarios relative to a "business as usual" baseline. But it is an artificial construct, not the world we live in. It is a scenario when there is no policy to price, or otherwise curb, emissions. It just assumes away the obligations New Zealand has undertaken under the Kyoto Protocol, in common with every other developed country except the United States.

So a cost of, say, $1400 a year by 2020 is relative to the position if emissions were allowed to grow untrammeled and we had not already undertaken the obligations we have. It is not the cost of further obligations that might arise from Copenhagen.

There is also an important semantic point. The models express the impact of different emission targets on real gross national disposable income per capita. That is gross domestic product adjusted for net investment income flows and the terms of trade.

It is a long way from everyday concepts of income.

Yet the Government release shortens that to "disposable incomes" which in a busy newsroom looks like "after-tax pay". It has a bearing on it, but it is not the same thing.

Curbing emissions on anything like the scale required is not going to be easy and will not come cheap. The less time we leave ourselves the greater those costs are likely to be.

But - up to a point - one man's cost is another man's livelihood. The trick is to be that other man.