Russia keeps everyone guessing on Kyoto

By BRIAN FALLOW

Russian dithering on whether to ratify the Kyoto Protocol is keeping much of the New Zealand Government's climate change policy up in the air, and corporate planning with it.

Central to the policy is the "carbon" tax on non-farm greenhouse gas emissions planned for 2007, but it will be adopted only if the Kyoto Protocol is in force and without Russia that treaty will fall over.

The Climate Change Office has begun to process about a dozen applications for negotiated greenhouse agreements, under which large emitters of carbon dioxide can secure exemption from the tax in exchange for committing to an agreed path to world's best practice in emissions.

Infrastructure investor Infratil meanwhile has called for the early adoption of a carbon tax to remove what it claims is a debilitating source of uncertainty from electricity generation investment.

And the Government is offering subsidies in the form of carbon credits, or internationally tradeable rights to emit greenhouse gases, for climate-friendly projects; uncertainty about whether Kyoto will get up clearly affects the value of those subsidies.

Kyoto will come into force and be binding on the nations that have ratified it only if it is ratified by countries responsible for at least 55 per cent of 1990 developed-country emissions.

It has been ratified by almost all of Europe, Japan, Canada and New Zealand, collectively accounting for 44.2 per cent of the required total.

But the United States (36.2 per cent) and Australia (2.1 per cent) have said they will not ratify, leaving Russia's 17.2 per cent as the deciding factor as to whether Kyoto comes into force or not.

President Vladimir Putin, addressing a world climate change conference in Moscow last week, made it clear Russia was in no hurry to ratify. His equivocal comments have further shaken the expectation that Russia will ratify because not to do so - to borrow a phrase from Energy Minister Pete Hodgson - would be to set light to a very large cheque.

Like New Zealand but on a much larger scale Russia would be a seller of carbon credits into the international market.

With the collapse of the Soviet economy Russia's emissions have dropped by nearly a third since 1990.

Put another way, its emissions would have to increase by 50 per cent over the next 10 years before it was in any danger of exceeding its Kyoto quota.

The gap between its actual emissions and its Kyoto allowance is likely to be big enough to make it the dominant seller of carbon credits.

But Russia is the world's second- largest oil exporter and a big exporter of natural gas, too. That creates an influential anti-Kyoto constituency, arguing that a treaty intended to be a first step towards weaning the world off fossil fuels is not in Russia's longer-term interests.

While Russia seeks to discover through negotiations with the Europeans what signing up to Kyoto is worth, the Kyoto-dependent elements of climate change policy here will remain in doubt.

The Government has said it will impose a carbon tax in 2007 but only if Kyoto comes into force.

The level of the tax will depend on what the international price of carbon credits is, subject to a cap of $25 a tonne of CO2. That would add about 6c a litre to the price of petrol.

It could well be less than that. If Russia ratifies it will have to decide how much of its stock of carbon credits to sell and how much to bank for later.

Econometric modelling by the Australian Bureau of Agricultural and Resource Economics this year concluded that the strategy that would maximise the net present value of Russian (and Ukrainian) carbon credits would result in a carbon price of around US$11 a tonne or $19 at the present exchange rate.

If Kyoto falls over, and the prospect of a carbon tax with it, will large corporate emitters lose interest in arranging negotiated greenhouse agreements (NGAs) with the Government?

Not necessarily, says Martin Harvey, who is in charge of price-related measures in the Climate Change Office.

Most of the firms contemplating NGAs are looking to the longer term, he says.

They see climate change and emissions management as an issue for them, regardless of whether there is a Kyoto Protocol or a tax on emissions.

Moving to world's best practice in emissions - the objective of an NGA - is valuable to the companies in any case.

"They see this as a reasonable risk management strategy regardless of what happens to Kyoto."

Chris Baker of the Greenhouse Policy Coalition, which represents large emitters and which lobbied strongly against ratification, says companies are working on the basis that there will be a carbon tax from 2007.

"Of course that is premised on the Kyoto Protocol coming into force. So until that is resolved it does create an uncertainty. But generally - I can't think of an exception - companies are assuming it is going to come into force.

"But if by the end of next year there is no clearer sign from Russia the Kyoto Protocol will be struggling. In that case it would be fair to ask why we were progressing with the carbon tax."

In the meantime uncertainty about the price of carbon is not discouraging energy users from aiming for an NGA, Baker says.

Infratil has urged the Government to bring in a carbon tax early, arguing that a lack of certainty in this area is having a chilling effect on investment in renewables and thermal generation alike.

"We think CO2 pricing is real and and is here to stay with or without the Kyoto Protocol," Infratil's Bruce Harker said.

"A broad-based emissions charge is the right policy and we would like them to get on with it, starting at a low level and ramping it up."

Without a carbon tax New Zealand is heading for a coal-fired future, Infratil says.

But with a tax of $15 a tonne of CO2 wholesale electricity prices would rise from less than 6c now to the 6.7c to 7c range at which wind power and some further hydro generation would become viable.

It would also encourage further gas exploration, as it would make gas more competitive against coal.

Infratil is not disinterested in this matter. It owns 35 per cent of Trustpower, which has 400MW of small-scale hydro generation and a wind farm.

It estimates a sustained 1c increase in wholesale electricity prices would add about $200 million to the value of its generation assets.

Harker says that without a carbon tax on the statute books there is a risk of a worst-of-both-worlds outcome where investment uncertainty means neither coal nor renewables get developed.

"There's a big risk of that. We have an industry structure where the state-owned generators [Meridian, Genesis and Mighty River] as well as Contact and Trustpower make decisions commercially, based on assessing those risks, and uncertainty just builds up delays in that investment process."

Hodgson points to the $25 cap on the carbon tax as an attempt to give business some level of certainty. "They seek more certainty but I don't think they want it in the form of a floor as well as a ceiling," he said.

"We have said we won't introduce the tax before 2007 and it will be at the discovered price of CO2. Infratil would like certainty before then ... [but] we can't unilaterally bring Kyoto into force. We, too, wait."