With the ratification of the Kyoto Protocol by Russia in November 2004, New Zealand has agreed to reduce its greenhouse gas emissions to 1990 levels. Withdrawing from Kyoto is no longer a feasible option and New Zealand must adopt whatever policies and methods are deemed most appropriate for meeting their emissions targets.
The New Zealand government has been proactive and has introduced a number of initiatives on this front including the carbon tax, a programme of projects to reduce emissions, the SME grant scheme and measures within existing government policy (e.g. New Zealand Waste Strategy, New Zealand Transport Strategy).
Julia Hoare and Murray Schnuriger from the Climate Change Services team at PricewaterhouseCoopers say the carbon tax details announced by Pete Hodgson last week are just the tip of the Kyoto Protocol iceberg for New Zealand.
This article first appeared in The Independent
The carbon tax has been a controversial anti-emissions measure. Much focus has been placed on its impact on the New Zealand domestic market but the carbon tax is only a starting point – the ramifications on our growth prospects are far-reaching if we fail to meet our Kyoto Protocol emissions target.
So what are the numbers? New Zealand’s emissions for the first commitment period (2008-2012) must be less than 308 million tonnes of carbon dioxide equivalents. The most recent official forecasts (prepared in April 2004) state that emissions are estimated to be 399 million tonnes. The government plans to partially address this 91 million tonne excess through climate change policies, but even after the policies are factored in, there is a projected shortfall of 62 million tonnes.
This significant shortfall will be dealt with by “forest sink credits”. Growing forests are termed forest sinks because of their ability to absorb and store carbon dioxide. Under the Kyoto Protocol credits are provided for forests planted after 1990. The government estimates 95 million tonnes of forest sink credits will be available to offset the excess in emissions, providing New Zealand with a 33 million tonne surplus.
However the government’s projections appear wildly optimistic, and fail to factor in the downside risk associated with deforestation. Rising land prices and falling log prices provide a catalyst for increased deforestation, and this threat is not adequately reflected in their estimates. A related concern is that the projections appear to be in a state of flux - in the last year projected surplus forest sink credits have declined from 56 million tonnes to 33 million tonnes, primarily due to predicted growth in agricultural emissions and deforestation. Clearly, a continuation of this revision trend will see New Zealand staring down the barrel at a deficit position.
The main consequence of being in deficit is that New Zealand will be required to purchase sufficient credits on the international carbon trading market to eliminate it. Based on the current international price of carbon, every 4 million tonnes of deficit (1% of total emissions) will cost New Zealand $60 million – an international commitment that our Australian and US competitors do not have. Furthermore, this cost could escalate particularly if, as expected, the price of carbon in 2012 soars based on global demand.
There seems little doubt reduced forest plantings and extinguishing all forest sink credits in the first commitment period will have a detrimental effect on New Zealand’s appeal as an investment destination. Ominously, there is an expectation that post-2012 emissions targets will be even lower.
Domestically – where the glare of the media spotlight shone brightest last week – the government defended the slings and arrows deriding the carbon tax policy as “anti-growth” by referring to the exemptions available under the Negotiated Greenhouse Agreement (NGA) policy.
Much was also made of revenue recycling, and promises that the tax would be poured back through business tax initiatives. Whilst we await the details of these initiatives in the Budget later this month, the carbon tax collections are unlikely to go back directly into energy intensive businesses.
In relation to NGAs, firms that are prepared to undertake world’s best practice in emissions management can become exempt from the carbon tax. They must also prove competitor countries have less stringent climate change policies, and that the tax will have a significant impact on its financial performance.
There are a number of problems converting the NGA policy into practice, reflected in only two NGAs being signed (NZ Refining Company and OceanaGold). Firstly, the quantitative criteria to establish NGA eligibility are relatively high, with the effect that even many energy intensive firms struggle to qualify. There is also the potential for a perverse outcome – a firm with low profits and inefficient emissions management will find it easier to meet the quantitative threshold demonstrating its competitiveness is at risk.
The second problem is that establishing world’s best practice in emissions management is complicated and subjective. For example, it is difficult to find like-for-like business operations and supporting data. Despite the government’s recent attempts to streamline the process, this is highly likely to become a bottleneck.
The third is the old chestnut of cost. Obtaining an NGA is an expensive and time-consuming process – in recent briefings the NZ Climate Change Office estimates applicants will require around $200,000, excluding internal costs. For an NGA to be worth pursuing, the carbon tax exemption benefits must outweigh the cost of the NGA application and any capital cost necessary to meet world’s best practice. This assessment is made difficult as all NGAs expire in 2012, when the first commitment period under the Kyoto Protocol ends. This means capital investment decisions which have a longer investment horizon will require a crystal ball as to whether exemptions will be available after 2012.
In the short term, the carbon tax will influence the international competitiveness of some firms in New Zealand. Firms that act now and look for opportunities under the government’s policies will minimise the impact of the carbon tax.
In the medium term, if the official emissions and forest sink credit projections are undercooked, New Zealand is sitting on an uncapped contingent liability. Doubts over the 2008 projections, and the fog surrounding the ramifications post-2012 must impact the attractiveness of New Zealand as an investment destination.
