This chapter covers:
- the importance of a credible response by New Zealand to the global challenge of climate change
- the importance of measures that address the economic drivers of greenhouse gas emissions
- the overall objectives of New Zealand’s response to the problem of global emissions.
The government’s decision to proceed with an ETS is driven by considerations central to its agendas for sustainability and economic transformation, including:
- the imperative to contribute to global efforts to reduce climate change
- the fact that greenhouse gas emissions are currently embedded in our economic system as an unwelcome by-product of economic activity (which normal market mechanisms have failed to control)
- the need to assess New Zealand’s options to address the problem of climate change with a view to:
- effectively reducing our own emissions levels below business as usual
- assisting the international effort to agree on effective climate change policies
- ensuring that solutions impose the least cost on our economy and way of life.
2.1 The climate change imperative
Over the last century the Earth’s climate has been changing at an increasingly rapid rate. It is largely recognised that human activity is the reason for this unprecedented rate of global warming, in particular the increasing volume of emissions of greenhouse gases in our atmosphere. The effects of this are already visible, and the changes ahead of us are likely to be much larger and to happen more quickly than any recent natural climate variations.
Climate change is a global phenomenon, which could affect almost every aspect of the future quality of life of the Earth’s inhabitants. The scientific consensus is that, even with a concerted global effort to reduce greenhouse gas emissions, there are likely to be changes in temperature and rainfall patterns, increases in the number of significant wind and storm events, and an increased risk of flooding and coastal erosion.
The potential impacts of climate change in New Zealand are substantial. The volume of the Intergovernmental Panel on Climate Change (IPCC) Fourth Assessment Report entitled Climate Change 2007: Impacts, Adaptation and Vulnerability14 confirms that the effects of climate change are already being felt in New Zealand. Since 1950 there has been 0.3-0.7°C warming across the Australia-New Zealand region as a whole, with more heat waves, fewer frosts, more rain in southwest New Zealand, less rain in north-eastern New Zealand, a rise in sea level of about 70 mm, reduced seasonal snow cover and ongoing glacial shrinkage. The IPCC report suggests that the most vulnerable sectors for New Zealand are natural ecosystems (affecting our forest and agricultural sectors), water security and coastal communities. Climate change could also have socioeconomic impacts, influencing migration and economic development.
Our best hope is for the international community to move collectively to reduce greenhouse gas emissions, and for individual nations to invest in measures to mitigate the impacts of climate change on their own populations. One of the world’s pre-eminent scholars of the economics of climate change, Professor William Nordhaus of Yale University, recently said:
Global warming is a serious problem that will not solve itself. Countries should take co-operative steps to slow global warming. There is no case for delay. The most fruitful and effective approach is for countries to put a harmonised price, perhaps a steep price, on greenhouse gas emissions, primarily those of carbon dioxide resulting from the combustion of fossils fuels.15
2.2 Greenhouse gas emissions and the economy
Climate change is happening because of increasing levels of emissions of greenhouse gases. But why are levels of emissions increasing? And what is the best practical method of reducing them?
At the simplest level, emissions are increasing because of increasing levels of the human activities that cause them: more electricity is being produced from coal- and gas-fired stations, more factories are emitting gases directly and more cars are being driven. Greenhouse gas emissions are a by-product of things that are valuable. The economic challenge of climate change is not to eliminate emissions, for to do so would also eliminate many things that we value. Rather, the challenge is to find ways to decouple growth in emissions from growth in economic activity, and thereby reverse the trend of increasing concentrations of greenhouse gases and reduce the risk of serious climate change impacts.
One of the basic principles of economics is that people will undertake activities up to the point where the additional benefits of one more unit of the activity just equal the additional cost. In many cases, all the costs and benefits of an activity accrue to the person doing the activity, be it buying an apple, investing in a factory or saving for a rainy day. When either a cost or a benefit accrues to someone other than the individual doing the activity, an “externality” is said to arise, because some party external to the decision-making is affected by the decision. The decision-makers will still seek to equalise the costs and benefits they face, but they will generally not take into account the costs and benefits to others. This leads to a disconnection between private costs and benefits and social costs and benefits, where “social” means the sum of all private costs or benefits.
Externalities are one example of “market failures”: cases where the operation of free markets does not lead to the highest attainable welfare. The Stern Review16 called climate change the greatest example of market failure we have ever seen. There are many ways to correct market failures, and in responding to climate change we can draw on our extensive experience of assessing which of these ways works best and in what circumstances.
Three common methods used by governments to address climate change market failures are regulations, taxes and emissions trading. Regulations involve placing legal restrictions on activities that cause greenhouse gas emissions. They are often costly to comply with and to administer, and they are not always very effective because it is difficult to design regulations that achieve the right balance of costs and benefits, and hence result in the right level of emissions.
Taxes and emissions trading are two priced-based measures for reducing emissions. They work by increasing the cost of activities – including production and consumption – that result in greenhouse gas emissions. Taxes increase prices directly by imposing an additional charge on activities that cause emissions. Emissions trading works by restricting the quantity of emissions, and allowing markets to set a corresponding price for those emissions and associated offset emissions (eg, forest sinks).
2.3 Reducing emissions below business as usual
It is the view of the New Zealand government that any future that is sustainable must involve broader and more stringent greenhouse gas emission reductions by all of the major emitting countries. This poses a unique challenge to global governance. Just as we have collectively inherited the achievements of previous generations in terms of economic growth, we have also collectively inherited a global environmental problem that has been a by-product of that growth. Our actions over the coming decades will determine the inheritance that we will pass on to generations to come. Failure to act could result in major disruption to economic and social activity, which the Stern Review suggests could be “on a scale similar to those associated with the great wars and the economic depression of the first half of the 20th century”17. Nevertheless, that action will require some significant adjustments over time, as to how businesses operate and invest, and how New Zealanders live.
There are four main climate change challenges for New Zealand. We need to:
control our own greenhouse gas emissions and reduce them relative to the current growth trend
support international initiatives for multilateral action on greenhouse gas emissions, principally through maintaining momentum on the implementation of the Kyoto Protocol and ensuring this momentum is carried through into whatever agreements emerge for the period after 2012
prepare for and adapt to the impacts of changes in our physical environment, by responding to the risks and taking advantage of the opportunities they present
achieve the above objectives at the lowest achievable long-term cost.
The full scope of the government’s response to these four challenges within the broader context of sustainability is detailed in the document New Zealand’sClimate Change Solutions (available at www.climatechange.govt.nz). The remainder of this chapter addresses particular aspects of these challenges that are relevant to the government’s decision in principle to implement an ETS.
2.3.1 Reducing New Zealand’s own greenhouse gas emissions below business as usual
The first part of the challenge is to reduce our own emissions below business as usual. New Zealand’s total greenhouse gas emissions are small from a global perspective at around 0.2 to 0.3 per cent of global emissions. This is due largely to our small population. Nevertheless, on a per capita basis we are a high emitter by international standards. This is because the current drivers of our economic growth and our quality of life are emissions intensive. We are heavy users of personal motor vehicles compared with many developed countries, and our major primary production industries (particularly agriculture and forestry) are emissions intensive. As a result, we have the 12th highest per capita emissions in the developed world. Moreover, New Zealand’s greenhouse gas emissions are continuing to grow, with emissions across all sectors (excluding forest carbon sinks) for 2005 being 25 per cent higher than the 1990 level.
New Zealand has an unusual greenhouse gas emissions profile, in that nearly 49 per cent of New Zealand’s greenhouse gas emissions result from agriculture (excluding agricultural energy use). This contrasts with other developed countries where, on average, 12 per cent of emissions are from agriculture. Meanwhile, our energy sector contributes 43 per cent of emissions, which is a smaller percentage than other developed countries, due in large part to the fact that approximately 69 per cent of our electricity is generated from low- or zero-emitting renewable sources, such as hydro, geothermal, wind, solar, biogas and wood. Approximately 19 per cent of total emissions, and 45 per cent of energy emissions, come from transport.
Figure 2.1 sets out the various sources of New Zealand’s emissions (excluding emissions and sinks from forestry)
Figure 2.1: New Zealand's greenhouse gas emissions, by sector, 2005