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Conceptual framework

Over the next few years decisions will be made on an international climate change policy framework to succeed the current Kyoto Protocol. These decisions will have outcomes that will directly and indirectly affect Net National Welfare (NNW) in New Zealand. To assist negotiators with making decisions which, given certain constraints, optimise NNW, the following conceptual framework has been developed. Every decision is influenced by either a pre-determined factor, or another previously made decision. Each decision will have implications for specific outcomes which affect NNW.

Figure 1: Conceptual framework of the factors, decisions and outcomes which affect net national welfare, within the context of international climate change negotiations

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The four key decisions1 that will be made at the international level, will be:

  1. the concentration for atmospheric greenhouse gas (GHG) stabilisation;

  2. the global ‘cap’, or ‘emission reducing strategy’, necessary to achieve this goal, and the level of participation of various countries;

  3. the rules around what emitting or sequestering activities are included in the cap, and what emission reducing activities can be sourced from outside the cap; and

  4. New Zealand’s net emission reduction responsibility target2 (‘cap’).

The other important decision, which may impact on NNW but will certainly affect the distribution of these impacts, will be how responsibility is devolved to emitters under the New Zealand Emission Trading Scheme (NZ ETS).

New Zealand position on key decisions

The first decision, on a long-term stabilisation goal for atmospheric concentrations of GHGs, will be primarily driven by the scientific relationship between concentrations, global mean temperatures, and resulting climate change impacts and associated costs. The Intergovernmental Panel on Climate Change (IPCC) has recently published its Fourth Assessment Report, which synthesises a number of studies which have modelled these relationships. While the results of these studies will certainly be an influence, the stabilisation goal will ultimately be determined by what Governments see as the maximum level of acceptable ‘impacts’.

With respect to the second decision, on a global emissions reducing strategy, while there is a reasonably clear relationship between any long-term stabilisation goal and the required ‘cap’ on global emissions, how these ‘rights’ to emit are allocated between various countries will be extremely controversial. Many developing countries, for example, argue that their emissions should not be capped, as it is the industrialised countries that are responsible for much of the current concentration of GHGs in the atmosphere. Given this, the likely global emission reducing strategy to come out of international negotiations will be a cap on developed countries emissions, and some form of commitment from developing countries to reduce emissions below business as usual (BAU) – particularly the major emitters3. Broad participation in commitments will also be necessary to ensure that competitiveness-at-risk and leakage issues are adequately addressed, with the emissions from developed countries not simply shifting to developing ones. The outcome of more countries participating within this strategy will also be a direct reduction in the world price for carbon, and possibly some positive indirect effects on export revenues – in particular land based commodities. New Zealand should therefore support broad participation by other countries in a global emission reducing strategy, in particular those countries, or sectors within countries, with which our economy competes.

The rules around what types of activities are included within the developed countries’ cap, and the types of emission reducing activities which can be sourced from outside the cap (i.e. flexibility mechanisms such as the Clean Development Mechanism (CDM)), is the third decision that will need to be made. These rules have major implications for the world price of carbon and international trade, and will directly affect New Zealand’s mitigation potential. In general, the more emitting or sequestering activities included in the rules, the lower the world price, and the less negative impact on NNW. Furthermore, the inclusion of certain activities, such as allowing avoided deforestation to be eligible for CDM status, may have positive effects on commodity prices of New Zealand exports, which could increase international trade and enhance NNW. However, it will be important that the environmental integrity of these credits is ensured, while at the same time improving the cumbersome nature and high transaction costs of the current arrangement. Some people also argue that broadening the activities eligible for CDM status may depress the world price, and provide insufficient incentive for the necessary investment in low-carbon technologies, and therefore recommend increasing the stringency of the caps in response. Including activities such as international aviation and shipping within a cap will help alleviate this concern, by increasing the demand for credits; however, it may have negative consequences for New Zealand on trade and NNW – although these effects may also be felt indirectly through trade barriers and consumer reaction if transportation fuels were excluded. The rules which determine what activities are included in a global emission reducing strategy, therefore, have some major implications for NNW in New Zealand, and it will be important that negotiators understand the likely outcomes before agreeing to any specific decisions.

The fourth decision, around an acceptable New Zealand cap or responsibility target, will primarily be driven by the cap which developed countries as a whole sign up to, and the domestic mitigation potential of New Zealand compared to other participating developed countries. With a large agricultural base and high renewable electricity generation, both the potential and cost of reducing emissions in New Zealand make it comparatively more difficult than other developed countries. Given our unique profile, New Zealand may have a good case for taking on a significantly less stringent target than other developed countries; however, further work is required to quantify the level of relative stringency. While the benefits to NNW of a less stringent target are clear (with fewer permits to purchase), some people argue that there may also be a positive effect on NNW of unilaterally imposing a greater target ex post negotiations – if the environmental ‘branding’ can be shown to increase export revenue more than the increase in compliance costs.

The final decision, around the design of an ETS, will primarily affect the distribution of costs in New Zealand, rather than the magnitude of these costs. However, the magnitude of the costs of the ETS will be affected by domestic abatement costs relative to the world price, the accessibility of international credits, and how the Government decides to recycle any surplus revenue into the economy. The ETS decisions around free allocation will also be determined, in part, by the participation of other countries in the global emission reducing strategy – with some level of support potentially justified for competitiveness-at-risk and leakage issues. While the ETS is the key domestic policy, it is also important to recognise that other policies, such as the bio-fuels obligation, moratorium on thermal generation, and some energy efficiency measures, may also impose some costs on the economy. This paper does however focus its analysis on the impacts of the ETS.

This paper discusses each of the key decisions in turn, and presents a more detailed evaluation of their relationship to outcomes, and potential impact on NNW. It then proposes a set of likely scenarios for future decisions, and based on their impact on NNW, recommends a more specific New Zealand position on each decision.

1 It will be a more iterative process in reality - rules ideally being decided before commitments

2 It is important to note that this target represents the level of emissions that New Zealand is responsible for – not what domestic emissions will be. This ensures emissions are reduced globally where it is least costly to do so.

3 This paper assumes that the global emission reducing strategy is a combination of a cap on developed countries emissions, and some form of voluntary obligation, or emission intensity target, within developing countries. Of the possible decisions around a strategy this probably is the first best outcome for New Zealand, and it is certainly the outcome that most of the current Annex 1 parties are promoting. It is however possible that if a multilateral agreement between developed countries is not reached over the next couple of years, a regional type approach may be adopted. In time, analysis will be needed on a New Zealand position to this approach. It may also be possible that some developing countries sign up to a cap, although this is unlikely.

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