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Impacts on NNW

Empirical work done

Determining the overall impact on NNW of decisions made on international, and domestic, climate change policy, is a complicated task. The outcomes which directly affect NNW will be the level of the world price and how it is transferred through the economy, and any shift in demand or supply of New Zealand exports. These outcomes will be driven by decisions at both the international and domestic level.

As discussed, the world price has major implications for NNW, and there have been a number of studies which have predicted the likely range of prices over the next 100 years. This paper has predicted an approximate price during 2013-2020 of about $US25/tonne – with decisions under the ETS determining how this price is passed through the economy. General equilibrium modelling has been undertaken recently to quantify the impact of the ETS on New Zealand’s NNW34, given the in-principle decisions around coverage and allocation, and assuming carbon prices within this range. The modelling also made an assumption that the Government would recycle any revenue from the sale of surplus credits by reducing business taxes.

With a carbon price of $NZ25/tonne the impact of the ETS on private consumption in 2012 is about -0.2% and in 2025 about -0.7%. With a price of $50 the impact is -0.3% in 2012 and at $100 is -2.2% in 2025. While these figures are relatively small, it is important to recognise that three specific components of the conceptual framework developed within this paper, are either ignored or an assumption is made that may not hold. Given the potential implications on NNW it would be useful if further empirical work was undertaken to address these issues.

Further analysis required

The modelling undertaken by Infometrics assumed that technology was exogenous, therefore ignoring how investments in new technology may reduce abatement costs35. Figure 13 has already illustrated the gains to NNW that can be made by abating emissions rather than purchasing credits internationally at the world price, and while it is important to factor in transition costs and the impact on total investment pattern in New Zealand, it may well be that the reductions in consumption are at the high end of the likely range. To help quantify this, further modelling will therefore be useful, which made technology endogenous by using information about abatement cost curves36.

Another issue which was largely ignored was the impact of climate change policy in other countries on the international trade of New Zealand exports. One component of this is whether international firms which compete with New Zealand exports face a price on carbon. While the data above assumes that none of the firms which New Zealand exporters compete with face a price on carbon, a run of the model was done where all competitors faced a price. In this scenario, with a price of $100/tonne, private consumption in 2025 fell by -1.4%, compared to -2.2% in the earlier run. While it is unlikely that firms in developing countries which export agricultural products will face a price on carbon, there may be some gains to NNW that can be made if sectors such as cement, aluminium and steel are included within the global emission reducing strategy.

Finally, an assumption was made around how the Government would recycle any surplus revenue – with a simple choice made that business tax would be reduced by an equivalent amount. While this may be the most efficient choice, it is important to consider the impact on NNW of other possible options.

34 Infometrics – Impacts of the ETS (2007). As with most GE models it uses consumption as a proxy for welfare.

35 The emission reductions which the modelling predicted were therefore due only to substitution between different activities (such as switching from coal to gas, or bio-fuels)

36 Work on determining these cost curves is currently being undertaken

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