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Likely scenarios and implications for negotiations

The recommendations above have highlighted some further modelling that could be carried out to get a better understanding of the likely impacts on NNW. It would also be useful to understand, and potentially model, what outcomes are likely in terms of carbon prices and shifts in demand for New Zealand exports from decisions made at the international level. The final section of this paper identifies some of the likely scenarios for future decisions, and makes some initial recommendations for a New Zealand position – given the evidence presented in this paper on the possible outcomes. This is by no means a final set of recommendations, as many of the decisions are still to be made, and much of the data still needs to be sourced.

Stabilisation goal:

The negotiations around a stabilisation goal are likely to focus on an acceptable temperature increase and corresponding concentration level. The European Union has focussed on 2 degrees Celsius as an acceptable temperature increase, which corresponds to an approximate concentration level of around 450ppm. This is at the lower end of the 450-550ppm range which is generally considered as an appropriate concentration target.

The outcome of a higher concentration goal will be fewer emission reductions and a relatively lower world price resulting in higher NNW. However, a higher concentration goal will result in greater global impacts of climate change, which, depending on the distribution of these costs, could reduce NNW.

Global emission reducing strategy:

To ensure any particular stabilisation goal will require global emissions to be capped at a certain quantitative level. Capping global emissions from 2013 onwards is however extremely unlikely, with a more probable scenario being a cap on developed countries emissions, and some form of commitment for developing countries to reduce emissions below BAU. The number of countries which participate in this strategy will have major implications for the world price, the reductions that New Zealand will have to make, and the prices of New Zealand exports.

Without a cap on the emissions of all major developed countries such as the United States or Australia, and commitments to reduce emissions from some of the larger developing countries, or emission intensive sectors within these countries, the reductions that New Zealand, and other developed countries will need to make, to ensure emissions are stabilised at 450-550pm will require an extremely high world price. Furthermore, the competitiveness of New Zealand firms relative to those in the non-committing countries would be negatively affected. Given the global stabilisation goal, and the likely impacts on NNW of achieving this goal with only small contributions for other countries, it is clear that New Zealand should only sign up to an agreement in which the emissions of all the major developed countries are capped37, and the larger developing countries make commitments to reduce emissions below BAU – possibly through emission intensity targets for certain industries such as cement, aluminium and steel manufacturing.

Rules:

The decisions around what activities are included within the developed countries ‘cap’, and what activities can be sourced from outside, will also have major implications for the world price and international commodity prices.

With respect to what activities are covered by the cap, the discussions at future international negotiations are likely to focus on bunker fuels (aviation and shipping) and the treatment of land-use, land-use change and forestry (LULUCF). As with participation, the greater the number of activities covered, the lower the world price will be. This is because there may be cost-effective emission reducing potential that is otherwise unrealised if it is not included. While reducing the world price is an outcome that New Zealand would generally desire, and would therefore support the inclusion of more activities within a future regime, (such as bunker fuels), there are other considerations – in particular the impact on New Zealand’s emission profile. In respect to bunker fuels, given our location New Zealand has a relatively high proportion of emissions from international transportation, however, as discussed, this would reduce our domestic mitigation potential, on average, and could result in a less stringent target being adopted.

With respect to LULUCF, the likely scenarios are a complete removal of forest sinks from the accounting, or a move to full-carbon accounting, where all emissions and sequestration from forests and soils is included. During CP1 New Zealand has relied heavily on our forest sinks, and the same will be true between 2013 and 2020. We would therefore want to ensure sinks are included in any future regime, although, as with the inclusion of bunker fuels, the sinks are a mitigation option that will probably increase the stringency of the New Zealand target. With respect to full-carbon accounting, it is unclear whether New Zealand’s emission profile will either increase or decrease, therefore, as with bunker fuels, it seems logical to include this activity.

Avoided deforestation relates to emission reductions that can be sourced from outside the cap, and this issue will probably be one of the most important decisions that will need to be made at the Bali negotiations. As discussed, including avoided deforestation will result in cost-effective emission reducing activities being available, which will reduce world prices. Furthermore, it would result in a reduction in timber supplied to international markets which would increase timber prices, with resulting positive flow on effect to New Zealand exports. New Zealand would therefore want to support the inclusion of avoided deforestation (assuming of course these are additional emission reductions), however would want to ensure that these projects were awarded credits that were linked to the international trading market (rather than a separate fund).

New Zealand cap:

The cap that New Zealand signs up to will be largely determined by the costs and opportunities of reducing emissions relative to other developed countries. The other considerations include how much investment the Government is doing in research and development, and funding adaptation in developing countries. Given the relatively high abatement costs in agriculture, the small opportunity for emission reductions in electricity efficiency measure, and the large amount of funding currently being given to agricultural research, there could be a good basis for New Zealand to argue a relatively low cap. More work will however need to be done to accurately determine our domestic abatement costs, and in time it is expected that the UNFCCC will design a framework for determining how to allocate responsibility under the aggregate cap to participating countries38. Furthermore, given the importance of the rules on determining mitigation potential, and therefore a fair share of the responsibility, New Zealand should not sign up to any domestic target unless the decisions around what activities are included have been made.

The implications for the New Zealand cap are two-fold. Firstly, the direct result of a less stringent cap will be a greater surplus of credits and more revenue for the Government to recycle back into the economy (assuming the final decisions around allocation mean there is a surplus). On this basis, we should push for as low a target as possible. However, there are some potentially negative implications of negotiating a lower target – primarily through the impact on our 100% pure, clean green brand, which has some value for international trade and tourism. The trade-off between accepting a more stringent cap, and the benefits for trade and tourism, will need to be considered. It may well be that NNW is enhanced by the Government unilaterally imposing a greater responsibility that what it signs up for.

37 The cap for developed countries as a whole would be somewhere in the range of 10-40% below 1990 levels by 2020, to ensure stabilisation in the range of 450-550ppm.

38 The UNFCCC has started to discuss factors that will contribute to determining mitigation –Synthesis of information relevant to the determination of the mitigation potential and to the identification of possible ranges of emission reduction objectives of Annex I Parties.(July 2007)

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