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Māori Impacts from the Emissions Trading Scheme: Detailed Analysis and Conclusions

Acknowledgements

Foreword

1 Introduction

2 Māori Contribution to New Zealand Greenhouse Gas Emissions

3 Māori Economic and Socioeconomic Position

4 Likely High-Level Generic Impacts of the ETS

5 Likely ETS Impacts on Māori – Absolute

6 Likely ETS Impacts on Māori – Relative to Non-Māori

7 Summary of Findings

4 Likely High-Level Generic Impacts of the ETS

4.1 Electricity and liquid fuel prices

The ETS will lead to increased electricity and liquid fuel (ie, petrol and diesel) prices. At the indicative levels of carbon prices used in official publications (ie, $15/tonne and $25/tonne), the price increases are relatively small (ie, 1–2 cents per kWh (or 5–10 per cent) for electricity, and 3.7–6.1 cents per litre (or 2.5–4 per cent) for petrol),¹⁹ especially when compared with historical price changes in such energy costs.

In fact the ETS will also lead to increased gas prices, and to secondary increases in prices of goods and services for which electricity, liquid fuel and gas prices are input costs (eg, food products via higher processing and transportation costs). Whether the price impact of the ETS is relatively high or low will depend on the level of international carbon prices once the relevant sectors are introduced into the scheme. Whether the ETS leads to “one-off” or successive increases in such prices will hinge on the future course of such international carbon prices. Global carbon prices will evolve according to the demand for carbon credits to offset emissions liabilities (which relates in part to the evolution of the Kyoto Protocol itself, particularly beyond 2008–2012, as well as global economic growth), and the development of technologies to reduce emissions (eg, carbon capture and storage).

Higher transportation costs can be predicted to fall relatively more heavily on rural communities, given the greater travelling distances they face, although numerically their burden will be less than that for non-rural communities. The burden of higher electricity prices can be predicted to fall more heavily in those parts of the country that are relatively cold, such as in the deep south of the South Island, where energy demands for heating are higher (and where Māori populations are relatively low).

These increased costs will fall at both the consumer and producer levels. Households will face higher energy costs, although the Government has signalled that support for low- and middle-income families will be made available to mitigate the impacts of the ETS on electricity prices.

Higher liquid fuel costs will particularly affect industries with high transport cost components, such as forestry and, especially, fishing. In the case of fishing, there may be different impacts on inshore and deep-sea fishing, with deep-sea vessels potentially able to skirt around the ETS by sourcing fuel from countries not imposing emissions charges on fuels. Higher electricity costs will affect industries reliant on electricity for energy-intensive processing, such as wood, pulp and paper, meat and dairy processing, and also sectors reliant on refrigeration and cool-stores (eg, horticulture). The Government has signalled possible relief measures for industries that are exposed to international trade, that have significant work forces at risk, and/or which have the potential to relocate to countries that lack greenhouse gas emission pricing.

4.2 Pre-1990 forests

Devolving deforestation liabilities to owners of pre-1990 forests should encourage the retention of a greater proportion of such forests in forestry, rather than see them converted into non-forestry uses, all other things being equal. This should result in a net negative impact on pre-1990 forest land values relative to no emissions pricing, since it will reduce the opportunities faced by some pre-1990 forest owners to convert their land into higher and better uses, at the margin. For example, economic modelling analysis commissioned by the Federation of Māori Authorities suggests that, at an initial carbon price of $15/tonne and initial milk-solids price of $4.42/kg, pre-1990 forest value as at June 2005 would be 13 per cent less with deforestation liabilities devolved to landowners (without any free emissions right allocations) than if they were retained by the Government.²⁰ This value loss arose from reduced dairy conversion options. At an initial carbon price of $25/tonne ($43/tonne) the corresponding value loss was estimated to be 19 per cent (47 per cent) relative to government retention of deforestation liabilities. If landowners were assumed to be unable to take advantage of free pre-2008 deforestation – whether due to institutional constraints on land-use changes or otherwise – the value loss rose to 18 per cent. This figure rose to 26 per cent if only post-2012 deforestation was assumed possible.

This negative forest value impact will be small or even non-existent, however, where pre-1990 forest lands currently lack higher or better alternative uses (given current land-use technologies), and/or with free NZU allocations to forest landowners. It will also be small where forest landowners face other constraints on changing land use. These might include replanting requirements under the Resource Management Act, or other land-use restrictions such as those emerging in some parts of the country to manage the nitrification of waterways, or Department of Conservation opposition to native scrub clearance.

Where pre-1990 forests have essentially no alternative use in the foreseeable future, such as might be the case with many indigenous forests (if pre-1990 indigenous forestry is to be included in the ETS) or forestry on extremely marginal land, the ETS’s impact may be inconsequential. In fact, if the owners of such lands receive a free allocation of NZUs under the proposed ETS, this could result in an initial windfall gain, which could be important to Māori who are large stakeholders in this estate. This is because those NZUs can be traded now for value that was not otherwise attainable, although at the expense of possible future development options. Importantly, the extent of any such gain will depend on the type of allocation mechanism, which initially at least will be based on simple forest land area, favouring lower-valued forests over higher-valued ones.

Another important, related consideration is the extent to which owners of pre-1990 forests are able to apply for exemptions under the proposed ETS. Notable among these is the provision for owners of forest blocks of up to 50 hectares to apply for exemption from deforestation liabilities. This exemption, however, is not available to owners of related bodies which in aggregate hold more than 50 hectares of pre-1990 forests.

4.3 Post-1989 forests

New forest plantings (ie, afforestation) should be encouraged by providing owners of post-1989 forests with the possibility of earning carbon credits on their forests (under the ETS, or the complementary Permanent Forest Sinks Initiative), or otherwise receiving subsidies to encourage post-1989 planting (under the possible Afforestation Grant Scheme). For example, economic modelling analysis commissioned by the Federation of Māori Authorities suggests June 2005 forest value, at an initial carbon price of $15/tonne, could have been increased by 46 per cent with the devolution of carbon credits and harvest liabilities to forest owners from 2008, relative to government retention of those credits and liabilities.²¹ At an initial carbon price of $40/tonne the value increase was estimated to be 84 per cent. Increased forest value through devolved credits and liabilities has also been predicted by other New Zealand research, though it is not clear what carbon prices were assumed in that analysis.²² This value gain may be tempered to some degree, however, due to the relatively increased area of pre-1990 forest land that will be retained in forestry, and increased post-1989 plantings, which will have the effect of reducing domestic log prices at the margin, relative to no emissions costs or sink credits.

Indeed, to the extent that overseas forestry nations implement similar forestry measures to those in the ETS, increased retention of pre-1990 forests in forestry, and increased post-1989 plantings, should be expected to constrain growth in long-term international log prices, all other things being equal.²³ Whether post-1990 plantings become more or less economic as a consequence will hinge on the degree to which international carbon prices evolve to support economic carbon sequestration, or to which alternative uses for wood fibre (such as bioethanol) develop. Global carbon prices will evolve according to the demand for carbon credits to offset emissions liabilities, and the development of alternative technologies to reduce emissions.

At current carbon price levels (often indicatively assumed to be in the order of $15–25/tonne of carbon dioxide equivalent (tCO2e)), at least some post-1989 forest plantings will be made viable by virtue of carbon sequestration opportunities. Where rising transport costs due to emissions costs make harvest uneconomic on more remote forest areas, the combined effect of these charges and carbon sequestration value may result in certain remote marginal lands being converted into permanent forest cover.

4.4 Wood processing, and pulp and paper

The net effect of reducing deforestation and encouraging afforestation should be an increased supply of wood-fibre for processing in New Zealand. There is also likely to be an increased supply of fibre from alternative species more suited to carbon sequestration than Pinus Radiata, such as varieties of Eucalyptus, Redwood and Douglas Fir, although with longer forest rotations. While this should be positive for the continuation of this sector, and hence for employment in the forestry and processing sectors (potentially favouring Māori), this should be balanced against the negative impact of higher electricity and liquid fuel costs (which increase the risk that processing is shifted to countries without emissions charges). In turn, such higher energy costs should encourage the substitution of alternative fuel sources for processing, such as increased use of wood-based energy production (which should increase the net returns to foresters, at the margin, if not the total demand for wood-fibre). Macroeconomic modelling analysis by Infometrics predicts modest increases in wood processing output, and in pulp and paper production, both short-term (in 2008–2012) as well as longer-term (2025), relative to an economy with no emissions charges, as a consequence of the ETS (setting aside short-term adjustment costs, and dynamic/uncertainty impacts on investment, among other things).²⁴

4.5 Agriculture, and food processing

Placing emissions charges on agriculture post-2012 will ultimately affect optimal stocking levels and farming type, at the margin. Conflicting research exists as to whether dairy farming will be more or less affected than other farming types by the introduction of an emissions charge. This is despite the fact that dairy farming produces the highest methane emissions per stock unit, with beef farming the next most emitting, and sheep farming emitting at much lower levels.²⁵ Certainly an emissions charge should result in lower overall emissions across all farm types, as a consequence of reduced farming at the margin across all types. It should also result in more marginal farm land being retired into forestry or reversion, and possibly some conversion from dairying into less-intensive farm uses at the margin (as well as reduced conversion into dairying).

However, farm type changes resulting from emissions charges will depend not just on the cost of emissions, but also the impact of emissions charges (net of any offsetting emission unit allocations) on the relative profitability of different farm types. Official figures suggest average payouts to dairying will fall by more than other farm types, followed by sheep farming and then beef farming.²⁶ However, economic modelling by Motu suggests an emissions charge of $25/tonne or $50/tonne (without free NZU allocations) would reduce sheep and beef revenues as a proportion of total revenue by more than for dairying. At the higher emissions charge Motu’s modelling suggests the profitability of dairying should fall by more as a percentage of average farm profits than for sheep and beef farming.²⁷ It is therefore unclear from these conflicting figures whether emissions charges will reduce dairying by more or less then less-intensive farming types.

The 2005 Motu analysis provides assessment of the regional impacts from a $25/tonne emissions charge on agriculture. The incidence of a farmer-level emissions charge is predicted to fall mostly on farm profits, although with some burden shifted to agriculture sector workers. While sheep and beef farmers are predicted to be unable to shift any of the emissions charge incidence to customers, a small ability to do so is predicted for dairy producers. A charge of $25/tonne is predicted to reduce dairy farm revenue by 7 per cent based on 2002 payouts. For sheep and beef farmers a higher impact is predicted, namely an 11 per cent decline on 2002 payouts. Figure 4.1, taken from the 2005 Motu analysis, identifies the areas most affected by an agricultural emissions charge in per capita terms.

On a per capita basis the areas most affected by agricultural emissions charges are Gore and MacKenzie in the South Island, and Taihape (having the highest national average impact of $2,715/person), Waipukurau, Te Kuiti and Dannevirke in the North Island (which are mostly sheep and beef regions, though with some dairy). The areas most affected are also those with relatively high employment rates, though also with relatively low rates of formal education. They are also the areas with the highest numbers of agriculture and fishery workers. The likely employment impacts in areas most affected by emissions charges are therefore somewhat ambiguous, except that agricultural sector workers are likely to face the strongest employment impacts. As to the socioeconomic characteristics of rural areas with high agricultural emissions charges per capita, they differ little from those of rural New Zealand as a whole. In particular, no clear relationships were found between agricultural emissions charge impacts per capita and ethnic mix in the relevant area. How the combined effects of agricultural, forestry and other emissions charges differed by ethnicity was not considered.

As discussed above, agricultural processing will also be affected by rising fuel and electricity costs. Taking such increased costs and direct agricultural emissions costs into account, macroeconomic modelling by Infometrics suggests that both meat and dairy processing will experience minimal output changes in 2008–2012 due to the ETS.²⁸ However, output in these sectors declines in 2025 across a range of scenarios, relative to the case where no emissions charges are introduced into the economy. Infometrics emphasises, though, that it is unlikely that output in these sectors will fall in absolute terms due to the ETS – rather they will not grow by as much as they would had no emissions charges been introduced.

Finally, deferring the introduction of agriculture into the ETS until 2013, while introducing other sectors earlier, means agriculture will implicitly be enjoying greater government support than those other sectors over 2008–2012.

4.6 Geothermal electricity generation and industrial processes

Placing emissions charges on users of geothermal energy for electricity generation and industrial processes should reduce the profitability of such activities, all other things being equal. In the case of geothermal electricity generation, however, since geothermal generators can generate at less cost than thermal generators which also face emissions charges, wholesale electricity price rises due to the ETS are likely to provide them with higher generation profits (indeed, higher electricity-sector wide profits are predicted in official documents). Industrial users of geothermal energy, however, will likely just face higher energy costs, absent any relief measures.

4.7 Research and development, and innovation

By increasing the cost of greenhouse gas emissions the ETS should encourage changes in production levels, types, and methods so as to reduce emissions. In part this will be brought about by making existing emissions-reducing technologies more viable. Alternatively, it will increase the profit opportunities for developing such technologies, and hence should be expected to increase technology-based research and development (R&D) and innovation directed at reducing emissions. Given high participation by Māori in especially the agriculture/farming sector, Māori will need to play an important participatory role in defining the way in which the Government frames its investment into research and development to develop these technology responses to reducing emissions. Māori have demonstrated a keen interest in fully exploring how R&D may enable its economic development interests and aspirations. However, this is currently limited to very few well-organised bodies like the Federation of Māori Authorities who have facilitated the development of cluster-based R&D strategies (ie, in forestry).²⁹ However, the current research framework is overly complex and strongly favours larger organisations like Crown Research institutes and universities. Recent policy changes within the Foundation for Research Science and Technology have further de-emphasised the role of applied research in favour of more blue skies research. Moreover, there is a lack of accountability to practically report against key metrics around delivery of science targeted specifically toward Māori research needs. This complexity amounts to another institutional barrier preventing Māori practically participating and using R&D as a key enabler of their economic development interests. There is a real need for greater targeting of R&D investment focused specifically on overcoming the unique institutional barriers faced by Māori and on meeting research issues that are particular to Māori.

4.8 Impacts in perspective

Macroeconomic modelling of the ETS by Infometrics suggests the scheme will have a zero to small positive impact on private consumption, and on GDP in world prices in the first Kyoto commitment period.³⁰ In the longer term, by 2025, it is predicted to have a small positive impact relative to no emissions costs or sink credits in the economy. Under either the ETS or government retention of credits and liabilities, long-term private consumption and GDP in world prices are both lower than if there were no emissions pricing, but only modestly so. The net impact of emissions pricing is to slightly reduce growth in production and consumption below what it might otherwise have been, but in the context of ongoing positive overall growth.

However, such modelling makes no allowance for adjustment costs, and also sets aside dynamic considerations such as the impact on long-lived irreversible investments of increased uncertainties (eg, from a volatile carbon price). It also tends to obscure the potentially significant impacts of ETS-like schemes on particular sectors or parts of the economy such as those experienced during the economic reforms of the late 1980s. While overall economic impacts may be small at an aggregated level, they are potentially large and uneven for the particular sectors in which they have the greatest impact. Considering forestry, for example, they can even have impacts of differing direction, with pre-1990 foresters facing potential net declines in asset values, but post-1989 foresters facing net increases. In the case of the Infometrics analysis, such forestry impacts were not modelled. Hence, when considering sectoral or demographic impacts of the ETS, such macroeconomic models are potentially of limited use.

Additionally, modelled climate change policy impacts tend to be based on an assumed level of carbon price. In The New Zealand Framework for an Emissions Trading Scheme, economic modelling uses two carbon pricing scenarios of $15 and $25/tonne (ie, per tCO2e), with sensitivity analysis using higher figures sometimes provided. It is unusual for carbon prices to be explicitly modelled, even though they can be expected to be quite volatile, and affected by modelled phenomena such as economic growth. A wide range of possible carbon prices is possible both over 2008–2012 and the longer term, with either very high or very low prices possible. Analysis by McKinsey & Company suggests that significant abatement opportunities can be expected for €40 (approximately NZ$75) or less,³¹ implying a longer-term upper bound on carbon prices, although short-term volatility could involve even higher prices. Given the considerable uncertainty in the likely course of this key parameter, particular regard should be had to how sensitive predicted policy impacts are to changes in its value. For illustrative purposes this report discusses results based on the values of carbon prices assumed in the relevant modelling, noting those assumed values without making a prediction as to what the likely actual carbon price will be.

Clearly sectors facing net emissions costs under the ETS (eg, agriculture, and pre-1990 forestry) will prefer carbon prices to be low. Conversely, sectors able to profit from carbon sequestration or avoided emissions (eg, post-1989 forestry) will prefer carbon prices to be high. Indeed, post-1989 foresters with forests having relatively low average ages should prefer carbon prices to be high while their forests are maturing, and low once they sequester carbon more slowly or near harvest. That way they would enjoy high carbon sequestration value as their forests grow, and low liabilities once they near harvest date. Such considerations highlight just some of the diversity of risks and opportunities different sectors may face as carbon prices change over time.

As emphasised above, many of the predicted ETS impacts are “at the margin”, or assume that all other things remain equal. In reality an international shift towards ETS-like schemes will result in potentially significant repositioning in global markets, as can be seen with rising dairy prices being in part caused by increased demand for food-based bio-ethanol. Conversely, the international competitiveness of New Zealand firms may not be materially changed if competitor nations also adopt similar schemes, although the omission of important producers such as China, Australia and the US from emission pricing in 2008–2012 means competitiveness issues may arise at least in that period.

Just as important, however, in assessing the relative importance of ETS-related impacts is the likely future course of the underlying “fundamentals” of each sector. Volatile oil and electricity prices mean that ETS-induced changes in energy costs may be relatively modest overall, unless international carbon prices should rise significantly. Similarly, ongoing world economic growth and hence the demand for New Zealand food and other primary exports are likely to be the greater drivers of sectoral profitability. Where sectors are currently marginal, however, and likely to remain so for the foreseeable future, the ETS may make the difference between ongoing viability and failure. Hence, general predictions of ETS impacts should be regarded with considerable caution, and with these perspectives in mind.

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