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2.2.1 New Zealand’s unique set of challenges

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New Zealand faces a unique set of challenges with respect to domestic emissions mitigation. Both the composition and concentration of our emissions differs quite markedly from those of other Annex I countries, and this impacts on the range of available mitigation options.

Methane emissions from enteric fermentation, combined with nitrous oxide emissions from agricultural soils, account for almost half of New Zealand’s total gross emissions. The comparable figure for the European Union is just 12%. The significance of agriculture in our emissions profile reflects our traditional comparative economic advantage in pastoral land-use activities. This stems from both our resource endowments (temperate climate) and historical trade policies. Agriculture alone contributes around 4.5% of GDP, and total primary-sector produce accounts for around two-thirds of our total exports. The significance of these emissions presents a particular challenge, as cost-effective mitigation options are currently limited.

Other countries with similar emissions contributions from agriculture (such as Argentina) are not only Non-Annex I countries (and hence not facing binding commitments over CP1), but represent some of our key export competitors. Given that New Zealand is a price-taker on the international market, mitigation policies and measures that increase costs to our agricultural producers therefore raise competitiveness and profitability issues for our domestic producers.

For most Annex I countries, carbon dioxide accounts for over 75% of gross emissions. In New Zealand, it accounts for just 46%. This reflects the significant contribution of renewable energy sources (in particular, hydro) to our electricity generation. While the contribution of new renewables (in particular, wind) is projected to increase, the fact that our electricity supply is already relatively low in emissions intensity by world standards means that the scope for mitigation from fuel switching is more limited than for many other countries.

New Zealand’s energy use has been shaped by our resource endowments and associated policy background. Our natural energy resources (abundant hydro and coal resources) have contributed to our low electricity prices to date. Combined with historical policies directed at encouraging the manufacturing sector, this has, in turn, attracted energy-intensive industries such as steel and aluminium. Our primary sector also relies heavily on energy for processing and transportation. As a result, our economic structure is focused on producing high energy-intensity commodities. So, while the contribution of CO2 to our total emissions is low by world standards, our scope for reducing these emissions through structural change appears to be more limited, or at least more gradual, than that of other countries.

The unique profile of our emissions and the high concentration of these in difficult areas has implications for the range of mitigation options available, and the associated costs of domestic mitigation. Together with the particular structure of our economy, this has ramifications for the trade-off between securing domestic emissions reductions and other objectives such as economic growth. While these tensions are becoming increasingly apparent in a number of other Annex I countries, this trade-off is possibly more stark for New Zealand.

In regard to our Kyoto obligations, these challenges are compounded by the 1990 baseline. In 1990, New Zealand was emerging from a period of low growth, associated with significant economic reforms and restructuring. Since then, our growth has been higher than many other Annex I countries, and indeed higher than expected when we ratified the Kyoto Protocol. The 1990 baseline therefore means we begin at a trough and span a period of strong growth – from New Zealand’s perspective, an unfortunate confluence of factors.

A further unique feature of New Zealand is the significance of plantation forestry as a land use. New Zealand’s liability under the Kyoto Protocol is potentially vulnerable to changes in land use; specifically, the conversion to other land uses post-2008 of tracts of land that were forested in 1990. At the same time, under the Kyoto sink mechanism the afforestation of new areas since 1990 can be credited as sinks to offset emissions during the period of tree growth. However, when the forest is harvested, under the current rules there is a requirement to “pay back” these credits. Therefore, while plantation forestry is expected to assist New Zealand in meeting its Kyoto obligation, the importance of this land use pre-1990, the changing relative economic returns to forestry and the temporary nature of sinks present particular complexities for New Zealand climate change policy over the longer term.