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Carbon Neutrality Goals Costly and Unattainable

EMBARGOED UNTIL 11.30 AM TUESDAY 5 FEBRUARY 2008

Carbon Neutrality Goals Costly and Unattainable

Taken alongside the government’s goals for economic growth, its goal of achieving carbon Neutrality

• could cost New Zealand households around $19,000 a year in current dollars by 2025

• but would leave the country further away from carbon neutrality than it is today.

These are key conclusions of the attached report by Dr Adolf Stroombergen of Infometrics Limited, prepared for the New Zealand Business Roundtable and the Petroleum Exploration and Production Association of New Zealand. The government’s Emissions Trading Group engaged Infometrics last year to model effects of the government’s proposed emissions trading scheme.

The period to 2025 was chosen for the study because it was used by the government and because it represents a ‘milestone’ on the path to the government’s goal of carbon neutrality by 2050.

The study analyses a target of reducing New Zealand emissions to 1990 levels by 2025. This is a very conservative target in relation to carbon neutrality: at the recent Bali meeting, New Zealand supported a proposal by the Intergovernmental Panel on Climate Change to cut emissions by 25- 40% below 1990 levels by 2020.

The study proceeds by modelling three scenarios.

First, a ‘high growth’ Business as Usual (BAU) scenario of 4.5-5% GDP growth is modelled to 2025. This scenario (Scenario A) serves as a benchmark to measure the economic costs of emissions reductions policies. A key premise of the study is that the impact of such policies does not put in jeopardy the government’s priority goal of achieving sustained annual real GDP growth of 4% or more (necessary if New Zealand is to get back into the top half of the OECD per capita income rankings).

Scenario B models the impact of imposing a carbon price on the economy (through an emissions tax or trading scheme). Ideally, the question posed would be what price is necessary to achieve 1990 emissions levels by 2025. However, it turns out that the necessary price would be too high to model realistically. Instead, the question asked was what impact an international price of $100/tonne CO2e, supplemented by measures such as the quasi-moratorium on new fossilfuelled thermal generation which would bring the effective (or ‘shadow’) domestic price up to $300/tonne, would have on emissions relative to 1990 levels.

Scenario B assumes that all economic resources would be reallocated to other activities over time in response to higher carbon prices but does not take account of the effects of investment uncertainty and transitional costs. Such effects are allowed for in Scenario C which assumes some fall in investment, employment and productivity.

The analysis shows that even with the very high carbon prices assumed, which would lead to a doubling of electricity prices in real terms and a 50% increase in petrol prices, New Zealand would be further away from its carbon neutrality goal than it is today, rather than on a path to achieving it. Moreover, in Scenario C private consumption would fall by 14% relative to BAU, which is about $7,000 per person or $19,000 per household.

In addition, the impact on numerous industries would be devastating – reductions in output of the order of 30-40% are reported in the case of sheep and dairy farming – and major industrial firms could face complete closure.

Commenting on the study, Business Roundtable executive director Roger Kerr and PEPANZ executive officer John Pfahlert said it called into question the consistency of the government’s twin goals of faster economic growth and carbon neutrality.

“Businesses and households have to take them seriously – they are surely not intended to be a fraud on the electorate.

“Yet the government is not on track to meet its growth target and it is clear from the study that the economic impact of carbon neutrality policies would be far greater than the government has maintained.

“The reality is that there are currently no low-cost ways for New Zealand to reduce emissions significantly. The business community takes the threat of global warming seriously and is not generally opposed to action to put a low initial price on carbon. However, rhetoric about ‘carbon neutrality’ and ‘leading the world’ is fanciful and irresponsible and no basis for sound policy, as the study demonstrates."


ENDS

Attachment:
NZBR_PEPANZ_Carbon_Mitigation_Scenarios.doc

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