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Cullen Address To EMA Kyoto Protocol Conference

Hon Dr Michael Cullen
Minister of Finance

Address to the EMA Kyoto ProtocolConference

Sheraton Hotel, Auckland

I’m pleased to have this opportunity to explain the government’s approach to climate change policy and the Kyoto Protocol.

Pete Hodgson, who is leading our greenhouse policy development, sends his apologies. He couldn’t be here because of a longstanding electorate commitment.

The government, as I expect everybody here today will know, has agreed in principle to ratify the Kyoto Protocol by September this year, subject to some further necessary steps.

These include select committee examination of the National Interest Analysis of ratification that was tabled in Parliament last week, the passage of legislation enabling ratification, and final decisions on the government’s preferred policy approach.

Late last year the government began a consultation process on climate change policy. The results are informing the development of a preferred policy outline, which we expect to release in April. That will be open to further public comment and the final cabinet decision on ratification will be made in late July or early August.

However the Protocol does not come into force until enough developed nations have ratified. In practice that means both Russia and Japan must join those countries that have already made it clear they intend to ratify. It is likely, but not yet certain, that both will.

The government’s policy response to the Protocol is predicated on the Protocol coming into force. If it does not come into force, policies required to implement our obligations will not take effect. Some policies – such as strategies for energy efficiency, transport and waste management – will proceed because they have a wide range of benefits. But there is no sense in which New Zealand will be “going it alone” with policies specifically relating to the Protocol.

We will not be following a bizarre policy of trying to lower sea levels in one country.

If the Protocol does come into force, it comes into full effect on the first of January 2008. That is when the clock starts ticking on our greenhouse gas emissions. We intend to be ready for that. And the more time we have to prepare, the better.

As the Prime Minister said in her opening statement to Parliament last Tuesday, this timetable places New Zealand in step with — not ahead of — a broad consensus of western countries on Kyoto. Two nations with targets have already ratified: by August it will be more like two dozen.

There are compelling reasons for New Zealand to support international action on climate change.

This country owes its prosperity – indeed its status as a developed nation – to a stable, equable climate that is ideal for pastoral farming. We have bought our place in the developed world with grass, which we have converted with exemplary efficiency into meat, wool and milk.

Our way with pasture is no longer quite enough to keep us in the manner to which we are accustomed, which is why this government is bent on transforming the economy to one in which knowledge and technology are more significant sources of value.

But for the rest of our lives, and far beyond, primary production will remain a basic driver of our economic welfare. The New Zealand knowledge economy will reflect our strength in primary production and the technologies associated with it. That means climate change is, profoundly, an issue of economic security for this country.

If global warming is allowed to continue unchecked, the long-term impacts on this country are likely to be severe indeed.

There may be some initial benefits for agriculture from a warmer climate, with possible increases in the growth rate and range of some crops.

But floods and droughts are expected to become more frequent and more extreme. Biosecurity is likely to come under increasing pressure, especially from subtropical pests and diseases. Sea level rises would create problems with saltwater intrusion into groundwater, as well as threatening infrastructure. Further problems with water supply and infrastructure would arise from higher rainfall in the west of the country and drier conditions in the east. New human health risks would arrive from pests and diseases, such as dengue fever, that presently thrive in warmer countries. Native species would be threatened by climatic changes in what remains of their habitats.

Climate problems can be very, very expensive. Last year’s electricity supply problems were an example of what a deviation from the norm can cost. One unusually dry winter knocked 0.2 percent off GDP.

We are all familiar with the huge price tags that get attached to floods and droughts. Flooding is the number one cause of civil defence emergencies in New Zealand and costs around $125 million a year, not counting the millions spent on flood protection measures and insurance. The El Nino floods in 1997 cost our agricultural industry an estimated $1 billion.

The costs of inaction on climate change are essentially inestimable, but there is good reason to expect they would be huge. And because global warming is a cumulative process, the costs only magnify with time. Doing nothing is not the low-cost option.

If we accept that the question is not whether to do something about climate change, but what to do about it, then we are confronted with the Kyoto Protocol.

Climate change is a global problem, which means concerted international action is the only remedy. And the Protocol is simply the only concerted international action on offer.

It has its limitations. It will not be, at first, a truly global agreement. It will cut western world greenhouse gas emissions in total by a mere 5 percent on 1990 levels, at best, if all parties meet their modest targets in the first commitment period.

But the Protocol does establish a functional international mechanism for reducing greenhouse gas emissions. That mechanism is the fruit of many years of negotiation and refinement. It embraces market solutions to an extent that the business community would generally be expected to welcome. It offers significant flexibility to member nations in their choice of how to manage their emissions. And it is readily capable of expansion to include developing nations in the second and subsequent commitment periods.

In short the Protocol is not just the only game in town. It is a positive, workable solution.

The government is being challenged, fairly, to explain the effect that ratification would have on the New Zealand economy. The crude answer is that, in the first commitment period, the best estimate is that ratification will bring us a slight net economic benefit.

The numbers are relatively simple: over the five-year first commitment period New Zealand is projected to receive carbon sink credits for its post-1990 “Kyoto forests” of 110 million tonnes of carbon dioxide equivalent. On the debit side we are expected to exceed our Kyoto emissions target, on business-as-usual, by 50 to 75 million tonnes of CO2 equivalent. The balance is positive by 35 to 60 million tonnes, so we will be a net seller of credits into the international carbon market.

Beyond that bald calculation we must accept some uncertainty in our analysis of the possible effects on New Zealand’s competitiveness and productivity, and on sectors and regions. That is true with all economic analysis, but it is especially so with climate change — because the future international price of carbon will be set by a market that does not yet exist.

Assumptions are the economist’s weapon of choice against uncertainty, of course, and by lining up enough of them it is possible to model the economic effects of just about anything. The government and the private sector have both commissioned a range of economic analyses in recent months of the possible effects of ratifying Kyoto, and many of you will no doubt be familiar with the results.

You will be hearing in some detail later about the work that ABARE has done for the government and NZIER has done for private sector clients, so I will not rehearse them now. Nor have I come to play “our economist is bigger than yours”. I simply want to stress a couple of points about what these studies do and do not tell us.

First, the extent of the assumptions they must make means they do not tell us what the economic consequences of ratifying the Kyoto Protocol would be. The difference between a general equilibrium model and a real economy should be obvious enough, yet it is a sad fact that the public debate on climate change has seen figures from these studies deployed as if they were definitive predictions.

The economic modelling done to date has tested the effect of applying a carbon price evenly, to all emitters, throughout the economy. In reality the government has a much wider range of policy options at its disposal and we will be using a combination of them to meet our Kyoto obligations. This includes measures already under way, such as the National Energy Efficiency and Conservation Strategy and minimum energy performance standards, whose effects the models do not allow for. Nor can the models allow for changes in technology, which will be probably the most significant factor determining the economic effects of constraints on greenhouse gas emissions.

What the modelling does tell us is that domestic greenhouse policy will be crucial to maximising the benefits and minimising the costs of ratification — and that the interests of some sectors of the economy must be safeguarded with particular care. Beginning, as we do, with the premise that the effects of putting a price on carbon should be spread as evenly as possible throughout the economy, we learn from the modelling that immediate and universal application of the price would have the contrary effect, hitting some sectors and industries much more than others.

We are very conscious of this as we develop our preferred domestic greenhouse policies. This is a government committed to fostering economic growth. We have absolutely no interest in adopting crude or extreme climate change policies that would run counter to that goal.

A set of key principles is guiding our policy development.

They include the principle that policies need to be consistent with a growing and sustainable economy. This has several important implications.

It means that policies must recognise the importance of maintaining the competitiveness of all our industries, including the competitiveness of new entrants. Achieving this means moving carefully and progressively to a full cost on emissions, reaching that point only when competitiveness issues have been addressed by the evolution of the Protocol into a fully global agreement.

Consistency with the goal of sustainable growth also means adopting policies that will avoid inappropriate distortionary effects on investment, including inward investment. And it means promoting the economic opportunities that come with climate change and the Protocol – a point I will come back to later.

Another important principle says policies must be responsive to the changing international context for action on climate change.

One implication of this is that our policies must recognise some of those immutable uncertainties about the future, including changes in our emissions profile, in technology, and the international environment. Policies must be adaptable and flexible, recognising the need for business and others to be able to accept them and respond to the policy changes that will inevitably be necessary in years and decades to come.

The government does not see the first commitment period as the time everything will and must happen. It would be a mistake to assume every policy instrument available to us will be deployed from 1 January 2008. The timing needs to be right.

A third principle of particular interest to this audience says that policies must result in permanent reductions in emissions over the long term.

A consequence of this is that policies must avoid what is known as “carbon leakage”, the relocation of high-emitting industries to countries that do not have emissions reduction targets. Clearly it is not in New Zealand’s economic interests to drive such industries offshore — and nor would it be consistent with the fundamental purpose of the Protocol, which is to reduce global greenhouse gas emissions. As with the need to maintain the competitiveness of New Zealand business, this principle argues for a phased approach to greenhouse policy as the Protocol moves toward a truly global emissions regime.

I want to close with a very important reminder that business must focus on the opportunities Kyoto presents, not just the risks.

The Protocol will change our energy use habits for good, by accelerating the shift away from finite fossil fuel resources and encouraging more efficient use of fossil fuels while they remain important. The countries that ratify the Protocol will be those where the sustainable energy technologies of the future are most rapidly developed and adopted. The Kyoto stragglers will risk being spectators to growth and innovation elsewhere.

One of New Zealand’s competitive advantages over other developed nations is cheap electricity, but – probably because it is cheap – we have not been very efficient with it. Under the Kyoto Protocol our power will still be cheap, but there will be new incentives to make more efficient use of it. If at the same time we can reduce greenhouse gas emissions while improving productivity, there are no losers. If we achieve the target of the National Energy Efficiency and Conservation Strategy, which calls for a 20 percent improvement in energy efficiency by 2012, we will have cut by a third our estimated excess of business-as-usual greenhouse gas emissions over our Kyoto target.

In the post-Kyoto world there will be international demand for new technologies, and improvements to existing ones, that reduce greenhouse gas emissions and make more efficient use of energy. Industrial processes, consumer products and agricultural technologies will be redesigned. There is no reason why New Zealand should not be a country that originates and profits from such advances.

This is particularly true concerning agricultural technologies: no other developed nation has a greenhouse gas profile as heavy in agricultural emissions as we do, which means none has the same incentive to develop processes and technologies for reducing agricultural emissions. The demand for such technologies and processes will come from less developed nations as the Protocol expands, and as developed nations seek to sponsor emissions-reducing projects under the Protocol’s Clean Development Mechanism.

The government and the New Zealand Business Council for Sustainable Development — one of the sponsors of this summit — are cooperating on a climate change project to identify with some particularity the business opportunities of a post-Kyoto economy. You wil be hearing more about it from the council this afternoon.

It is important that business is alert to the competitiveness and cost risks that poorly conceived greenhouse policies would bring, and that you bring these to the attention of the government. But it is every bit as important that you should think strategically about capitalising on the change that Kyoto will bring. In the long run, that is where the profits lie.


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