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Kyoto Protocol: the Govt’s preferred policies

Tuesday 30 April 2002 Pete Hodgson Speech Notes

Kyoto Protocol: the Government’s preferred policies

Today the Government outlines its preferred policy package for the domestic implementation of the Kyoto Protocol.

This announcement follows extensive consultation last year and will be followed by further consultation beginning today. Final policy decisions will be taken in July as will the decision to ratify. A decision in principle to ratify was taken in February and the Government anticipates ratifying in August. We are likely to be about the twentieth developed nation to do so.

As far as domestic policies are concerned, we began last spring with New Zealand’s first ever energy efficiency and conservation strategy. Since then, we have added the waste strategy and the transport framework and emerging transport strategy. These all sit beneath the Growth and Innovation Framework of last February and are collectively know as Foundation Policies. The Foundation Policies released so far will between them reduce New Zealand’s excess emissions by about a third over the next decade.

Today we flesh out those Foundation Policies somewhat. A strategy and target for renewable energy is being released today as are the Government’s plans for a partnership with local government and for what we are calling projects. Projects are specific activities aimed at delivering defined reductions in greenhouse gas emissions in return for an incentive.

These policies will ramp up quite quickly from now until 2008 which is when the first commitment period begins. They will be funded from Government or predominantly so. They begin the process of improving the nation’s energy efficiency, fuel switching, renewable energy investment and public awareness.

Together these policies will prepare New Zealand well for the first commitment period and their effectiveness means that no pricing policies, for example in the form of a low emissions charge, will be necessary before 2007.

In addition later this year the Government will make public the results of a study jointly funded by the New Zealand Business Council for Sustainable Development and ourselves into the national and international business opportunities arising from Kyoto. Business awareness of these opportunities is low and it is our hope that innovative New Zealand companies will learn quickly to explore opportunities through the international Clean Development Mechanism, and the like, which are all part of the Kyoto package. There are likely to be rich pickings for our energy sector, primary processing sectors including forestry, and our consultancy sector including agricultural consulting.

Today we also announce other new policies for the first commitment period. These policies, sometimes called price policies, will only come into effect if the protocol itself comes into force. We will not know that for a year or more.

For the first commitment period we have divided the economy into four groups.

The first, called the “competitiveness at risk” group, is that fairly small number of firms or sectors which have high energy use, which export and which are therefore vulnerable.

These firms are vulnerable because they compete with nations that are not yet part of the group of nations with Kyoto targets. The Government intends that they will be fully shielded from any emissions charge, in return for a successfully negotiated greenhouse agreement which sets a pathway for the firm or sector towards world’s best practice in emissions intensity. Partial shielding will also be negotiable.

Kyoto will have a modernising influence on the New Zealand economy, where appropriate, through this mechanism. This sector represents perhaps a third of our carbon dioxide emissions.

The second, called the general energy users group, is the energy and transport sector, most businesses and households. This group represents about two thirds of our carbon dioxide emissions. This group will face an emissions charge from 2008 approximating the international price of carbon, capped at $25 per tonne of carbon dioxide with revenue recycled back to the economy — for example, through the tax system.

The decision to cap the price requires brief explanation. Current estimates are that the world price of carbon in a free market will be low initially, say $10 to $30 a tonne of carbon dioxide equivalent. Kyoto is after all only just beginning, and the largest buyer in the form of the USA has pulled back. However there is no certainty that the market will be free. For example we cannot know what arrangements Russia may wish to enter into as a condition of ratification. Yet New Zealand business and society values certainty and the decision to cap provides certainty against price spikes or initial volatility. Business uncertainty is therefore now limited only to how low the price will go, not how high.

The Government retains the option of introducing emissions trading, rather than an emissions charge, if the international market is functional and if the world price of carbon is reliably below $25 per tonne of carbon dioxide. In practice the issue of a reliable price will depend on the availability on futures trading and other financial derivatives. Emissions trading is where New Zealand business will gain most in terms of commercial opportunities and innovative responses.

The third group is agriculture. Methane and nitrous oxide from agriculture form over half of all our emissions, giving New Zealand a unique greenhouse gas profile. Yet farmers have no way to reduce emissions other than by reducing stock numbers. Accordingly an emissions charge of any form on agriculture is rejected.

Instead the Government’s preferred policy approach comes in the form of research. We expect the industry to fund most of this research, because each sector must contribute to reducing New Zealand’s emissions, but also because any productivity increases from methane reductions are likely to accrue to the industry.

The Government retains the option of a research levy – 20 cents per sheep per year would raise more than we think we need – but in all likelihood that will be unnecessary. One consortium bid is already underway. Needless to say if the research programme were successful, and we anticipate it will be, intellectual property may well be formed and will flow to those who fund the research.

The fourth group goes by the unlovely name of other. This includes methane from landfills which is reducing quickly and which the Minister for the Environment is sure will reduce further with the waste strategy recently announced. It also includes the three so-called synthetic gases – HFCs, PFCs and sulphur hexafluoride – which will be managed by a mixture of regulation and industry agreement.

The Government intends to retain all sinks, for the first commitment period at least, for a long list of reasons.

The first is that it enables us to exempt many key sectors of the economy, the largest being farmers, as the Protocol begins its transition to a truly global instrument.

The second is that it allows us to address the key concerns of the forestry industry. The industry saw the distinction between pre-1990 and post-1990 forests as arbitrary. They saw the deforestation liabilities as unacceptable and they found the prospective transaction costs of measurement and accounting as equally unacceptable. Retaining sinks allows us to address all these issues. Deforestation liabilities will however be capped nationally at 5% of the area of forest expected to be harvested over the first commitment period.

The third is that is allows sinks to be managed to maximise their value for NZ and it means that the risk of changes in international negotiation is carried by the Crown.

The fourth is that sink credits, which cannot be carried forward, can be swapped with emissions units and saved for future commitment periods or against the possibility of a biosecurity event or other major incident.

The fifth is that incentives might become available for some forestry planting, for example on multiple-owned Maori land, as well as for conservation forestry or indigenous forestry regeneration, with the water and soil conservation benefits and the biodiversity benefits that brings.

And finally sink credits will be sold and the revenue recycled back into the economy. On this issue of revenue recycling – be it from the sale of sink credits or from an emissions charge – I would like to add parenthetically that we are not today announcing tax cuts. Nor can we. Any speculation on the amount of money available for recycling, for any purpose, is idle until the price of carbon is known.

However, the principle of recycling is being established, today. Unlike most countries NZ will be a net seller of credits on the international market, which means the overall effect of ratification on national income is positive. It follows that, nationally, there will be more money available for recycling than is collected from an emissions charge, because of the sale of sink credits.

In conclusion, I want to make just three quick points.

The first is that Kyoto policy will change as the years go by, probably forever. In that sense it will be no different from any other aspect of Government policy. We have scheduled reviews for 2005, 2007 and 2010. These reviews will finesse policy announced today as well as addressed policy for the second commitment period beginning 2013.

The second point is that there is much detail I have had to omit today in the interests of brevity – Kyoto is a rather large issue.

The third is that on Thursday the Journalists Training Organisation is hosting an all day seminar for those who wish to delve further.

Thank you very much.


Ends

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