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Farming and the Kyoto Protocol - Hodgson Speech

Wednesday, 22 May 2002
Hon Pete Hodgson Speech Notes

Farming and the Kyoto Protocol

[Address to North Canterbury Federated Farmers AGM, Christchurch]

Thank you for the invitation to speak today. I welcome the opportunity to discuss climate change and the Government’s reasons for supporting the Kyoto Protocol.

You asked me to speak specifically on the benefits and costs to New Zealand.

I frequently hear critics asking when they are going to be presented with a full cost-benefit analysis of ratification of the Protocol. It sounds like a reasonable question — until you give it a moment’s thought, and realise it is merely rhetorical.

I do not mean, obviously, that the Protocol has neither costs nor benefits. I mean that ratifying the Protocol is a decision that requires us to weigh a great many factors, many with no dollar amounts attached and many with costs or benefits that cannot be specified with any certainty.

There is nothing particularly special or unusual about Kyoto in that respect. If public policy could be decided by cost-benefit analysis we would need only accountants to keep civilisation going. In fact all significant decisions concerning the future of our economy and society are political, in that they require vision, judgement and leadership rather than a mechanical weighing of dollars and cents.

Let me give you a few quick examples of dimensions of the decision on Kyoto that do not fit easily into a cost-benefit spreadsheet — or, for that matter, into an economist’s general equilibrium model of the economy.

Consider what New Zealand’s clean environmental reputation is worth to you, as food producers, in sophisticated consumer markets such as Europe. Can you put a dollar value on that? What would be the cost of the damage to that reputation if New Zealand walked away from Kyoto after supporting it for the best part of a decade?

Or consider the pressure that the Protocol applies in favour of clean, efficient and renewable energy supplies. What is the effect on New Zealand’s international competitiveness if we shelter our economy from that pressure? What is the cost of clinging to old energy technologies while other developed nations reach for the energy technologies of the future?

Note that these are not moral or ideological considerations. They are about our competitiveness, our economic welfare.

And here’s another one that relates directly to the economic welfare of farmers in particular. What is New Zealand’s stable, equable, wet, mid-latitude climate worth to you? And what would be the costs and benefits of change?

It’s essentially impossible to give meaningful financial numbers in answer to those questions. But we can look at the science and analyse the risks. And we can arrive at the conclusion that the costs will, in all probability, outweigh the benefits.

I say this because the scientific evidence indicates that 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. And native species would be threatened by climatic changes in what remains of their habitats.

We already know that climate problems can be very, very expensive. As farmers you will be well aware of the costs of floods and droughts. Flooding costs this country an estimated $125 million a year, not counting the millions spent on flood protection measures and insurance. The El Nino floods in 1997 cost agriculture an estimated $1 billion.

So in any notional cost-benefit analysis, we can’t forget to pencil in the likely costs of inaction on climate change. They are inestimable, but most likely huge. And because global warming is a cumulative process, they only magnify with time.

There are numbers we can plug into our spreadsheets and models, and they tell a good story, not a bad one. I’ll move on to these, but my first point is that numbers cannot and do not tell the whole story. And we must not lose sight of the larger picture if we are to make the right decisions about climate change.

You are naturally interested in the benefits and costs for your sector from ratifying Kyoto, but let me first give you a quick rundown on the Government’s preferred policy as a whole. We have sought to maximise benefits in the national interest and spread costs widely and fairly, so it is important to understand the policy regarding agriculture in the wider context.

The foundation policies in our response to climate change are mostly in place already. We began last spring with New Zealand’s first ever National Energy Efficiency and Conservation Strategy. Since then, we have added the waste strategy and the transport framework. Work on the transport strategy is well advanced.

Important new additions to the foundations are our plans for a partnership with local government to reduce emissions, 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 Protocol’s first commitment period begins. They will be funded by Government, or predominantly so. They begin the process of improving the nation’s energy efficiency, fuel switching, renewable energy investment and public awareness. Between them they are projected to reduce New Zealand’s excess emissions over our Kyoto target by about a third, over the next decade.

The effectiveness of these measures means that no price will be put on greenhouse gas emissions before 2007. After that there will be a price, but it will not be applied flatly throughout the economy.

We have identified four broad groups of businesses and industries, according to how difficult it would be for them to adjust to paying the full cost of their emissions.

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. They compete with nations that will not have Kyoto targets in the near future.

These firms will be fully shielded from any emissions charge, as long as they negotiate a greenhouse agreement that puts them on track for world’s best practice in emissions intensity.

A second group comprises the energy and transport sector, most businesses and households. This group will face an emissions charge from 2008 approximating the international price of carbon, capped at $25 a tonne of carbon dioxide. All revenue will be recycled back to the economy — for example through tax cuts.

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 the $25 a tonne mark.

There is a small miscellaneous fourth group, concerning businesses producing synthetic gases and odd sources of methane such as landfills.

But the third major group is you. Agriculture.

Methane and nitrous oxide from agriculture form more than half of New Zealand’s greenhouse gas emissions, a unique profile amongst developed nations. Yet there are currently no readily available, practical ways for you to significantly reduce those emissions, besides the undesirable one of reducing stock numbers. That is why you are being exempted from any emissions charge.

Agricultural gases are expected to exceed our Kyoto target by 5 million tonnes of CO2 equivalent a year in the first commitment period, a projected growth of about 12 percent on current emissions. The Government’s decision to take responsibility for the sector’s emissions growth means that the direct cost to the state will be more than $125 million a year if the international price of carbon reaches or passes our cap of $25 a tonne.

But as you have heard, every sector of the economy will be taking responsibility for its emissions in some way. For agriculture the Government’s preferred policy approach is to pursue a solution through research.

We expect your sector to fund most of this research, not only because you must take some responsibility for your industry’s emissions, but because any productivity increases from methane reductions are likely to benefit you directly.

The Government retains the option of a research levy, and as a ballpark indication I have said that 20 cents per sheep per year would raise more than we think we need. But my expectation is that a levy will be unnecessary.

One small research consortium bid from your sector is already under way. If the research programme is successful, and we have good reason to expect that it will be, any new intellectual property will belong to the consortium members.

Some of you may have seen the recent news of AgResearch Grasslands’ discovery that condensed tannins found in some pasture species can directly reduce methane emissions by as much as 16 percent. Microbial intervention strategies are also under investigation.

Because methane is waste, the potential productivity gains are exciting. But there are also likely to be significant business opportunities in selling New Zealand solutions to the world. Developed nations, and developing ones when they take on emissions targets, will need solutions to agricultural emissions.

Research into reducing methane and nitrous oxide emissions is also likely to have other environmental benefits. For example, reducing nitrous oxide emissions through more efficient nitrogen fertiliser application is likely to reduce nitrate leaching into groundwater, as well as lower the cost of producing more feed.

You are not being asked to sacrifice money to research. You are being asked – and forcefully, for which I make no apology – to invest in research.

Actually a lot of what I do as science minister comes down to prodding New Zealand business to invest in research. The overwhelming reason for doing so is that it pays off. Wherever you look, in whatever sector, research and development pays off.

For the farm foresters amongst you, I want to finish up by explaining why the Government intends to retain all forest sinks, for the first commitment period at least.

Although the Farm Forestry Association was unconvinced, before our policy announcement, that its members would be any better off with sink credits, I note that the tune has changed with the news that the Government will retain them.

The first of many reasons for retaining sink credits 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 agreement.

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.

The third reason is that retaining sinks allows them to be managed to maximise their value for New Zealand, which is why successive governments negotiated them into the Protocol in the first place. And it means that the risk of changes in international negotiation to the rules around sinks 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. They can also be saved against the possibility of a biosecurity event threatening our forests, or another major incident such as fire.

The fifth is that retaining sinks might enable us to make incentives 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 these practices bring.

And finally sink credits will be sold and the revenue recycled back into the economy. New Zealand will be a net seller of credits, with a positive balance of about 11 million tons of carbon dioxide equivalent a year. At a world price of say $20 a tonne, that would be $220 million a year, net, into the economy. So there’s another item that will fit into a cost-benefit analysis, if that’s your inclination.

One final, but important point.

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 update policy as our knowledge advances, and address policy for the second Kyoto commitment period beginning in 2013.

That means consultation on policy will continue, this year and far into the future. The problem of global warming with be with us for the rest of our lives, for the lives of our children, and their children, and more. Our response to it will have to be constantly adjusted as our understanding grows and as new technologies emerge.

I urge you to think about the opportunities that future presents – and about how New Zealand, one of the world’s smartest and most capable agricultural nations, can take advantage of them.


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