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Economic modelling backs Emissions Trading Scheme

17 October 2007

Economic modelling backs Emissions Trading Scheme

New economic modelling supports analysis that an Emissions Trading Scheme will help New Zealand meet its international obligations to reduce greenhouse gas emissions while having little impact on economic growth.

Research, which was commissioned by the Emissions Trading Group (based at Treasury) and undertaken by Infometrics economist Adolf Stroombergen, analysed the impact of an Emissions Trading Scheme on emission levels, economic growth and other economic indicators.

Infometrics’ report concludes that during the period between 2008 and 2012, the impact of New Zealand meeting its commitments under the Kyoto Protocol on a number of economic indicators is likely to be around 0.0 to 0.3 percent.

In the longer term, the report says, introducing a price on carbon across all sectors of the economy through an Emissions Trading Scheme is clearly a lower cost option than making taxpayers responsible for meeting New Zealand’s likely climate change commitments.

Minister for Climate Change Issues David Parker said the analysis is pleasing.

“The modelling says the Emissions Trading Scheme will reduce emissions in New Zealand, and it will do so at least cost to the economy.

“It also states that an ETS is better economically than the government just buying all the emission reductions offshore.”

The Minister noted that the report did not make any predictions about the future cost of carbon. It models at $25 a tonne or more because (as it explains) anything less than $25 tonne has such a small macroeconomic effect that it can’t be measured.

“In my view, a higher international price of carbon will only occur if there is international action to reduce emissions, which would reduce competitiveness-at-risk issues because there will be a widespread price on carbon. If there is no such agreement then the international price will stay low.

“Even at higher international prices for carbon, this report says New Zealand’s economy would still grow and we’ll still get wealthier.

“We expect the New Zealand economy will continue to enjoy good growth while the NZETS provides an important tool to help us contribute to international efforts to combat climate change. For example, we might achieve living standards in 2030 that we would otherwise have expected in 2028 or 2029.

“Emissions trading is both an affordable and sensible approach to reduce emissions. Clearly, without an Emissions Trading Scheme, the costs to the country as a whole of reducing emissions would be higher.

“Meanwhile, the government will assist households and businesses to adapt and provide a smooth and gradual transition as the scheme is introduced.

“The analysis does not consider the potential risks in not taking action to reduce emissions, threatening New Zealand's clean green image. Failure to appropriately control greenhouse gas emissions would have trade risks, in addition to serious environmental and political consequences that unmitigated climate change would bring,” Mr Parker said.

Read the Infometrics report here:
http://www.climatechange.govt.nz/nz-solutions/reducing-our-footprint.shtml

Notes:

1. Mr Parker also intends to release shortly two reports on the international carbon market titled: Issues in the International Carbon Market 2008-2012 and Beyond and Functionality in the International Carbon Reduction Project Market. The reports were prepared by Point Carbon, a world-leading provider of independent analysis on carbon markets based in Norway. These will be able to be downloaded from http://www.climatechange.govt.nz/nz-solutions/reducing-our-footprint.shtml


2. Infometrics economist Dr Adolf Stroombergen will present his analysis at a public seminar at Treasury on 1 November 2007 at 12.30pm. For more details, visit http://www.climatechange.govt.nz/nz-solutions/engagement.shtml

ENDS

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