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2020 Emission Targets – An Appeal to Reason
Barry Brill
9 August 2009

The government is about to announce a formal “Target” for reduction in New Zealand’s 2020 tonnage of greenhouse gas emissions (GHGs), expressed as a percentage above/below those of 1990.

This Target will be tabled in upcoming negotiations for a post-Kyoto treaty - and may then translate to a formal Liability to purchase that quantity of international emissions permits (Offsets), at the going international price.

How much will that cost? Nobody knows.

Any reductions in New Zealand’s own 2020 GHGs would earn Offsets and obviously help in meeting the Liability - but this source is not likely to be significant unless the Offsets price is extremely high. It is cheaper to buy “hot air” from third-world countries. Economic Models (2) have shown that the least cost way of meeting 2020 obligations is through the government purchasing Offsets from overseas, funded by an increase in general taxation.

Declaring such a premature Target appears to be against New Zealand’s interests, given that:

1. The government has previously committed to a 50% reduction by 2050 – to be achieved by technology changes. Reducing GHGs BEFORE the new technologies emerge can only be achieved by unnecessary pain and sacrifice.
2. In accepting any Liability at all, the government will commit future New Zealanders to a substantial net welfare loss.
3. The quantum of any treaty Liability imposed upon us will be shaped by the government’s negotiating skills, and by perceptions of what is a “fair share” of the burden. A pre-announced target raises expectations and deprives us of negotiating coin.
4. The declared Target will be an “opening offer” to the international community. During the months and (probably) years of subsequent discussions, this initial number will be tortured and stretched until our competitors are satisfied that we have nothing left to give.  The natural response is to bid low initially.
5. A Kyoto replacement can offer no positive benefits - only an arguable mitigation of perceived detriments in the distant future. And that possibility has to be regarded as very remote, considering the attitudes of most countries, Kyoto’s history, and the ever-changing science.
6. New Zealand accounts for 0.2% of global GHGs, and its actions over the next decade cannot change the future global or local climate. (ie no weather benefits accrue). 

The government takes a different view. MFAT prefers to be seen as a fervent supporter of a post-Kyoto treaty, hoping this will boost New Zealand’s reputation for greenness.  In particular, this perception might aid our parallel negotiations for change in the counting rules for land use and forestry (LULUCF).

Cost-Benefit?

Issues of this complexity demand the use of standard decision-making tools, which would be applied routinely in the business sector – primarily cost-benefit assessments, with a range of sensitivities. In setting up the select committee on the Emissions Trading Scheme, the minister (Hon Nick Smith) directed that a quantified cost-benefit assessment be prepared. My submission to that committee offered suggestions on measurements methods and targets (to read the submission click here>>>).

Sadly, it seems the government now intends to abandon the cost-benefit approach as being too hard. Instead, it will look to Economic Models for a vague approximation of first-level costs, and make unquantified feel-good assumptions that there’s bound to be some benefits.

What’s Affordable?

When no confident data is available, the immediate instinct is to limit the downside – “how much can we afford to lose?”

This question must first be answered in dollars. It can then be translated into GHG megatons, percentages, base years, and all the other arcane jargon which keeps thousands of global bureaucrats entertained and employed.

Nick Smith has recently estimated that a Liability of minus 15% would equal a tax increase of $1400 per capita per annum ($112 per week for a family of 4, every year). This has been criticized as an under-estimate, but even if it is correct (in constant 2009 $ terms) it is $5.6 billion in additional government expenditure each year! $56 billion dollars in the first decade alone!

That is plainly unaffordable.

Tax Increases?

Economic Models assume that a carbon price could be introduced by a carbon tax, or by directing some New Zealand firms (excluding the trade-exposed sector) to purchase their ETS requirements for Offsets directly from overseas. These costs will be passed on to the household sector, in increased prices for almost everything.

The induced price rises will be offset by other tax cuts to ensure “neutrality”. Otherwise, the jump in prices will pass into the CPI, leading the Reserve Bank to raise interest rates, which will in turn push up the exchange rate and add to the general misery.

But what if a stretched Treasury allowed some of those Liability costs to go uncompensated? Would households be willing to accept an extra financial burden?

The latter question was recently tested in a USA survey conducted by YouGov for The Economist which “found that 62% of Americans want carbon curbs, but only 30% would pay even $175 a year for them and only 7% would pay $770” (3).

If Americans jibbed at $175 per household, we can expect that (poorer) New Zealanders will have trouble at about $150 per household per annum. That would buy a 2020 Target of about plus 20% (77Mt).

Hon Bill English has declared the government accounts to be in terrible shape, predicting a “demoralising 10-year trudge” to retire deficits, and saying taxes need to be reduced rather than raised. If so, then the dollars spent on the 2020 Target will need to be diverted from the “big three” existing votes – Health, Education and Social Welfare.

Has any minister even thought about consulting with the public on a 40% reduction in vote Health to pay for a 2020 GHG Offsets Liability?

The Green Lobby

Greenpeace is campaigning for every developed country to adopt the same Target  - 40% reduction of 1990 GHG levels. That goal would require New Zealand to cut back to 38 million tonnes of CO2, which compares to the official projection that we will actually use 89 million tonnes by 2020, on a “business as usual” (BAU) basis. So Greenpeace seeks a cut of 57%.

The minus 15% level imputed to Mr Smith equates to 54 million tones – cutting 40% off 2020 BAU levels.

Why did Greenpeace choose the minus 40% number? There is no explanation on their website. How much do they think that would cost? They don’t say and don’t seem to care.

An opposing lobby does care. The Greenhouse Gas Policy Coalition cites work by Infometrics indicating the Greenpeace target would require an extremely high carbon price – perhaps $800-900 per tonne. Such a price level would pretty much shut down New Zealand, slashing living standards and inducing widespread poverty. It is about 30 times the Economic Models’ assumption of $25 per tonne.

Research by Infometrics has also found that:

• Getting rid of all transport vehicles would cut GHGs by 20%
• Closing down all major industry (forestry, dairy, metals) would cut 11%
• Abandoning all non-renewable power stations would add a further 11%.

A New Zealand with decimated income, no transport, and constant power blackouts would still use 37 million tones of GHGs – well above the target urged by the Green lobby. However, the target would undoubtedly be exceeded by indirect effects: with no transport, all the cows and sheep would be killed off - and most of the people would have emigrated.

It’s All About Dollars

Sir Stephen Tindall’s advertisements suggest that the Target will set limits to GHG use within New Zealand. It will not.

By the end of the Kyoto period, there will be no low-hanging fruit left in this country.  More than half our GHGs will be agricultural (although the food will be eaten in other countries), with no technology yet available to change this. It will be much more cost-effective to spend our Liability dollars on Offsets from China or Russia or Brazil.

The threat to the global CO2 limit of 450ppm comes from the huge economic growth of these developing countries, and they won’t sign any treaty unless it guarantees them a flow of dollars from the developed world. Mechanisms to handle this massive wealth transfer are now occupying climate ministers throughout the industrialised world.

China, which so far has supplied 60 percent of traded Offsets through the U.N. “clean development mechanism”, is urging developed countries to set ambitious 2020 goals for reducing their GHG’s.  This is hardly surprising. The higher the aggregate targets, the keener the bidding for Offsets - and the higher the Offset price payable to China.

Economic Models report (at p7) : “New Zealand will meet any future international obligation primarily by purchasing international carbon units rather than by domestic emissions reductions.”   There you have it.  To meet the Target, New Zealand doesn’t get “greener”- it just writes cheques.

Like so many things, the entire 2020 Target debate is about money and who pays – not starry-eyed vows to save the planet.

The Green Party Paper

On 4 August, the co-leaders of the Green Party released a paper, by the Party’s research unit, which detailed “an optimistic and constructive” view of GHG savings which could be achieved by 2020.

This paper pulls out all the stops. It advocates culling 20% of the dairy herd, shutting down power stations, mode shifts from vehicles to cycling and walking, and a host of other policies. All this combined could see a GHG reduction of 14.55Mt.

The Ministry for the Environment has published a consultation leaflet, showing that New Zealand’s GHG emissions in 2020 are projected to be 88Mt on a “business as usual” (BAU) basis. The emissions in the 1990 base year were 64Mt.

So, even the Green Party can’t see any way of reducing 2020 emissions below about 73Mt – which equals a Target of PLUS 15%. Why did they “sign on” to the Greenpeace slogan of minus 40%, before they carried out this study?

The party paper, “Getting There”, also proposes that New Zealand should earn a further 22.55Mt of Offsets by planting and managing forestry. But, that won’t change the cost of the 2020 target. In a post-Kyoto world, any such Offsets are a form of international currency and forest owners will sell them to the highest bidders. Even if the Government confiscates them, the opportunity cost must be counted as part of the cost of the Target. When the trees reach maturity, the Offsets stop – and when they are harvested, the offsets reverse.

The Green Party paper marks a welcome advance from sloganeering to actual argument. But the arguments are clearly unable to back up the slogans.

Post-Kyoto Negotiations

Few believe any new treaty will emerge from December’s Copenhagen talks.  As a first step, the USA must pass its own legislation. The Waxman- Markey bill barely squeaked through the House, despite having a 2020 Target of about zero. It won’t pass the Senate without substantial watering-down. Then, agreement needs to be reached with China, on terms broadly acceptable to India, Brazil and others.

As the G8 recently discovered, developing countries are a long way from any commitment. There is growing support for a series of country-specific plans, rather than a Kyoto-type cap policed by a central authority.

If the government insists on announcing a 2020 Target before the negotiations even begin, it should be based on principles rather than absolute numbers:

1. Meaning of “Fair Share”

The Prime Minister has stated that New Zealand will contribute its “fair share” to any globally-agreed project to reduce GHGs. In the context, this probably means “reasonably proportionate to the contribution made by other countries with which we are usually compared” and the most obvious comparators are the Anglo group - Australia, Canada, USA and UK. As there is an unavoidable relationship between energy use and living standards, the most usable starting point is GHGs per unit of GNP. (Any suggested use of GHGs per capita is hopelessly utopian, and a waste of breath).

2. Scoping the Target

The Ministry has published a leaflet indicating the minimum 2020 targets under discussion (adjusted to 1990 base year) in several comparator countries:

Australia - minus 4%;
Canada - minus 3%,
USA  - plus 0%
EU-27 - minus 20%.

The European figure is driven by the 1997 Kyoto gerrymander which arbitrarily chose 1990 as the base year. In 1991, all of the Eastern European bloc dismantled their communist regimes and most of their uneconomic factories – earning huge quantities of Offsets. In that same year, the UK (and others) brought North Sea gas ashore and closed most of their coal mines. Absent these historical effects, the European target would be in single digits.

These published figures point to a New Zealand “fair share” of about minus 2-3%. But we are a much poorer country, and any “fairness” argument must take this into account.

  The 1990 Kyoto base has no application to either Australia or USA and has been repudiated by Canada.  The appropriate measure for comparable effort by 2020 is the projected 2020 GHGs for each country, on a BAU basis.

3. Linear Progression

Linear progression to the 2050 target makes no sense as technological progress will obviously be heavily weighted to the long end. As is pointed out in the unanimous report of the UK House of Lords Select Committee 2005-06, “the sooner the change, the higher the cost”.

When reductions are dependent on new inventions and yet-to-be-developed technologies, only a fool would accept an obligation to achieve the same rate of results in the next decade as can be gleaned in the 3 decades thereafter

As a country, we have made a formal commitment that, by 2050, we will have reduced our GHG emissions to a tonnage (32 Mt) which is 50% below our putative 1990 level of 64 Mt. As at today, we are at a point 24% above those levels (78 Mt) – so our obligation is to reduce current emissions by 59% over the next 40 years. A straight linear reduction from 2010 onwards would require cuts of 1.47% (1.15Mt) each year. This would produce an aggregate reduction of 14.7% in 2020 – an extremely commendable effort – resulting in a 2020 target only 3.9% ABOVE 1990 levels.  

This linear target would require us to not only succeed in stopping dead all the steady increases we have experienced to date in the transport, energy and agriculture sectors, but actually turn them all around (despite projected population growth) - and then somehow effect reductions at the same rate as we hope to achieve in the 2040s.

4. Target for Agriculture: Research

New Zealand rightly argues that it is unique amongst developed countries, and its unusual characteristics need to be recognized in any government-adopted Target. Our target Liability in agriculture should be expressed as expenditure of a percentage of GNP on research to reduce net agricultural GHGs globally. It is reasonable that the chosen percentage be higher than comparator countries, recognizing our greater dependence on the farming sector.

This is an area where New Zealand can really make a difference. No Kyoto Annex 1 countries have yet adopted reduction schemes or targets for their farming sectors, and 27% of the GHGs of developing countries are agricultural.

A crucial issue for research is whether New Zealand’s pastoral farming absorbs more GHGs than it emits. In an important recent article (4), Owen McShane recounted the heavyweight reports on soil sequestration published by the North American Carbon Program, resulting in US farmers qualifying for CU credits. Another issue which has received too little attention is the fact that methane in the atmosphere breaks down to CO2 within 12 years.

5. Target for Non-Farm Sectors

 Kyoto requires countries to report GHGs annually on a sectoral basis. We know our energy sector still performs well as a result of high reliance on hydro, but is rising sharply. Our target Liability should be no less than comparator countries.

Our transport sector performs poorly as a result of geography, topography and low population density, so we should be less ambitious than comparators in 2020 – expecting to make up ground in future decades when new technologies are fully established.

6. Flexibility

We obviously don’t want to be hoist with a meaningless and expensive Target if there is no result in post-Copenhagen rounds, or if any outcomes prove to be entirely different from Kyoto caps. Any announced Targets must state the assumptions on which they are based, and emphasise that the Targets may change if the assumptions change.

The Minister’s presentation at consultation meetings mentions 4 assumptions:

• Access to Offsets 
• The functioning of international carbon markets
• LULUCF rules
• Other countries committing to similar Targets

The sub-assumptions to these are equally important:

• The price of Offsets will be “affordable”
• They will be buyable by individual firms in a secure, liquid, efficient market
• New Zealand’s amendments to LULUCF will be adopted
• A GHG treaty will be ratified by most countries.

Perhaps the most fundamental assumption is that New Zealand won’t have to spend more than it can afford on meeting these Targets.  In addition to the net expected outlay for CUs, the calculation needs to factor in all the economic and transactional (measurement, enforcement, trading, etc) costs of a GHG regime, and publish the projected economy-wide cost of the announced Targets.

If this assumption is proved wrong by subsequent events, because prices rise to unaffordable levels, then we will be free to adjust the Targets accordingly.

*********************************************

1. The title is cribbed from Lord Lawson’s excellent 2008 book.
2. The Ministry for the Environment commissioned a joint report from  NZIER and Infometrics, each of whom ran numerous scenarios on their respective models. The report dated 20 May 2009, “Economic Modelling of New Zealand Climate Change Policy”, has been referred to the select committee reviewing the Emissions Trading Act. In this paper, the report is referred to as “Economic Models”.
3. “The Economist” 3 July 2009 p.28
4. NBR 3 June 2009:

www.rmastudies.org.nz/index.php/columns/56-columns/347-us-farmers-sell-
their-carbon-credits--how-come

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