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SUBMISSION on New Zealand government preferred climate policy for ratifiying the Kyoto Protocol - 2002

This submission is presented on behalf of The Pacific Institute of Resource Management (PIRM). The Institute is an Incorporated Society concerned with social justice and environmental issues. It publishes the "Pacific Ecologist" magazine.

The Institute wishes to congratulate the Government on its programme of action for addressing the global threat of climate change, especially by its commitment to ratify the Kyoto Protocol.
The timetable for introduction of enabling legislation is commendably tight and we urge the Government not to allow the intervention of an election to delay the process. The Policy Package goes some way toward achieving the desired outcomes, but in our view is insufficient in comparison to the magnitude of the threatened climatic catastrophe.

Comments on several specific Policy areas follow.

Goal and key principles

The Goal expressed is not the explicit and quantified Kyoto Protocol goal. We are concerned that this represents a lessening of commitment.

External and Internal Factors

We applaud the recognition of the need to look beyond the first commitment period in any planning. This recognises that achieving Protocol requirements is likely to become more difficult as the requirements increase in stringency. It also dispels the false sense of security that may arise from our positive emission credit balance in the first period.

The recognition of universal responsibility to contribute to reducing NZ's greenhouse gas emission is important but the proposed mechanisms may be unable to make this responsibility manifest due to their complexity. The administrative costs of ensuring broad spread of responsibility for emissions while not penalising vulnerable social groups or "competiveness-at-risk" enterprises seem likely to be burdensome and to siphon funds away from activities directly addressing emission reduction. It seems unlikely that an entirely "fair" system will result in any event.

Key Points of Package

The proviso that none of the new policies will be implemented unless the Kyoto Protocol comes into force is disappointing. It implies that these initiatives have no intrinsic worth outside of the particular framework of the Protocol. In the event of the Protocol failing to come into force, New Zealand would be in some respects contributing less to greenhouse gas abatement than several countries that have distanced themselves from the Protocol.

Building upon the foundations of existing policies is of course sensible with many policies addressing matters that are central to climate change concerns - e.g. NEECS, Transport Strategy, Sustainable Energy Strategy.It is important that greenhouse gas emissions concerns inform a wide range of policies so that incrementally and synergistically they may contribute to reducing emissions.

Foundation Policies

The explicit recognition of greenhouse gas issues within the context of business innovation is excellent and we urge continued support for the NZ Business Council for Sustainable Development. There should be early introduction of a Government sanctioned/operated certification programme that identifies NZ products that have been produced using a significant component of renewable energy (capitalising on our current relatively high proportion of renewably-sourced energy) and/or that have otherwise minimised greenhouse gas emissions during production. This "branding" of NZ products would significantly supplement our existing clean and green image.

It is essential that the programmes of the NEECS receive all funding required to enable achievement of the high level goals of the Strategy. This is the main tool that is not dependent upon new technology or novel market structures and accordingly has a good guarantee of success. Early results from the Strategy indicate that it is capable of producing significant benefits in aspects such as public health through improvement of the domestic environment of low-income households. The beneficial returns from investment in NEECS are such that expansion of its application is indicated. In particular its projects have huge potential through careful targeting to redress adverse effects of price/taxation instruments on vulnerable groups in the shorter term and to provide a vehicle for universal revenue recycling in the longer term. The importance of generous funding of this Strategy cannot be overemphasised.

Our submission on the renewable energy consultation is appended as a separate document.

Transport is a major and fast growing contributor to carbon dioxide emissions. It is disappointing that there is little mention of this sector in the Policy Package beyond reference to the NZ Transport Strategy that is still in development. The large vested interest in high emission transport modes in this country, supported as they are by powerful lobby groups, makes it very uncertain that the NZTS will deliver significant reductions in emissions. Rather than relying upon unformed policy, the Policy Package should include explicit targets for emission reduction and renewable energy use in this sector that the NZTS will be obliged to help deliver. In particular there should be promotion of non-polluting and low emission transport modes - walking, cycling, rail transport - embedded within overarching policies. The transport sector has shown itself to be insensitive to price signals. A price on carbon may produce some abatement in response but there is a need for regulations to be employed if the sector is to deliver emissions reduction commensurate with its size.

The NZ Waste Strategy is likely to deliver significant reductions in greenhouse gas emissions as assessed in terms of the Kyoto Protocol - i.e. relative to 1990 emission levels. This technical reduction does not address emissions in an absolute manner. The varying ability of facilities to monitor and manage emissions and the presence of many landfill sources imply that there is a need to focus specifically on waste disposal sites in the Climate Change programme. Making such sites liable for emissions charges will ensure that they are not conveniently forgotten and targeting them for revenue recycling by way of projects will help address monitoring and management shortfalls. There may be beneficial side effects, for example the use of more landfill emissions as an energy resource. The plan for early review of the Waste Strategy is commended.

The preferred approach to synthetic gases (HFCs, ShexaF, PFCs) may be adequate for the quantities of these gases likely to be emitted, but there needs to be a monitoring mechanism to ensure that emissions are held at an "unavoidable" minimum. This monitoring must encompass the whole life of the agents. Refrigerants in particular are likely to finally be exhausted to the atmosphere in situations that are outside of the scope of Industry oversight when the products in which they are enclosed have reached the end of their economic lifetimes. These agents require measurement of quantities imported, auditing within the refrigeration and air conditioning industry and specification in waste management strategies. Targets for leakage should be set at low levels. Growth in the use of these agents is obvious with increasing commercial, domestic and motor vehicle air-conditioning and widespread use of expanded polystyrene as a building product. The manifestations of climate change seem likely to accelerate this growth.

Research into many aspects of climate change is of fundamental importance. This includes basic research on climatic processes and history, emission reduction and renewable energy technologies, carbon sequestration and climate change mitigation strategies. The biological basis of much of New Zealand's economy and our vulnerability to adverse climatic events make such research compulsory. While there is some recognition of the importance of work in these areas by increased directed funding, this funding should be significantly increased and attention given to building increased research capability through for example tertiary education programmes. This area is more important economically, socially and environmentally than some other endeavours that are being targetted for growth in just such a broad based manner.

Increasing public awareness of climate change issues underpins individual changes in behaviour that are required for emission reduction strategies to be successful. The Package incorporates much activity in this area. The need for such education has been shown by the results of the previous consultation round in which a desire for more information was expressed by a significant proportion of respondents. In fact it is such a large element in many of the attendant programmes such as NEECS that some care may need to be taken to prevent excessive or overly prolonged commitment of resources to this area. Knowledge of climate change and techniques available to reduce its adverse effects will emerge as a natural consequence of activities across the field and it is likely that there will be progressively less need to directly promote education. This should be recognised so that agencies established for education and information dissemination can be appropriately sized and funded to fit the milieu.

The adaptation measures as outlined in the Cabinet Paper make a very good start in this important area and the concentration on Local Government activity is appropriate. The benefits from employment of a little careful foresight are likely to be huge.

The Resource Management Act and its amendment is a rather fraught area. Changes to the Act and its implementation must not be allowed to erode its fundamental principles. Changes which encourage attention to certain matters such as urban form, energy efficiency and renewables will be of value and will restore some of the advantages of the Planning mechanisms that preceded the RMA.

It is anticipated that the Foundation Policies will produce one third of the required emissions reduction required for NZ to meet its target. There is a single paramount imperative: there must be an explicit Budgetary commitment to full funding of foundation policies, in particular the NEECS.

New Policies

We dispute the contention that there is no need for a price measure prior to 2007. If two-thirds of NZ emission reductions are to come from new policy mechanisms such as Projects and Negotiated Greenhouse Agreements, what is the source of revenue for the expenditure that these mechanisms will require? If it is from general Government funds this should be signalled as it will presumably have repercussions in potential expenditure in other areas of Government responsibility or will require the Government to borrow money. If it is to be covered by allocation of Emission Units, this would appear to be a risky strategy in that the value of such units is unknown and in the event of failure of the Kyoto Protocol to establish an international market, they may be valueless.

In the latter event, Government would presumably hold some liability for having issued these global warming junk bonds. In any event the uncertainty regarding the value of EUs would be a disincentive for businesses to enter into either of the new mechanisms. Introduction of a price measure prior to 2007 would provide revenue to fund the full range of climate change responses and thus ensure that we are in an advantageous position entering the first commitment period. In the event of Kyoto Protocol failure, we will still be advantaged by improved efficiency of energy use, enhancement of our environmentally responsible image in international markets, improved housing, better transport and an increased ability to withstand the deleterious effects and capitalise upon the beneficial effects of climate change.

There are problems inherent in the division of the economy into four groups. Many of these are recognised in the Policy Package and the vast number of other documents that precede and support it. The way to resolve problems such as determining true "competitiveness-at-risk" status and defining "additionality" in NGAs remains largely a mystery. In terms of the first key principle, it may be advisable for some industries to relocate overseas if this allows them more immediate access to renewable energy or lower emission technology. There may be some enterprises that have been established under economic or political conditions that are no longer relevant, or that are based upon non-renewable resources that are approaching exhaustion. There is always of course the awkward point that this may be globally beneficial in reducing the emissions cost of transport to markets. CAR status would need to be used with extreme discretion and could be politically a very delicate issue.

The exemption of the Agricultural sector from responsibility for the 55% of our emissions that it produces is difficult to accept, despite the very strong arguments for exemption. The reduction in sheep numbers following subsidy withdrawal does not appear to have dealt a fatal blow to the sector and has already made a significant contribution to reaching our KP targets. It is apparent that shifts into different areas of agricultural production can be highly beneficial in terms of greenhouse gas emissions and reducing stock numbers may be in no way other than arithmetical a negative activity.

Despite a large amount of investigation over many years, there is very little conclusive data regarding the operation of emission charges or trading as economic instruments for reducing greenhouse gas emissions. The Preferred Policy Package contains almost nothing about these matters other than proposing their deferral. There is no information about whether emissions charges or domestic emissions trading or a mixture will be used. The economic modelling that has been done in this area has taken little account of the effects of the proposed new policy mechanisms. There appear to be some unanswered fundamental questions regarding the operation of price measures. Firstly there seems to be an assumption that the imposed cost of emissions will be borne and thus will generate revenue. This is contrary to the aim of the cost measure which is for the extra dollars not to be spent; for it to deter spending and preferably to reduce expenditure in carbon-emitting activities below the starting baseline by changes in behaviour.

There is no specific information in the Package regarding how any revenue raised by price measures would be spent. In the Climate Change Working Papers most of the discussion and modelling suggests that revenue will be recycled through tax relief or used for repayment of Government debt. Although use of such revenue to fund emission abatement activities is mentioned, there does not appear to have been modelling of the effects of such useage. It is important that the Government undertakes modelling of the overall effects of the new mechanisms so that businesses and taxpayers can be reassured of the sustainability of these proposals.

It is unclear how a price measure will contribute to emission reduction when it is proposed to levy it upon the sectors in which it will have the least impact, and to offset any impacts it may have by revenue recycling to reduce tax rates. The sustainability of any double dividend of lower emissions and lower taxes is distinctly suspect given the likely fate of the untaxed money to be spent in consumption or invested in a growing economy. Neither the outlets for consumer spending nor areas for investment are likely to be greenhouse gas emission-free. A larger national economy will require greater relative emission constraints to achieve emission reduction targets. The Kyoto Protocol targets are not expressed on a per capita basis.

The pricing of commodities to discourage consumption is totally contrary to the operation of any conventional market. It remains unclear how such a system can function in practice. There is no good model in operation although measures to reduce cigarette consumption show some similarities. The emergence of a Black Market in such a situation is not an encouraging outcome. New Zealand also has experience with the artificially constructed electricity market. Again, the results have not fulfilled the intent of establishing this market. The propensity of markets to produce derivatives and intangibles unrelated to the primary commodity is capable of completely perverting the original purpose and can add significant costs - witness the possibly unsustainable prices paid for access to blocks of customers in the electricity market. This market has required continual attention and threats of re-regulation to keep it in any sort of order. It does not augur well for the effective operation of any form of domestic emissions trading.

Nonetheless, if the Kyoto Protocol comes into force we will see an international emissions market in operation. It would seem prudent to allow this market some considerable time to bed in before exposing the NZ economy to its vagaries.

The uncertainties surrounding the proposed economic instruments are such that other alternatives should be seriously considered, regardless of the resources that have already been expended upon the favoured market approaches. One such alternative that does not appear to have been analysed is the use of a tax rebate to reward emission abatement. If used in conjunction with a broad-based tax to provide revenue specifically for funding of climate change measures, this would seem capable of providing strong and universal incentives for emission abatement within existing and well-proven systems. It would not require division of the economy into artificial sectors and would allow normal business practices to guide decisions without the distortions that arise from direct exposure to emissions costs. It need not preclude participation in an international emissions market if this proved to operate well in the future. The fact that there is an "embedded" greenhouse gas emission component in all consumer goods - the methane and nitrous oxide from agriculture in most foodstuffs, the carbon dioxide from manufacturing and transport - suggests that GST would be an appropriate tax to employ for this purpose. The effects of a 2.5% increase in GST is known from direct past experience. The early introduction of such a taxation instrument with revenue recycling to the taxpayer in the form of subsidisation of energy efficiency measures could truly produce a double dividend in reduced emissions and lower energy bills. Introduced in increments to allow expansion of the energy efficiency business sector and moving progressively from targeted to universal efficiency and renewable energy projects, such a scheme would prepare NZ for future Commitment Periods, and put us in the vanguard of nations with technologies and expertise available for sale internationally.

The decision of the Government to take responsibility for all sink assets and associated risks and for harvest liabilities is commended. The explicit recognition that sinks are only a stopgap measure is also applauded. Given this recognition, it is presumed that the rationale for encouraging the planting of production forest sinks is as a temporal buffer to allow more time to address problematical emissions such as those from agriculture. As this is introducing a distortionary element into the forest industry it is viewed with circumspection. It would be preferable if there was increased planting of production forest to meet the needs of increased domestic manufacturing of forest products and as a feedstock for biofuel production.

We support the proposal to create incentives for non-harvest sinks. This will, have large benefits in aspects of the environment such as biodiversity, water quality and a host of others. The decision not to account for overall land use is disappointing and along with the decision to use the upper limits in definition of forests suggests an intent to "fudge" our greenhouse gas status. It may however be largely accounted for by the difficulty of measurements. We urge the continuation of research into emissions assessment relevant to section 3.4 of the Kyoto Protocol as this will help guarantee our integrity in future climate change negotiations and expertise gained in this area is likely to be highly sought-after internationally. There should be an expressed intent to work toward use of S3.4 as a motivation for continued efforts in pest control, water quality improvement and fostering of a conservation ethic.

Thank you for the opportunity to make this submission.