Fast follow-up

My critique of the NZI’s “fast follower” report – described as “spirited” by Nevil Gibson in the NBR – has received a swift response from the NZI. We’re Right Behind You was written by NZI chief executive David Skilling and researcher Danielle Boven. Danielle interviewed me about climate issues earlier this year, and has taken the trouble to prepare an extended response to my criticisms. It’s too long to post as a comment, so Danielle becomes HT’s second guest blogger (IPCC lead author Jim Renwick was the first). I have not edited her words, but do offer some comment at the end. Note: Danielle refers in several places to papers 1 & 2. The first paper is the one published this week, the second a forthcoming one which will consider other aspects of climate policy. Over to Danielle….

It may be useful to provide a broader view of our overall argument, as there are some pieces in the first paper which may have been misinterpreted, in part due to the fact that we intend to address additional issues, including policy recommendations, in the second paper.

Let’s get a few things out of the way first

Climate change is real and a serious response is required, meaning substantial reductions in global emissions (on the order of 60-80% below 1990 levels by 2050).There is a best strategy for global response to climate change. New Zealand’s best strategy for navigating the global response to climate change is likely to differ from the global strategy, but must be consistent with it.

The Institute is required to take the perspective of maximizing New Zealand’s economic interests. From that perspective, I recognize that New Zealand is better off in all instances if global emissions are reduced, therefore an international agreement is preferred.

And, finally, the Institute is entirely independent in our views. We are not advocating the interests of big business, and we take a long term perspective on business interests in considering how they deliver against economic outcomes for all New Zealanders

What I observed

Economic activities in New Zealand are not being changed in preparation for a low carbon economy – that is a fundamental, substantial change and even the Green Party is accepting small steps just because they are in the right direction. The proposals put forward to date will not deliver the kinds of emission reduction required to ‘do our share’ in addressing climate change. Politicians are deferring the hard decisions and planning to write a check rather than achieve emissions reductions, but that only gets us through the first commitment period and positions us poorly for the second. Overall, New Zealand is not making the substantial changes required to move toward a low carbon economy and I find that particularly concerning because a shift to a low carbon economy may be required suddenly and rapidly.

What I would prefer to see

New Zealand needs to think longer term than 2012 and begin to position itself for 2050, and a lower carbon economy. Therefore we should take opportunities to reduce emissions at low cost (to be discussed in our second paper); establish a mechanism to manage emissions (ETS works fine); and set some long term (2050) and medium term (5 years out) targets. The long term target should be revised as required based on global action, perhaps also based on developments in technology. I would like to see real change occurring in the New Zealand economy, not plans for the future and change on the fringe of standard activities.

Therefore, what I think New Zealand should be doing

New Zealand must agree a management strategy for emissions reduction (paper 1). In order to maintain our competitive position, this strategy should be contingent on what other countries are doing. The targets must be able to be revised to ensure adaptability as the future is unveiled, but regular and lengthy forward projections are required to create some stability and predictability.

New Zealand should seek to achieve real emissions reduction and economic benefits where they are possible. That means pursuing emissions abatement at minimal cost through timing (paper 1), pursuit of low cost emissions opportunities (many of which require standards and regulation rather than an emissions trading scheme), and the ability to trade emissions credits internationally (possibly with some limit on how global price can skew domestic price)

Where there are economic opportunities, New Zealand should invest and take a leading position (paper 2). That includes investing in research to reduce agricultural emissions. New Zealand should pursue other opportunities where being a leader generates benefits, and we have yet to determine where these are as many of the areas we have examined fail to yield evidence of benefits that outweigh costs, or where the benefits are defensible.

New Zealand should seek to achieve economic growth with limited emissions impact (paper 2). Weightless industries (products and services delivered digitally, see Institute website for further description) not only are where the greatest rates of growth are being achieved, they are also an area where New Zealand should have advantage, and are some of the economic activities with the lowest emissions intensity.

Finally, New Zealand should become truly exceptional in environmental management (paper 2). New Zealand may not be able to become one of the lowest emissions economies in the world, but we can protect our environmental assets exceptionally well, and become known for that. We are half way there, but have some major gaps to address.

What I think about Kyoto and international agreements

We take the perspective of maximizing New Zealand’s economic interests, and recognize that New Zealand is better off in all instances if global emissions are reduced, therefore an international agreement is preferred.

Generally, I agree with the principles on which Kyoto was constructed
International action is required to address climate change
Independent action will harm the actors
Therefore Kyoto was carefully crafted to ensure many actors (>55 signatories, >55% of emissions)
Unfortunately, Kyoto does not look likely to deliver on those principles
Insufficient international action is achieved and emissions continue to rise
Major emitters are not included in the first Kyoto period
Some that are included do not appear prepared to deliver
I would like to see an international agreement that delivers on the Kyoto principles, in a substantial manner that will actually address climate change and over a longer time frame so there is no temptation for politicians to play the game of appearing to make change without actually doing so.

So, why do I prefer that New Zealand not meet the Kyoto obligation by having the taxpayers write a large check to Russia? There are two principles guiding me to this recommendation: the objective is real reduction in global emissions, nothing else will address climate change; the other objective for New Zealand is to maintain firms’ competitiveness over the long term. If one expects the world to transition to a low carbon economy, then New Zealand firms should learn how to operate in such an economy, and the more time they have to make that transition, the better and less costly it will be (consider the ability to transition capital goods as they wear out rather than immediately).

These principles lead me to conclude that emissions reductions that take place inside of New Zealand are preferred. I realise that pure economic theory would have one prefer to buy anywhere in the world to achieve lowest cost, but in the real world there are concerns about veracity, quality, and spillover benefits. Veracity – am I getting these credits really cheap because they do not really involve someone reducing emissions, or maybe they are getting sold several times over? Quality – am I getting these credits really cheap because the economic activity that generated emissions in 1990 was not really justified in the first place and fell over when the supporting political structures disappeared? Or might I be purchasing a sequestering activity that has few protections against releasing the carbon in the future?

I want the New Zealand economy and New Zealand firms to learn how to operate in a lower carbon manner, and that can only be achieved through experience. Paying for emissions reduction activities abroad trains up firms in other countries rather than New Zealand firms, and means that we miss out on the spillover benefits of new technologies developed in the course of reducing emissions.

Therefore, I would argue it is preferable to continue investing in reducing New Zealand’s emissions to purchasing a lot of offsets from abroad. Preferable means what we would rather do, from an economic perspective. If there is an unacceptable cost in political terms, then we write the check. If New Zealanders feel there is an unacceptable cost in terms of reputation, then we write the check. Keep in mind that somewhere in the Kyoto materials there is an expectation that the majority of emissions reductions should be domestic.

So, from the perspective of our economy, I believe that we should prefer to invest the funds and make further progress in emissions reduction within New Zealand, because writing a check does not create an awareness of carbon in the New Zealand economy, it only imposes a cost on the taxpayer. That does not go a long way to creating a world economy that will not damage the atmosphere, and makes no progress in reshaping the New Zealand economy to make our fair contribution.
Danielle Boven, New Zealand Institute, 25/10/2007
……….

Thanks Danielle. There’s much in the above that I would agree with, but there are several areas where I think your analysis is faulty. That has lead you to a conclusion – the “stretch Kyoto” suggestion – which fails to deliver the goals you’re aiming for.

You assert that economic activities in NZ are not changing in preparation for a low carbon economy. It may be the case that certain sectors of the economy are not (yet) taking significant action, but there’s plenty of evidence of change underway. It’s more than a few wind farms – our exporters are being very pro-active in responding to food miles and carbon labelling issues (which are not always consumer driven – they can be competitive action, as Fonterra discovered). Businesses with exposure to international markets are leading the way, and that has changed the political landscape. The National Party’s new Kyoto friendly stance is in large part due to pressure from its business constituency. Roger Kerr doesn’t represent everybody….

You then say that “the proposals put forward to date will not deliver the kinds of emissions reductions required to ‘do our share’ in addressing climate change”, but in the report recommend reducing their effectiveness by de-coupling from the Kyoto process and setting ourselves a cap far less stringent than that envisaged in, for example “50 by 50”. Of course, it’s possible to criticise proposed climate policy on many points of detail, but in most respects the thrust and balance of policy looks to me to be well-judged. The ETS gets a price signal into the economy and gives firms (and to a lesser extent consumers) a framework within which to operate, while the demand side initiatives (efficiency etc) help where price signals are not particularly efficient (or where the expected price signal will not be large enough to drive change). The lack of this framework is one reason why many sectors have been reluctant to take action. Business needs some certainty about the policy environment in which it operates.

The discussion of emissions targets in the report, and your section on Kyoto above, don’t seem to take into account that the ETS has been explicitly designed to link into international trading, and that the “cap” is therefore the overall Kyoto cap. You would prefer to see real emissions reductions in the domestic economy, and as a matter of general principle I agree – it’s better to seek, say, efficiency savings in energy use in plant than simply write a cheque for emissions units. But international linkage achieves two things – it allows “least cost’ mitigation, which is important for many businesses. The second is that it ensures that NZ is in the mainstream of international action – not leading or following – but adopting best practice. This point alone is sufficient to make a nonsense of the reasoning in We’re Right Behind You.

Kyoto is, and always was, a flawed instrument for climate action, made worse by the failure of the USA and Australia to get on board. But my general comments on Kyoto as a step towards an inevitable cap and converge deal remain valid. It is the only game in town, and whether we like it or not, is going to lead into the next phase of international action. And any credible international deal is going to involve steeper emissions reductions for developed countries – whether or not cap and converge is the approach used. The science is compelling on that point.

There’s more I could say – and probably will, but that’s enough for now. I’ve got a GST return to do…

(PS: If anyone from the Emissions Trading Group wants to chip in, feel free…)