To boldly follow…?

The New Zealand Institute, the politically neutral think tank born of the “Knowledge Wave” conference, has been making waves of a different kind today with its new, and rather idiosyncratic take on how NZ should approach emissions reductions. The report, part of a series on climate change, is called “We’re Right Behind You” [PDF], and advocates a “fast follower” approach to emissions reductions – which apparently means reneging on our Kyoto commitments. The report recommends that:

…it seems appropriate and realistic for New Zealand to undertake to reduce its net emissions to their 1990 levels by 2020 rather than by 2012. We recommend that New Zealand should seek to avoid the obligation to purchase carbon credits associated with the decision to delay achieving its Kyoto committment by 2012.

This effectively means withdrawing from Kyoto, and as you might expect this “considered analysis” has been welcomed by the big emitters. I was interviewed by one of the authors of the report back in June, before HT was published, and in a swift email exchange this morning I promised to read the report thoroughly before rushing to any judgement (unlike some). So, my timely (but not rushed) view of this contribution to the policy debate?

The NZI’s analysis of the issues is deeply flawed, overly simplistic, and their only specific recommendation, the abnegation of our Kyoto commitments, is spectacularly misguided. In other words, I’m not a fan. This will be no surprise to readers of Hot Topic, who will be familiar with my analysis of NZ’s vulnerabilities and strategic options with respect to climate change. Let’s look at a few key points in the report.

Underlying much of the report’s analysis is the stated assumption that the costs of acting on climate change will be high. The only number used in the report is $500 million, being the government’s cost for meeting the projected Kyoto emissions overshoot. Is this really high? Over five years? Let’s assume that the cost of carbon is higher than the government (and this report) assumes, and our liability is $1 billion. Over 5 years, that’s $200 million a year. The economy next year will likely be worth about $160 billion. So $200m is 0.125% of GDP. Given that the economy is expected to grow over the Kyoto commitment period, that cost falls with time. It’s not a high cost, it’s peanuts. (That was the argument of a Treasury official at the ChCh ETS workshop, and though it’s a crude rule of thumb calculation I think it provides a good illustration). Of course, economic costs could be greater (or smaller) than our headline Kyoto commitment as the economy reacts to carbon pricing in the domestic and international market, but the NZI make no case for that. In this case, their “high economic cost” argument, which underpins their strategic judgement, amounts to speculative handwaving.

To illustrate what they see as NZ’s strategic vulnerabilities, they develop two scenarios – Steady As She Goes, and A Perfect Storm. Steady assumes that we don’t do much. International action on climate change is fragmented and slow, and direct impacts of climate change are not driving policy. Storm considers what might happen if there are direct climate impacts in large northern hemisphere economies, and the world takes concerted action. I have no problem with the use of scenarios to illustrate possible change and vulnerabilities – it is, after all, what the IPCC do for the emissions projections that drive climate models – but the problem here is that the scenarios do not adequately illustrate the world of possibilities we confront. If you posit only two scenarios, one that you explicitly take to be status quo, and one relatively extreme, then if you get your scenario choices wrong your strategic analysis cannot be meaningful. You have a false dichotomy. In this case, Steady As She Goes is already removed from the reality of what’s happening, both in terms of international realpolitik, and in terms of its relationship to the emerging impacts of climate change (Arctic ice, anyone?).

Two aspects of this report strike me as being rather “once over lightly”. The first is the consideration of the international scene with respect to climate change policy and business responses (especially the burgeoning growth in carbon trading – and see my link earlier this week to Deutsche Bank’s view that climate change response is an “emerging investment megatrend”), and the second is their discussion of emissions targets and trajectories. The relationship between the two is the crux of future global climate policy and deserves consideration in some detail. This report does not provide that insight.

We’re Right Behind You does make the good point that NZ policy has to be capable of responding to changes in the international perception of the seriousness of the problem. We need to be able to adjust if targets are tightened – or loosened. However, they get the risk analysis wrong by failing to appreciate which way the wind is blowing.

Post-Kyoto negotiations get underway in earnest in Bali next month. To have any real hope of addressing climate change, the international community has to to find a way to get the Kyoto countries round a table with the USA, Australia, India, China and the developing world. With that in mind, the only game in town is “cap and converge”. This means setting a global emissions target for, say, 2050, and then apportioning that around the world – probably by head of population. Countries will then have to design policy (cap and trade ETS’s almost certainly) that will get them to their 2050 target. If that target is – say – 550 ppm CO2e, then the reality will be that the developed world will have to introduce steep cuts soon, while India, China and the developing countries have “room” to grow. Will we get that sort of deal? I think yes, but the economic and political imperatives will probably mean a lax target over 550ppm, or lots of fudge room that amounts to the same thing. From a science perspective, of course, I’d prefer to see 450 ppm CO2 (not CO2e, because we’re there already). I also recognise that getting this sort of post-Kyoto agreement is going to be very difficult, and that does lend credibility to considering scenarios where no deal emerges. But in my view the balance of risk lies in the other direction.

The bottom line? Under any credible international deal, NZ is likely to face steeper cuts sooner, and so taking slow action now is only storing up more difficulty for the future. In that context, the report’s discussions of emissions trajectories and targets is not only simplistic, it fails to take account of reality.

The crux of the report is that NZ should be a “fast follower” rather than a leader in emissions reductions. That is certainly a defensible strategy, but We’re Right Behind You doesn’t effectively make that case, because its one major recommendation is less “fast follower” than “left behind, being lapped”. The idea that we can somehow defer our Kyoto commitment without major international cost is risible. In the context of hard-nosed post-Kyoto negotiations, to take that sort of position would be to place NZ firmly on the outer. NZ has always understood that the only way we can influence our global position is by being a good world citizen. We need multilateral approaches, whether it be to trade or to climate change. Throwing that away would be potentially disastrous. Current policy gets us a seat at the table, and the goal of leading the world in agricultural emissions research and reductions gives NZ a chance to influence at least that aspect of future international policy.
There is however one part of the report with which I wholeheartedly agree:

“The priority now is to commence a more strategic conversation about how best to use this framework [the ETS] and the nature of the most appropriate pathway to reduce NZ’s emissions over time.”

It’s a pity that We’re Right Beyond You is a such a poor contribution to that debate.