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New Zealand's Billion-dollar Question

Jason Funk

When New Zealand's Labour government signed on to the Kyoto Protocol in 2002, policy projections suggested that the country would meet its emissions targets with ease, allowing it to sell surplus 'credits' into the global carbon market at considerable gain. Not so, say revised reports issued by New Zealand's Climate Change Office this year. Due to a stronger than expected economy and some fine print concerning the inclusion of forest sinks in the Kyoto Protocol, New Zealand now finds itself facing a Kyoto debt as large as half a billion dollars (NZ). Ecosystem Marketplace considers whether the Kiwis will jump ship or stay the course.

When New Zealand's Labour government signed on to the Kyoto Protocol in 2002, policy projections suggested that the country would meet its emissions targets with ease, allowing it to sell surplus 'credits' into the global carbon market at considerable gain. Not so, say revised reports issued by New Zealand's Climate Change Office this year. Due to a stronger than expected economy and some fine print concerning the inclusion of forest sinks in the Kyoto Protocol, New Zealand now finds itself facing a Kyoto debt as large as half a billion dollars (NZ). Ecosystem Marketplace considers whether the Kiwis will jump ship or stay the course. Facing a projected deficit of 36.2 Mt CO2-e at the end of Kyoto's first commitment period, some disgruntled Kiwis are asking whether Kyoto is penalizing their economic success and pre-1990 stewardship. A report released by the New Zealand Climate Change Office in July reversed earlier predictions that New Zealand would have about 33 Mt of carbon credits to sell in 2012. Instead, one revised scenario estimated that New Zealand would fall short of its Kyoto commitment by over 36 Mt. At projected carbon prices, that could shift New Zealand from a credit that would have been worth nearly half a billion dollars (NZ) to an equally large deficit. In a document, New Zealand's Ministerial Group on Climate Change stated: "This updated forecast shows a substantial turnaround from the projections calculated in 2003 (surplus of 55 Mt CO2e) and 2004 (surplus of 32.6 Mt CO2e). The decrease from previous projections is due primarily to an increase in projected emissions from the energy and industrial processes sector and a decrease in the removals via forest sinks. The decrease in removals is due to the quantification of previously unknown risks concerning scrubland and updating of previous estimates with improved scientific information."

Kyoto Politics

Minister Pete Hodgson, leader of the Ministerial Group on Climate Change, attempted to put a positive spin on the results: "The good news for New Zealand is that significant savings are available from the adaptation of readily available emissions reductions technologies and practices. We know what we need to do to make our economy less emissions intensive, more energy efficient and more competitive. Being one of 150 nations to have ratified Kyoto means we have many options to meet our targets at least cost." (see the full document) But politicians from the National Party–the leading contender to the incumbent Labour government–have opposed New Zealand's commitment to Kyoto on the grounds that "New Zealand [is] carrying an unfair share of the burden arising from climate change." Their official policy is to "Withdraw from the Kyoto Protocol from 2013 if New Zealand makes commitments to reduce emissions beyond those binding trading partners like Australia and the United States." In the meantime, National counts on selling 100 Mt worth of credits during the first commitment period. There has been no revision of National's position since the emissions estimates were revised, but it is likely that a carbon deficit would strengthen the case for New Zealand's withdrawal under a National government. Christian Judge, press secretary for Minister Hodgson, answered emphatically when asked whether the revised estimates would affect Labour's stance toward Kyoto: "No. Under a Labour government, there is no threat of withdrawing from Kyoto. Kyoto provides us with a least-cost way of doing it and a way of making money. The costs of failure of climate change policy for New Zealand would be many times greater, with flooding, crop losses, and so on. The New Zealand economy is dependent on having a stable temperate climate and we can't afford to lose it. If you look at the recent impacts of drought on farmers in Australia, for instance, you get a sense of the stakes involved." Kyoto could figure in the upcoming national election, slated for September 17. The National Party will be attempting to gain advantage in a coalition government. Thus, if the incumbent Labour Party loses its hold, the future of NZ climate policy will be cast into doubt. This would throw a spanner in the works of several policy initiatives that are in the pipeline.

Sticks and Carrots

Two of the most controversial initiatives are a carbon tax and payments for carbon sequestration on private lands, in the form of credits. The carbon tax has already been approved and will come into effect at the beginning of 2008. The initial price of carbon emissions will be NZ$15 per ton, and is allowed to rise no higher than NZ$25 per ton by the end of the first commitment period in 2012. Labour has pledged to make the tax "cost-recoverable"; that is, all revenue from the tax would go toward reducing other taxes. The National Party, however, "is totally opposed to the introduction of a carbon tax in 2008 as proposed by Labour." According to the party's website, "It is unnecessary to meet New Zealand's Kyoto obligations because of the forest credits and is just an excuse for expanding Government revenue. It will impose significant additional costs on the New Zealand economy and will undermine our competitiveness." The forest encouragement scheme, called the Permanent Forest Sinks Initiative, is an attempt to stimulate carbon sequestration on private lands through land use change. More specifically, it lays out a process for devolving carbon credits to landowners who set aside land in continuous-canopy forest. Landowners would then be free to sell these credits on the international market, starting in the first Kyoto commitment period. While many New Zealand forest owners have their eye on the bill, it is currently locked up in the committee process, where it probably will remain until after the election.

No Simple Sinks

Many big landowners would welcome the inclusion of forest sinks in New Zealand's carbon strategy, but negotiations around forest payments will undoubtedly be difficult. After seeing its carbon projections go from a half-billion-dollar surplus to a half-billion-dollar deficit, the government may have its back against the wall, providing opportunities for private enterprises. The current carbon tax scheme would provide an upper bound on the cost of carbon in NZ. Below this ceiling, private enterprises could negotiate contracts for sequestration that costs less than the tax. Otherwise, businesses can simply pay the tax and let the government decide how to recover the carbon. In a private market, third-party brokers may emerge to manage contracts and risk between businesses and landowners. The Initiative sounds fine in principle, but the details of distributing credits remain problematic. When the government announced that it would initially hold all the credits for NZ, the forest industry went into an uproar. With over 1.7 million hectares of forest plantations (source: Statistics New Zealand), the industry stands to gain a huge windfall if it can access forest credits. But how much of this land qualifies as Kyoto forest is unclear. By retaining the credits, the Labour government claims to be protecting foresters from the penalties of past harvests. If landowners end up owing debts for past harvests of timber, they could suddenly face an enormous devaluation of their land, at a time when land speculation in NZ is running high. Such landowners may blame Kyoto for their losses.

The Maori Case

The indigenous Maori people–significant landholders on the North Island–would be especially hard-hit by these debts. After decades of fighting to recover their lands from the Crown, they hope to utilize the lands to bring returns to their tribes. Tribal authorities struggle to balance economic returns with maintaining the cultural value of native habitats. But the tribal land tenure structure–with hundreds of owners holding shares to each parcel of land–makes land-use decisions difficult. Many Maori lands have reverted to closed-canopy forest, either through deliberate set-asides, through lax management, or because they were tied up in courts. Now Maori landowners would like to earn sustainable incomes from these lands, only to find that they may face restrictions on clearing existing forests. Any restrictions on clearing forests will reduce management options for Maori. "For the most part, Maori land is not sellable," says Rakei Taiaroa of the Tuwharetoa Maori Trust Board, a major tribe in the central north island. "That is because of cultural value associated with the land and because the ownership structure makes it difficult to sell. All around us, we see forest lands going on the market for development. That option is not open to us–we're here to stay." Unfortunately, the stewardship practices of the past are unlikely to receive rewards in the future. "We were putting in native forest, such as buffers around streams back in the '70s, long before it became environmentally fashionable. We did it as part of our tikanga–our traditional ethics of guardianship of our resources. Now those forests are in great shape, but we'll get no credits, no other benefits from them." In terms of permanent forest contracts, the government has limited options in dealing with Maori lands. Because it is difficult for the government to bring liens against Maori land, the government has no stick to back up its incentive carrot. If landowners don't comply with the contracts, there is little the government can do. Many of the lands are so marginal that monitoring costs could outweigh the value of the carbon credits they generate. In this case, Maori ethics and government goals are in alignment, but mistrust on both sides could undermine any agreements.

Decision Time

What lies ahead for New Zealand? On the one hand, the National government had planned to use forest credits to offset its emissions in the first commitment period. "National's favoured approach, if emission limits are agreed to by all internationally, is a system of tradable emission permits where foresters get credits and emitters debits. This system would give the flexibility for the economy to find the least cost way of ensuring compliance with emission targets and would provide economic incentives for activities like planting forests and greater energy efficiency that contribute positively to climate change." (Source: National's 2005 Climate Change Policy). If it perceives that New Zealand is carrying more than its fair share, the National government has threatened to withdraw from Kyoto. The revised emissions estimates only strengthen this threat. On the other hand, Labour pledges to follow through with its strategy. "The latest estimates certainly came as an unpleasant surprise. But they only add importance to our policies already on-line, as well as further actions taken across the board. We're waiting for an international review of the estimates, and then we'll have a better idea of where the actual numbers fall," says Christian Judge, Press Secretary for Minister Pete Hodgson. "But we're taking a bigger picture approach. We already have things in the works across a whole range of actions–energy efficiency, waste reduction, land use–each of which will address part of the problem Internal and external politics continue to change the dynamics of the situation. In response to the recent emission projections, the Climate Change Office has undertaken a review of current policy. The review will chiefly address whether New Zealand's policy strategy needs to be changed or updated, whether emission reduction obligations should be devolved, and what mitigation strategies could best reduce the emissions deficit. The review, due to report by 31 October 2005, could stimulate changes in either a Labour- or National-led government. Furthermore, the National Party could back down from its challenge to Australia and the United States to carry their share of the climate burden, now that those countries have signed onto their own climate change pact. After struggling for the past decade to improve their economy, it is clear that some New Zealanders are not happy about what they perceive as the added burden of Kyoto. As the election approaches in September, they must decide how to weigh that burden against the value of New Zealand's future environment. What's more, given the well-publicized potential cost of Kyoto to New Zealand, the country's continued participation in the treaty could effectively hinge on the results of this very same election. Jason Funk reports for Ecosystem Marketplace from Wellington, New Zealand. He may be reached at jfunk@stanford.edu. First posted: August 23, 2005

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