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Climate Change Policy
Allan Rae
Professional Development Programme for Economics
Massey University
Friday 27 November 2009.
Climate Change – some science
• The majority science view seems to be that:
• Atmospheric concentrations of GHGs increased from 280ppm (preindustrial) to 380ppm today
• Strong evidence led to global temp increase of 0.7C due to human
• By 2100 average global temperature projected to increase by 1.8 –
• May lead to more extreme weather (floods, droughts, storms & rise
in sea levels of 18-59cm)
• To keep temperature increase to 2.0C, GHG concentration should
be kept below 450ppm
• This could require up to a 50% emissions reduction below 1990
levels by 2050
The Benefits of Reducing Emissions
- or, what happens if we dont
• Unchecked, climate change is likely to have
impacts on:
– Sea levels
– Food production & security
– Human health
– Water supplies
– Tourism
– Extreme climatic events
Sea Levels
• More erosion & floods
• Salt water intrusion
• Serious impacts in river deltas and on island
• Migration flows
• All have economic consequences
• Reductions (cf 2050 baseline) in GDP modelled at
less than 0.03%, depending on region
• But more serious for the affected regions within
Human health
• Global warming could increase heat-related health
problems, but reduce cold-related problems.
• Also effect range & abundance of species carrying
diseases, e.g. malaria (may increase due to global
• Economic impacts are gains or losses in labour
productivity, and re-allocation of household
expenditure towards health spending in some regions
• Modelling shows that labour productivity may rise or
fall, as does demand for health services. This impacts
wages, prices of other factors and household incomes.
• Regional GDP changes by -0.6% to +0.5%
• Popular destinations may become “too hot”,
whereas cooler regions may become more
attractive to tourists.
• Will change regional distribution of tourist
expenditures and demands for tourism
• Modelling shows small impacts on GDP: in the
range of -0.02% to +0.01%
Food production
• Ideal climate zone for each crop is different
• Agronomic studies, if assume crop location
remains unchanged, predict substantial
reduction in yields with climate change
though yields may rise in some cooler regions
• Economic studies allow farmer adaptation, so
location of crop & livestock production may
change as farmers seek maximum profit
Findings from some economic food
• Rain-fed farms tend to be more climate-sensitive than
• Livestock farms that rely on heat-intolerant breeds
more affected than farms with a mix of breeds
• Farms in Latin America, India & Brazil more sensitive
than US farms, as in already-warmer climates
• Farmers in cooler areas may benefit
• African farmers may increase profits under a mild
(2.5C) temperature rise, especially irrigated farms provided still have access to irrigation
• In warmer, drier areas farmers may substitute livestock
for crops
Climate change is harmful to mankind
– right?
• Is the majority science view right? Uncertain
• Even if it is, is climate change all bad?
• Above results suggest winners and losers
– I.e. Climate change may bring benefits to some
people and regions
• So will climate change produce a NET global
cost? Uncertain -how large?
Points to Ponder
• Climate change could (probably will?) impose net costs
on the world
• How might that uncertain cost compare with the cost
of reducing global emissions by 20% by 2020 and 50%
by 2050?
– Benefits of policy action are the (partial) avoidance of net
costs of climate change
– This B/C analysis is incomplete and uncertain
• How will the developing world cope with such large
• Can mankind ADAPT to climate change?
– And if so, how might these adaptation costs compare with
those of mitigation (cutting emissions)?
– Given the uncertainties and lack of information, how might
policy be formulated?
How Should NZ React?
• NZ may be a net beneficiary of climate change
• So should NZ be selfish? Or a free-rider?
– Only contribute 0.2% global emissions
• Could be a cost to NZ food exports and tourism if
NZ seen to be free-riding on the efforts of others
• If climate change is a global problem, it calls for a
global solution
– Suggests the more nations support international
policy effort – the more likely to succeed
NZ’s GHG emissions
Million tonnes CO2-ee
removals LULUCF
Between 1990 and 2007, CO2
emissions rose by 35% while CH4
rose by 4.5%
Reflects growth of energy sector
relative to agriculture.
• New Zealand’s greenhouse gas
emissions across all sectors for
2007 totalled 75.6 Mt CO2-e.
• That was 22 per cent higher
than the 1990 level of 61.9 Mt
• Removals of greenhouse gases
in the Land Use, Land-use
Change and Forestry (LULUCF)
sector amounted to 24.6 Mt
CO2-e in 2007. This is an
increase of 35 per cent above
removals in 1990
• Growth of plantation forests is
the major carbon dioxide sink.
The Kyoto Protocol
• Came into force in Feb 2005
• Aims to reduce GHG emissions to 5.2% below 1990
levels by 2012
• Applies to developed countries and countries in
• Countries face a cap, or target
• If dont reach target, can:
– Buy credits from other developed countries
– Or fund GHG reduction projects in developing countries
• NZ target is 100% of 1990 levels.
Projected net emissions over 1st Kyoto
commitment period
• Commitment is to reduce
net emissions to 1990 levels
• 1990: 62Mt CO2-e
• Over the 5 years 2008-2012,
project gross emissions of
76 MtCO2-e per year
• And net annual removals by
forests of 17Mt. CO2-e
• Equates to net annual
emissions of 59Mt
• NZ expected to meet Kyoto
The NZ Emissions Trading Scheme
• The New Zealand ETS came into force in September 2008 with a change in government later in 2008 the scheme was
amended last Wed
• The scheme introduces a price on greenhouse gases to
provide an incentive for New Zealanders to reduce emissions
and enhance forest sinks, and to develop and apply carbonfriendly techniques and technologies.
• Emissions trading provides flexibility in how participants
comply with their obligations, enabling a least-cost response.
– This market-based approach requires emitters to pay for
emissions increases and to be rewarded for decreases.
• The scheme has a wide sectoral coverage – agriculture,
liquid fossil fuels, stationary energy, industrial
processes, synthetic gases, waste and forestry.
• Participants are required to match their emissions by
surrendering an equivalent number of emission units,
while some forestry participants are able to earn
emission units for CO2 stored or removed from the
• Participants acquire emission units by purchasing from
government, another participant or from overseas
sources, and may acquire a free allocation from
Economics of emissions trading
• Idea is to achieve least-cost
• Polluting producer may face a
range of abatement options
• If the carbon price is $20,
producer could profitably
reduce emissions by up to 7
• If her target is LESS than 7:
– The difference can be sold to
other polluters
• If her target is MORE than 7:
– The difference will have to be
A marginal abatement cost curve
• Energy and liquid fuels enter in 2010,
agriculture in 2015
• Free allocation of NZUs to industry and
agriculture made on an output intensity basis
• This means that a participant’s allocation will
vary with output. The baseline will be the
industry average emissions per unit of output.
• Aim is to encourage more emissions-efficient
Agriculture in the ETS
• Agriculture is the largest single source of GHG emissions in New Zealand,
and is a major exporting sector. Agriculture was to be included in the ETS
from January 2013 - now delayed until 2015
– Government agreed to bear the cost of agriculture’s GHG emissions
during the first Kyoto commitment period provided the sector
contributes to GHG mitigation research to develop effective and costefficient strategies.
• The points of obligation within agriculture are processing companies: price
impacts likely to be passed on to farmers
– Compliance costs would be higher if farmers were the responsible
participants, but incentives to reduce emissions would be greater than
if that responsibility rested with processors.
– Obligation point could be individual farmers at a later stage
A free allocation of emission units (NZ Units) will be made initially
90% of the baseline figure (emissions/output)* output
This allocation gradually reduced by 1.3% per year
Will reach zero by 2084!
Aim is to minimise risk of farm production ‘leaking’ to other countries
And to provide time for mitigation technologies to be developed
Implications include:
• This ETS implies that the free ‘permits to emit’
will increase if output increases
• Total emissions also increase with increasing
• If agriculture/industry achieves reductions in
emissions per unit of output (desirable) then
surplus NZ units are likely to accrue, perhaps
for sale to other polluters
Impacts on forestry profits
• C sequestered in radiata increases with age of trees,
and averages 30 tonnes/ha over a 30 year cycle.
• C credits accrue during trees life, but re-paid when
trees harvested (unless replaced).
• Generates early cash flow for foresters
• At C price of $30/t, NPV = $6,400 over the 30 year cycle
• But if C price increases by 7% per year, the NPV
becomes zero
• Is all C really released on harvest??
Forestry new plantings have been falling
new plantings ('ooo ha)
• Bulk of trees planted in
early 1990s will be
harvested by 2020-30
• This will increase NZ net
• If planted
50,000ha/year until
2030, would more than
account for increase in
emissions due to above
forest harvesting
Copenhagen – the next commitment
• NZ has offered cuts of 10%20% below 1990 by 2020,
and 50% below 1990 by
• US : return to 1990 level by
2020, and 80% below 1990
by 2050
• Aust: 14-24% below 1990 by
2020, and 60% below 1990
by 2050
Projections of NZ GHG emissions to
Compared with 1990:
Agriculture up by 29%
Energy up by 55%
Dairy up by 126%
• Net emissions projected to be
31% above 1990 level by 2020.
• From 2021 on, forestry will be
a net source of GHG as early
1990s forests are harvested.
• NZ emissions in 1990 = 62Mt CO2-e
• Projected net emissions by 2020 = 80.4Mt
• If achieve, say, a 15% cut from 1990
– Gives 2020 target of 52Mt CO2-e
– The ‘gap’ by 2020 = 28 Mt
• How can this be met?
By taxpayer: $840 million at C price of $30/tonne
Plant new forests?
By energy & farm sectors?
By 2020 agriculture still gets free allocation of 83% of