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The Kyoto Protocol

19 July 2006

The Economic Reality for New Zealand

2

Content

Kyoto Protocol Framework and Country Commitments

New Zealand – Economic Cost of achieving target is unacceptable

New Zealand is set to miss its target

Fiscal Cost for New Zealand range from:

Minimal, if Kyoto collapses

NZ$3 billion, if Kyoto succeeds

3

Kyoto Protocol - Status

Ratified, with Commitment

Ratified, no Commitment

Ratification Pending

Ratification Declined

Not a party

4

515

1339

1872

75

4057

1214

6893

4179

0

1000

2000

3000

4000

5000

6000

7000

8000

US Australia EU Japan Russia NZ China India

To

tal

GH

G E

mis

sio

n (

mt

CO

2 eq

uiv

ale

nt)

Total Emissions in 2003

Not Ratified

Ratified, with Commitments Ratified, No

Commitments

Emission Transfer

4237

1187

3046

61

(1994 Data)

5

Kyoto Target for a Typical Country with a Commitment

CO2 Emissions

(in tonnes)

20001990 2008 2012 2018

???

1st Commitment Period

2nd Commitment

Period

Target5%

•buy units

•or earn units

•or carry forward with 30% Penalty

Actual

Forecast

6

0

10

20

30

40

50

60

70

80

90

100

110

120

130

140

150

GH

G E

mis

sio

ns (

mt

CO

2 e

qu

ivale

nt)

-

10

20

30

40

50

60

70

80

90

100

110

120

130

140

GD

P (

NZ

$b

illi

on

)

New Zealand’s Emissions

1st Commitment

Period

2nd Commitment

Period

Actual GDP

Forecast GDP

Actual Net Emissions

Forecast Emissions

Target

Requires:

• Change in economic structure

• Increase in energy efficiency

7

39.9

16.6

20.4

4.42.3

-9.2

0

10

20

30

40

50

60

70

80

90

Agriculture Energy Transport Industry Other Sinks

GH

G E

mis

sio

n (

Tg

CO

2 e

qu

ival

ent)

New Zealand’s Emissions by Sector 2010

-9.2

Target: 61.6Excess 12.8

(4)

(4)

(1)

(4)

To close the gap:

4 + 4 + 1 + 4 = 13

(mt

8

Electricity Sector

Wholesale Electricity

Price

(c/kwh)

Gwh per annum

12

8 Coal

Coal

Wind

WindDemand

A tax on coal could increase electricity prices by 25%

9

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Kil

om

eter

s (m

illi

on

)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

Em

iss

ion

fro

m C

ars

(mt)

Transport

1st Commitment

Period

2nd Commitment

Period

Actual emissions from cars

Actual car-kilometres

Forecast emissions from cars

Forecast car kilometres

Required to:

• Drive less

• Use smaller cars

• Increase energy efficiency

Kil

om

etre

s

10

Example

Holden 6 Cylinder Fuel Consumption

0

5

10

15

20

25

VH 19813.3L

VK 19843.3L

VL 19863.0L

VN 19883.8L

VP 19923.8L

VR 19933.8L

VS 19953.8L

VT 19973.8L

VTII 19993.8L

VX 20003.8L

VXII 20013.8L

VY 20023.8L

Model

Litre

s/1

00 k

m

1000

1100

1200

1300

1400

1500

1600

Mass (kg

)

MassCity

Highway

11

Forestry

Planting Year

Are

a P

lan

ted

(000

ha)

Kyoto Protocol Signed 1998

4 mt CO2 requires reduction in deforestation

of 5,000 ha

12

Likely Outcome

Political recognition that the cost of complying is extremely high

Electricity prices, reduced travel, reduced conversions from forestry

New Zealand likely to miss target

Government’s latest figure 64 million tonnes CO2

13

Net Excess Emissions During the First Commitment Period (M tonnes CO2)

2010

First commitment period

2008 - 2012

Gross emissions 83.6 418

Sinks (9.2) (46)

Net emissions 74.4 372

Assigned amount 61.6 308

Excess emissions 12.8 64

14

Price of Emission Units

Emission Trading Schemes

Settlement Price depends on expectations for CP II

Low, if low expectations for CP II

High, if high expectations for CP II - $US30 per tonne

Flexibility mechanisms

US $ 6 per tonne CO2 last year

15

Fiscal Cost of Buying Compliance

Excess Emissions Quantity x Price of Unit = Fiscal Cost

64 million units

x

USD/Unit

$0

$6

$30

NZD/Unit

$0

$10

$50

=

NZD

$0 million

$640 million

$3 billion

If Kyoto fails

If Kyoto succeeds

16

How Did This Happen?

Belief that energy use was inefficient

Belief that new economy would see us right

Belief that we could avoid leakage and reduce emissions

Belief that we would have credits from forests

17

Conclusion

The growing economy and population have generated a rapid growth in emissions over the last 25 years

As long as economic growth continues, the same pattern is likely to continue in the future

There is no realistic set of policies which would BOTH:

Reduce the total level of emissions back to 1990 levels, AND

Be consistent with continued economic growth

The costs of meeting the target are likely to be unacceptable to New Zealanders

That leaves us with a fiscal cost:

minimal, if the Kyoto Protocol collapses

as high as $3 billion, if the Kyoto Protocol were to succeed