T +1 (202) F +1 (202) K Street NW Suite 450 WASHINGTON DC United States of America T: +64 (4) F: +64 (4) Level 2, 88 The Terrace PO Box WELLINGTON New Zealand T +33 (1) F +33 (1) Rue Claude Chahu PARIS France Copyright Castalia Limited. All rights reserved. Castalia is not liable for any loss caused by reliance on this document. Castalia is a part of the worldwide Castalia Advisory Group. The Kyoto Protocol 19 July 2006 The Economic Reality for New Zealand

1 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

2 Kyoto Protocol - Status Ratified, with Commitment Ratified, no Commitment Ratification Pending Ratification Declined Not a party

3 Total Emissions in 2003 Not Ratified Ratified, with Commitments Ratified, No Commitments Emission Transfer (1994 Data)

4 Kyoto Target for a Typical Country with a Commitment CO2 Emissions (in tonnes) ??? 1 st Commitment Period 2 nd Commitment Period Target 5% buy units or earn units or carry forward with 30% Penalty Actual Forecast

5 New Zealand’s Emissions 1 st Commitment Period 2 nd Commitment Period Actual GDP Forecast GDP Actual Net Emissions Forecast Emissions Target Requires: Change in economic structure Increase in energy efficiency

6 New Zealand’s Emissions by Sector Target: 61.6 Excess 12.8 (4) (1) (4) To close the gap: = 13 (mt

7 Electricity Sector Wholesale Electricity Price (c/kwh) Gwh per annum 12 8 Coal Wind Demand A tax on coal could increase electricity prices by 25%

8 Transport 1 st Commitment Period 2 nd 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 Kilometres

9 Example Mass City Highway

10 Forestry Planting Year Area Planted (000 ha) Kyoto Protocol Signed mt CO2 requires reduction in deforestation of 5,000 ha

11 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

12 Net Excess Emissions During the First Commitment Period (M tonnes CO2) 2010 First commitment period Gross emissions Sinks(9.2)(46) Net emissions Assigned amount Excess emissions12.864

13 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

14 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

15 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

16 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