Economic and Environmental Challenges New Zealand in a Post Kyoto World Institute of Directors 11 September 2007

2 Post Kyoto Scenarios ► Scenario 1: No global deal to continue the Kyoto Protocol even in the medium term –Diplomatic efforts to reach agreement fail ► Scenario 2: A universally applicable deal is achieved under which: –All emissions are treated equally on a CO 2 e basis, irrespective of industry and country of source –Sequestration is treated as a negative emission on an equal footing –The cap for each country is set relative to GDP

3 Post Kyoto Scenarios ► Scenario 3: A Kyoto-type deal is concluded under which: –Developed economies are subject to an absolute cap –Developing economies are not subject to any cap ► Scenario 4: A two-tier deal is concluded under which: –Developed economies are subject to a cap related to GDP –Developing economies are subject to a cap related to GDP but with a higher level of emissions permitted

4 Environmental and Economic Challenges ► Scenario 1: –Climate change impact on NZ ?? If accept scientists then warmer, wetter in west and drier in east, more violent fluctuations, some sea level change Relatively moderate for NZ because of maritime effect –Economic impact on NZ NZ agriculture will need to adjust locations and methods but it is used to doing that Some impact on coastal and other property risks and costs (ChCh?) Need for better, rational water management (ChCh?) Growing demand for our products especially from Australia

5 Environmental and Economic Challenges ► Scenario 2: –Climate change impact on NZ Moderated –Economic impact on NZ No competitiveness at risk issues Low carbon footprint of our agricultural production will mean it is advantaged world-wide NZ may have comparative advantage in forest sequestration International tourism likely to suffer as visiting NZ carbon intensive. Domestic tourism likely to get boost Transport costs generally likely to rise Overall in medium term not likely to be a great impact on NZ income levels or growth

6 Environmental and Economic Challenges ► Scenario 3: –Climate change impact on NZ Effectively same as for Scenario 1 but may actually be worse What will change is where emissions come from in the world. More from developing economies –Economic impact on NZ Major competitiveness at risk issues for our export oriented and import competing economic activities Industries and agricultural production will over time leak overseas to developing economies Significant impact on NZ income levels and growth prospects

7 Environmental and Economic Challenges ► Scenario 4 –A mixture between scenarios 2 & 3 –Where in the spectrum will depend on how close the cap for developing economies is to the cap for developed economies –If similar caps, then impact likely to be close to scenario 2 –If dissimilar caps, then impact likely to be close to scenario 3

8 Implications ► The economic impact on NZ will depend much on the nature of the deal so we need to mount a major diplomatic effort ► My suggestions are based on my thinking about the situation. Solid research using complex general equilibrium modelling to help us understand the likely impacts of various alternative deals is essential ► If I am right, NZ should be pushing for “all in” and at most concede minimum concessions to developing economies