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Clarky's Comment - July

The COP21 in Paris will be held this year from 30th November to 11th December. The internationally agreed objective of COP21 is to achieve a new international agreement on climate, applicable to all countries, that will keep global warming below 2°C. All countries are expected to nominate their own targets for greenhouse gas reductions that will contribute to this objective.

Climate Change Minister Hon. Tim Groser recently announced the target New Zealand will take to Paris as a 30% reduction below 2005 levels by 2030. The previous target of 5% reduction below 1990 levels (66.7 Mt CO2 equivalent) by 2020 equates to annual total gross emissions of 63.4 Mt CO2 equivalent in 2020. The original 5% below 1990 by 2020 target equates to around 3 Mt / year reduction in gross emissions if starting mitigation from today, whereas the 11% below 1990 by 2030 (i.e. the stated 30% below 2005 by 2030) is around a 1.3 Mt/year reduction - so it is hardly more ambitious.

Even accepting the arguments that half of NZ's emissions come from agriculture and over 80% of our electricity is already generated without fossil fuels, is this really "doing our fair share" when to meet the internationally agreed target of keeping the temperature rise below 2°C requires around 40% global GHG reductions by 2030?

But regardless of what the target is, the most tangible evidence of political commitment to meeting or exceeding the target without reliance on importing reduction units from other countries will be domestic policies in support of reducing net emissions. These will become evident when the scheduled 2015 review of the NZ ETS takes place.

While reliance on imported reduction units has proved to be a convenient "get out of jail free" card for NZ emitters over the past few years, having virtually no price on carbon has at least in part contributed to New Zealand making no progress towards any reductions target.

It is also evident from the increased global focus on climate change that the environmental integrity of products and services traded internationally will become more important in the future in terms of both price and market access. New Zealand businesses that are carbon neutral or lower emitters per unit of production than their international competitors will have a competitive advantage in the face of either non-tariff trade barriers or discerning consumers.

While the ETS was initially conceived as an all-gases all-sectors market mechanism to reduce emissions at least cost to the economy, it has since become evident that the price on carbon units is largely determined by the ETS settings put in place by the NZ government. Unrestricted access to low-cost international units, 2:1 emission liability, exclusion of agriculture and generous allocations to trade-exposed firms have all served to keep the carbon price low. Although emitters are now restricted to using NZUs that could change, and the government has also introduced legislation enabling it to increase the supply of NZUs via auctioning. This is clearly a means of managing the price of units downwards. While this may make sense from a short-term economic management perspective, it does introduce business uncertainty and political interference risk unless there is clear guidance from government as to the price range it is seeking. Whether you are an emitter making investment decisions that would reduce emissions or a farmer or forestry investor deciding whether to plant trees or not, some clarity around the likely range of carbon price would help.

My final comment is that the continued exclusion of agriculture is doing no favours to New Zealand Inc., nor farmers I would argue. Our food producers have a great deal at stake in maintaining a clean, green brand. While a generous phase in period may be warranted, farmers are typically much better placed to achieve carbon neutrality than virtually any other emitter. They can plant trees. Tree planting is a low-cost means of lowering our national carbon net emissions. If done well it can provide a valuable timber cash crop as well, plus other environmental and social benefits. Land is the single biggest cost for forestry investors but farmers can legitimately treat land cost as the profit lost by excluding stock. This is a much lower figure than the land market value expressed as an annual rental. In the case of under-utilised Maori land that has been handed back by a tenant forest owner in a cutover state, or is in scrub or low-grade pasture the opportunity cost of land is often close to zero. Low land costs have a big impact on improving the investment returns from forestry.

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