Clarky's Comment - March, NZ's Clilmate Change Policies

NZ's Climate Change Policies

As a businessman I only have so much energy and why waste it on a lost cause? By "lost cause" I'm not referring to the subject matter of lower atmospheric greenhouse gas levels. Pictures from Vanuatu in the wake of Cyclone Pam should remind us again that one has to retain some faith that humans collectively via our leaders will work on solutions to the most pressing threat to the lifestyle of our children and their children. My "lost cause" is that New Zealand's domestic policy will do anything to prepare NZ business for a carbon-constrained world.

The NZ public and our senior politicians may take comfort in the fact that because NZ already has 80% renewable electricity generation, and 50% of our emissions come from agriculture for which no-one in the world has a credible solution, we can simply cruise along as we are.

As a national strategy this would be fine given that NZ itself can only have a miniscule impact on global warming, as long as the rest of the international community would buy this story. I strongly suspect they will not. There are two important principles at stake here:

  1. NZ's international credibility and clean green image that drives both tourism and food exports - this, in turn, underpins our lifestyle.
  2. Preparing NZ business for a time when a product's or service's greenhouse gas footprint becomes a critical purchasing criteria for consumers in a more globalised and "greenhouse gas aware" marketplace.

What I feel right now is that MFAT and MPI officials need to get their heads out of the sand and start some scenario analysis that can be presented to political leaders to get their attention.

More forest planting can buy time for NZ to achieve its emissions reduction targets (it appears very unlikely we will achieve them without it). That will give time for NZ to prepare for international competition in due course. At the moment we have net deforestation going on. The data may not show up clearly to Ministers that rely on official Kyoto definitions of deforestation (4-year lag), but that only delays the truth.

Forestry planting is generating 5 - 6% real rate of return without any carbon income factored in, at least on lower-cost land and on some Maori land that is not for sale on the open marketplace. That rate of return, combined with the negative sentiment towards forestry investment arising from the sector's treatment by local and central government (See Clarky's Comment in Wood Matters February 2015 Issue) is not sufficient to unlock private capital for planting. A $15 - $20 NZU price would increase that to 7 - 9% real pre-tax ROI. That is sufficient to generate significant private investment in new planting as we saw in 2011 and 2012.

Despite some concern about the Emissions Trading Scheme (ETS), dry stock farmers stand to gain from policies that allow them to grow commercial forest crops profitably on part of their land. That is good land use from a soil and water perspective, as well as a diversification of income.

At $15 - $20/NZU will the NZ economy collapse? I think it added 4c/l to petrol prices when the ETS was first introduced in 2008 as well as electricity prices rising. The NZ economy will not collapse. Forest planting would be encouraged and emitters would get serious about finding some ways to improve emissions efficiency. Is any of that a bad thing?

The Labour Government's decision under Pete Hodgson's leadership to impose a deforestation tax on pre-1990 forest owners was counterproductive, resulting in massive deforestation in the lead-up to the 2008 commencement of CP1. The National Government's decision to allow unlimited entry of low cost ERUs for statutory compliance has been a policy disaster of similar proportions - putting our otherwise well-designed ETS into an induced coma since 2011.

The major problems constraining forest planting solutions to NZ's impending blowout of emissions from about 2018 (forestry harvesting plus economic growth) are:

  1. Uncertainty over how the government will apply its legislated right to "print" and auction NZUs to constrain the value of NZUs. Why will it not give a price range and therefore give businesses (emitters and foresters) some planning certainty on which to base investment decisions?
  2. A low domestic carbon price. NZUs must be in the range of $15 - $20 to get the attention of forestry investors. The government has the power to arrange that by restricting entry of foreign units and advising when it will exercise its auctioning solution to high prices, and by removing the 2-1 subsidy.
  3. Evidence of government support for the forestry sector. The messages that are being sent in recent times are not encouraging.

The international climate change negotiations come up at the end of this year in Paris. With the strength of commitments we saw from China's President Xi and USA's President Obama in November last year you can bet there is a fair bit of serious preparatory work under way right now. But for NZ businessmen and women decisions that can make a difference to New Zealand's emissions profile reflect domestic policies and messages. Until we see some movement on that front then most of us have more productive ways to spend our days than pay much attention to international climate change debates.