THE ENERGY FEDERATION OF NEW ZEALAND

Beehive Theatrette

As I'm sure you are all well aware, I announced last month that the Government has decided to defer a decision on whether to introduce a low level carbon charge until early 1998. The decision to delay a carbon charge was strongly influenced by the current international negotiations for targets beyond the year 2000 and should be placed in the context of the evolving international debate over action to address greenhouse gas emissions. It should not be interpreted as a backing away from addressing carbon dioxide emissions.

Under the current policy, adopted in 1994, a decision on whether to introduce a low level carbon charge was to be taken in June 1997, based on an assessment of whether New Zealand was on track to achieve its goal of reducing the rate of growth in gross CO2 emissions by 20% and stabilising net CO2 emissions at 1990 levels by 2000. Since then, current projections indicate that New Zealand is not on track to achieve the stabilisation of net CO2 emissions at 1990 levels by the year 2000. This is mainly due to: CO2 absorption by planted forests being considerably lower than expected; and gross CO2 emissions, 90% of which come from fossil fuel use, continuing to increase with continuing economic growth, albeit at a lower rate than might otherwise have been the case. Overall, emissions of all greenhouse gases are expected to be 4% above 1990 levels by 2000. This rather better result has been achieved through declining methane emissions from lower livestock numbers.

At the time of the 1994 policy, New Zealand's actions were entirely consistent with the intent of the FCCC and the sorts of actions being taken by other developed countries. Over time however, it has become apparent that many countries, New Zealand among them, will fail to meet the targets they ``aimed'' to achieve under the Convention. Those that are on course to meet their targets are able to do so mainly because of unrelated developments in their circumstances. (Russia's emissions are, for instance, projected to be 17.2% per cent below 1990 level by the year 2000.)

Since 1994, there has been a growing appreciation that policies that pursue uniform national targets behind national borders and within relatively short time frames, have several flaws. Foremost amongst these flaws is the growing awareness that such targets would impose widely different marginal emission abatement costs on different countries, depending on their particular national circumstances. For this reason, some countries would find it easy to meet emission reduction targets, because of conditions peculiar to their economies, while others would find it difficult and expensive. Of probably greater concern to this audience, is the likelihood that significant unilateral action by one country to control emissions may see industries simply move to countries that do not have such controls. The result could be national loss for no global gain.

A more recent development in the negotiations is the push by New Zealand and countries such as the United States and Canada for international emissions trading. At the simplest level, emissions trading would allow a country which has more than met its emission reduction target, and thus created a "surplus", to transfer its surplus emission rights to another country. The receiving country would then be entitled to increase its emissions by an amount equal to its target plus the surplus emissions transferred. Such transactions could be formalised into an emissions trading system.

Under a formal emissions trading system, country emissions would be limited by their targets or binding commitments. Countries with such commitments would have an emission budget or ``quota". A country could choose to distribute the emission ``quota'' domestically which would make it possible for individual companies to participate in the system.

Participants in the system would be able to buy and sell "emission quota" from each other. Alternatively, if a participant had surplus "emission quota" that they did not wish to sell then it could "bank" them either to sell or use in the future.

International emissions trading would provide the flexibility for emission reductions to occur where and when it is most cost effective for it to occur. All countries would have an equal opportunity to find their way forward at lowest cost. The potential for a flexible multilateral instrument to assist countries in meeting any new targets beyond 2000 is very considerable but it will take some time to design and implement. That means countries such as New Zealand need to keep all of their options open at this stage. For this reason a carbon charge is not off the table, but as I have said previously, it is a second best option compared with a multilateral instrument such as emissions trading. There may, however, still be a place for a low level carbon charge as part of the transition to an emissions trading regime, whether domestic or international, as foreshadowed by the Working Group on CO2 Policy.

Indeed, under the existing policy, work had commenced on the design of a low level carbon charge. A technical document on this subject is now available to provide further information on this option to reduce CO2 emissions. I should warn you that this is a technical document. It does not address the question of whether we should introduce a low level carbon charge, what a `low' level might be, nor what impact such a charge might have. What it does focus on are design issues, whether the charge should apply uniformly across all fossil fuel users, and the technical aspects of its coverage and administration. I should also note that some technical elements of the working paper may also be applicable to other economic instruments such as emissions trading.

Work will continue on alternative instruments, such as emissions trading, and other measures consistent with a least cost approach. It is intended that a paper examining the technical issues associated with emissions trading will be available later this year. While my personal view is that emissions trading is one of the most exciting and innovative policy responses to an environmental problem that has yet been developed, there is a great deal of work to be done on the design of such an instrument. While I have few doubts that such a scheme is feasible (a view shared by the Working Group on CO2 Policy), I believe that it will be necessary to present the issues in a thorough and easily accessible manner if we wish to have informed debate about emissions tr ading and its role in New Zealand's climate change response.

When you place the Government's announcement to defer a decision on the introduction of a carbon charge in the context of both the international negotiations and the exploration of other options such as emissions trading, I'm sure this audience will have little difficulty in concurring with our view that until we know what form new commitments are going to take, it would be premature to take a decision on whether to introduce a carbon charge.

The emerging picture from the international negotiations, including the most recent declaration by Ministers in Geneva last year, is that action will be taken to reduce emissions of greenhouse gases, including legally binding targets for beyond 2000. For New Zealand, the key issues are likely to be not only the ultimate scope and timing of such targets, but also what actions and avenues will be available to meet any new targets.

Between now and December, officials will be continuing their analysis of the positions of other Parties in the negotiations. A work programme is being developed that will enable an assessment of the potential impacts on New Zealand of the various proposals that will be tabled by other countries as the negotiations proceed. The work programme will include regular consultation with industry representatives and NGOs. Officials will also continue to participate in related international fora which are analysing the key issues related to international emissions trading and examining practical options for its implementation.

The reason we're particularly interested in emissions trading is that it offers the least costly way forward. The key elements of a least cost approach include:

setting targets in relation to a time frame sufficient to allow businesses to take advantage of changes in technology and the turnover of capital stock;
moving over time to include all sources and sinks of greenhouse gases;
the use of economic instruments (such as emissions trading), internationally and domestically, which are more likely to ensure that least cost opportunities for emission reductions are pursued first; and
flexibility as to when and where emission reductions occur.
It is too early to predict the outcome of the Kyoto negotiations but I am hopeful that the company we keep on this issue is powerful enough to keep our preferred way forward on the table. Certainly, I expect emissions trading and joint implementation to be endorsed as legitimate responses to whatever commitments are signed up to.

With this in mind, I hope that informed industry groups such as this one will do some thinking of their own. The Government would be greatly assisted if you were prepared to take a proactive approach and help in the development of our thinking on emissions trading and joint implementation and how these mechanisms might be translated into domestic policy to meet any commitments made for the years beyond 2000.

How substantial those commitments will be remains to be seen. There is an increasing awareness that this is a long-term issue and that commitments should be realistic and relate to a timetable that will accommodate technological change and an improving scientific understanding of the issues. On the other hand, progress has to be sufficient to convince developing countries that it is worth their while taking on commitments. As you are aware, Annex I countries like New Zealand are obligated to take measures to reduce emissions ahead of the rest of the world.

In crude terms, the Rio Convention envisaged that since developed countries had taken up such a large share of whatever atmospheric `buffer' exists before anthropogenic emissions reach destabilising concentrations, these countries should take the first steps. It was also understood that, given the very low level of per capita emissions in developing countries, they should be able to increase their emissions as a concommitant of development. Otherwise, the developed world's emission levels would have effectively pre-empted the development of poorer countries.

The logic of an emissions trading system is strongly on the side of including all economies since some of the most important opportunities for reduced emissions lie in developing countries where the nature of huge new energy investments over the next few decades will profoundly influence the profile of emissions through to the middle of the next century. To get buy-in from really important players (like China, India and Indonesia) the Annex I countries are going to have to make real and measurable progress.

The EU has agreed on a formula that would see its emissions reduced 15 per cent by 2010. The scale of reduction that key OECD economies outside of Europe (like Japan and the US) are prepared to advocate remains to be seen. Interestingly, the EU has recognised within its own borders the very problem with uniform targets that New Zealand and many others have remarked on: although an overall 15 per cent reduction is forecast, national targets within the EU range from a 25 per cent reduction in Germany to a 40 per cent increase in Portugal.

The Europeans are coy about admitting the clear logic that would allow a recognition of different starting points across all Annex I countries. A flexible, tradeable mechanism could achieve the same result with lower overall costs. Portugal would have to buy permits to increase its emissions and Germany would be able to sell surplus permits generated by easy reduction gains available to it. The incentives would be better for both countries: Portuguese companies would be under greater price pressure to reduce the rate of their emissions growth while German companies would be compensated for the cost of reduction initiatives. If trading were restricted within the EU, the marginal cost of abatement would in all likelihood be higher than it would if trading were allowed with the whole of Annex I since there are likely to be cheaper reduction opportunities in countries like the US. The logic of trading is to provide emitters with the widest possible array of emission reduction options within whatever overall emissions cap is agreed.

From a purely economic point of view there is little doubt that Europe has chosen a higher cost approach than is necessary, with countries like Germany and the Netherlands shouldering an even higher cost to accommodate the emissions growth of economies like Spain and Portugal. However that may be, the Europeans insist that politically the approach they have chosen was the only way forward.

And so it will be in Kyoto. I am not expecting a perfectly (or even vaguely) rational debate. The best we can do is to hold out for a sufficiently flexible approach to accommodate our relatively more expensive adjustment path. We will also be supporting efforts to see that any further commitments by Annex I countries beyond Kyoto will be dependent on the evolution of commitments to embrace developing countries. This will be delicate territory but vital none the less. Without it, we risk complete inaction with the result that should more ambitious steps be required we will have wasted valuable years and made future adjustment costs that much more acute.