Climate Change Policy

Allan Rae

Professional Development Programme for Economics TeachersMassey University

Friday 27 November 2009.

Climate Change – some science• The majority science view seems to be that:

• Atmospheric concentrations of GHGs increased from 280ppm (pre-industrial) to 380ppm today

• Strong evidence led to global temp increase of 0.7C due to human activity

• By 2100 average global temperature projected to increase by 1.8 – 4.0C• May lead to more extreme weather (floods, droughts, storms & rise in

sea levels of 18-59cm)• To keep temperature increase to 2.0C, GHG concentration should be kept

below 450ppm• This could require up to a 50% emissions reduction below 1990 levels by

2050

The Benefits of Reducing Emissions - or, what happens if we dont

• Unchecked, climate change is likely to have impacts on:– Sea levels– Food production & security– Human health– Water supplies– Tourism– Extreme climatic events

Sea Levels

• More erosion & floods• Salt water intrusion• Serious impacts in river deltas and on island nations• Migration flows• All have economic consequences• Reductions (cf 2050 baseline) in GDP modelled at

less than 0.03%, depending on region• But more serious for the affected regions within

countries

Human health• Global warming could increase heat-related health problems,

but reduce cold-related problems. • Also effect range & abundance of species carrying diseases,

e.g. malaria (may increase due to global warming).• Economic impacts are gains or losses in labour productivity,

and re-allocation of household expenditure towards health spending in some regions

• Modelling shows that labour productivity may rise or fall, as does demand for health services. This impacts wages, prices of other factors and household incomes.

• Regional GDP changes by -0.6% to +0.5%

Tourism

• Popular destinations may become “too hot”, whereas cooler regions may become more attractive to tourists.

• Will change regional distribution of tourist expenditures and demands for tourism services

• Modelling shows small impacts on GDP: in the range of -0.02% to +0.01%

Food production

• Ideal climate zone for each crop is different• Agronomic studies, if assume crop location

remains unchanged, predict substantial reduction in yields with climate change though yields may rise in some cooler regions

• Economic studies allow farmer adaptation, so location of crop & livestock production may change as farmers seek maximum profit

Findings from some economic food studies

• Rain-fed farms tend to be more climate-sensitive than irrigated

• Livestock farms that rely on heat-intolerant breeds more affected than farms with a mix of breeds

• Farms in Latin America, India & Brazil more sensitive than US farms, as in already-warmer climates

• Farmers in cooler areas may benefit• African farmers may increase profits under a mild (2.5C)

temperature rise, especially irrigated farms -provided still have access to irrigation

• In warmer, drier areas farmers may substitute livestock for crops

Climate change is harmful to mankind – right?

• Is the majority science view right? Uncertain• Even if it is, is climate change all bad?• Above results suggest winners and losers– I.e. Climate change may bring benefits to some

people and regions• So will climate change produce a NET global

cost? Uncertain -how large?

Points to Ponder• Climate change could (probably will?) impose net costs on

the world• How might that uncertain cost compare with the cost of

reducing global emissions by 20% by 2020 and 50% by 2050?– Benefits of policy action are the (partial) avoidance of net costs of

climate change– This B/C analysis is incomplete and uncertain

• How will the developing world cope with such large reductions?

• Can mankind ADAPT to climate change?– And if so, how might these adaptation costs compare with those

of mitigation (cutting emissions)?– Given the uncertainties and lack of information, how might policy

be formulated?

How Should NZ React?• NZ may be a net beneficiary of climate change• So should NZ be selfish? Or a free-rider?– Only contribute 0.2% global emissions

• Could be a cost to NZ food exports and tourism if NZ seen to be free-riding on the efforts of others

• If climate change is a global problem, it calls for a global solution– Suggests the more nations support international policy

effort – the more likely to succeed

NZ’s GHG emissions• New Zealand’s greenhouse gas

emissions across all sectors for 2007 totalled 75.6 Mt CO2-e.

• That was 22 per cent higher than the 1990 level of 61.9 Mt CO2-e

• Removals of greenhouse gases in the Land Use, Land-use Change and Forestry (LULUCF) sector amounted to 24.6 Mt CO2-e in 2007. This is an increase of 35 per cent above removals in 1990

• Growth of plantation forests is the major carbon dioxide sink.

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Between 1990 and 2007, CO2 emissions rose by 35% while CH4 rose by 4.5%Reflects growth of energy sector relative to agriculture.

The Kyoto Protocol

• Came into force in Feb 2005• Aims to reduce GHG emissions to 5.2% below 1990

levels by 2012• Applies to developed countries and countries in

transition• Countries face a cap, or target• If dont reach target, can:

– Buy credits from other developed countries– Or fund GHG reduction projects in developing countries

• NZ target is 100% of 1990 levels.

Projected net emissions over 1st Kyoto commitment period

• Commitment is to reduce net emissions to 1990 levels

• 1990: 62Mt CO2-e• Over the 5 years 2008-2012,

project gross emissions of 76 MtCO2-e per year

• And net annual removals by forests of 17Mt. CO2-e

• Equates to net annual emissions of 59Mt

• NZ expected to meet Kyoto target

The NZ Emissions Trading Scheme

• The New Zealand ETS came into force in September 2008 - with a change in government later in 2008 the scheme was amended last Wed

• The scheme introduces a price on greenhouse gases to provide an incentive for New Zealanders to reduce emissions and enhance forest sinks, and to develop and apply carbon-friendly techniques and technologies.

• Emissions trading provides flexibility in how participants comply with their obligations, enabling a least-cost response. – This market-based approach requires emitters to pay for

emissions increases and to be rewarded for decreases.

• The scheme has a wide sectoral coverage – agriculture, liquid fossil fuels, stationary energy, industrial processes, synthetic gases, waste and forestry.

• Participants are required to match their emissions by surrendering an equivalent number of emission units, while some forestry participants are able to earn emission units for CO2 stored or removed from the atmosphere.

• Participants acquire emission units by purchasing from government, another participant or from overseas sources, and may acquire a free allocation from government.

Economics of emissions trading• Idea is to achieve least-cost

abatement• Polluting producer may face a

range of abatement options• If the carbon price is $20,

producer could profitably reduce emissions by up to 7 units

• If her target is LESS than 7:– The difference can be sold to other

polluters• If her target is MORE than 7:

– The difference will have to be purchased

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A marginal abatement cost curve

• Energy and liquid fuels enter in 2010, agriculture in 2015

• Free allocation of NZUs to industry and agriculture made on an output intensity basis

• This means that a participant’s allocation will vary with output. The baseline will be the industry average emissions per unit of output.

• Aim is to encourage more emissions-efficient production

Agriculture in the ETS• Agriculture is the largest single source of GHG emissions in New Zealand, and is a

major exporting sector. Agriculture was to be included in the ETS from January 2013 - now delayed until 2015– Government agreed to bear the cost of agriculture’s GHG emissions during the

first Kyoto commitment period provided the sector contributes to GHG mitigation research to develop effective and cost-efficient strategies.

• The points of obligation within agriculture are processing companies: price impacts likely to be passed on to farmers– Compliance costs would be higher if farmers were the responsible participants,

but incentives to reduce emissions would be greater than if that responsibility rested with processors.

– Obligation point could be individual farmers at a later stage• A free allocation of emission units (NZ Units) will be made initially

– 90% of the baseline figure (emissions/output)* output– This allocation gradually reduced by 1.3% per year– Will reach zero by 2084!– Aim is to minimise risk of farm production ‘leaking’ to other countries– And to provide time for mitigation technologies to be developed

Implications include:

• This ETS implies that the free ‘permits to emit’ will increase if output increases

• Total emissions also increase with increasing output

• If agriculture/industry achieves reductions in emissions per unit of output (desirable) then surplus NZ units are likely to accrue, perhaps for sale to other polluters

Impacts on forestry profits

• C sequestered in radiata increases with age of trees, and averages 30 tonnes/ha over a 30 year cycle.

• C credits accrue during trees life, but re-paid when trees harvested (unless replaced).

• Generates early cash flow for foresters• At C price of $30/t, NPV = $6,400 over the 30 year cycle• But if C price increases by 7% per year, the NPV

becomes zero• Is all C really released on harvest??

Forestry new plantings have been falling

• Bulk of trees planted in early 1990s will be harvested by 2020-30

• This will increase NZ net emissions

• If planted 50,000ha/year until 2030, would more than account for increase in emissions due to above forest harvesting

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Copenhagen – the next commitment period

• NZ has offered cuts of 10%-20% below 1990 by 2020, and 50% below 1990 by 2050.

• US : return to 1990 level by 2020, and 80% below 1990 by 2050

• Aust: 14-24% below 1990 by 2020, and 60% below 1990 by 2050

Projections of NZ GHG emissions to 2020

• Compared with 1990:• Agriculture up by 29%• Energy up by 55%• Dairy up by 126%

• Net emissions projected to be 31% above 1990 level by 2020.

• From 2021 on, forestry will be a net source of GHG as early 1990s forests are harvested.

• NZ emissions in 1990 = 62Mt CO2-e• Projected net emissions by 2020 = 80.4Mt• If achieve, say, a 15% cut from 1990– Gives 2020 target of 52Mt CO2-e– The ‘gap’ by 2020 = 28 Mt

• How can this be met?– By taxpayer: $840 million at C price of $30/tonne– Plant new forests?– By energy & farm sectors?– By 2020 agriculture still gets free allocation of 83%

of baseline