Business NZ Address To Climate Change Seminar

Business New Zealand

Address To Climate Change Seminar, Auckland, 20 February 2002

Good afternoon ladies and gentlemen. Over the next few moments I would like to briefly outline Business New Zealand’s position in regard to climate change and the debate over what role New Zealand should play - both in terms of ratifying the Kyoto Protocol and creating an environment contributing to the Government’s and Business New Zealand’s shared goal of sustainable economic growth.

Our position in regard to ratification can be summarised as follows:

- Business New Zealand regards climate change and ratification of the Kyoto Protocol as probably the pre-eminent issue of 2002 for the business community and the national economy.

- Business New Zealand rejects any case for New Zealand to take a global leadership role in terms of climate change given the insignificance of New Zealand’s 0.2% contribution to alleged global warming and the implications for our international competitiveness. We are of the view the Government should suspend the current “rush to ratification” until the necessary analysis of those implications has been carried out and given full and careful consideration, including proper consultation with its Treaty partner.

- While we believe the science of climate change includes an ever growing number of contradictions and uncertainties, we do not wish to debate that science. The Kyoto Protocol is not an international science or environmental agreement - it is an economic one. And an economic agreement that is international only in name. The vast majority of our trading partners and international competitors are either refusing to participate at this time, or are not liable to its provisions for a number of years, if ever.

- The agreement probably has greater implications for growth and the well-being of the national economy than the United Kingdom’s entry into the EEC. The key and little understood issue is the impact on New Zealand’s competitiveness and growth.

- The policy development framework, consultation time-frame and proposed legislative process outlined in the consultation document, “Kyoto Protocol - Ensuring our Future”, are seriously flawed and are likely to deliver perverse outcomes.

- The current declared intention of ratification of the Kyoto Protocol is not the correct one. Ratifying ahead of our trading partners and in the absence of robust analysis of the wider economic and growth consequences is not an economically or socially prudent course to pursue. An economy of New Zealand’s small size, location and fragility cannot afford premature action on Kyoto given the likely risks and costs.

- Analysis of selected industry sectors indicates potentially huge social and economic costs.

- There has been no adequate or rational analysis of what ratification may mean for our international competitiveness, particularly in terms of Closer Economic Relations with Australia or for current or likely closer economic partnerships with countries such as Singapore or the US. Current policy intentions will result only in wealth transfer from the New Zealand economy.

- Awareness of the implications of climate change and the Kyoto Protocol remains low within the mainstream of the New Zealand business community - a community typified by very small enterprises. All will be affected by implementation yet few understand the implications of ratification to their ability to grow and prosper.

- The environmental benefits and opportunities for innovation asserted by Government have not been subjected to rigorous evaluation and economic analysis.

- The potential “leakage” of significant industries to Australia, Canada, the US or non-Annex 1 countries, or the foreclosed growth potential of those remaining is a very serious concern. This would surely accelerate an existing trend that we should be seeking, and are seeking according to the Prime Minister, to reverse.

Why such serious concerns over this issue?

Business New Zealand’s key goal is to champion the implementation of policies that will see New Zealand retain a first world national income and to regain a place in the top ten of the OECD in per capita GDP terms.

This “top half” goal is one regularly espoused by the Government.

Consistent, sustainable growth in real GDP per capita of well in excess of 4% per annum (and probably closer to 7-8%) will be required to achieve this goal. Continued growth of around 2% (our long-run average) will only continue New Zealand’s relative decline.

Overcoming the country’s low growth profile will require significant policy prioritisation together with ingenuity and innovation in overcoming the tyrannies of distance and size. Any impediment of whatever nature placed upon New Zealand’s productive sectors that is not simultaneously placed upon the nation’s trading partners will serve only to further inhibit the prospects of growth for the economy.

One of the size aspects that appears to be regularly misunderstood by those formulating policy - and it is particularly evident in reference to climate change policy - is the predominance and role of “SME’s” or “small to medium enterprises”. And many of these are very small.

New Zealand’s economy is dominated by such enterprises - and they are critical to the success or failure of any national climate change or energy efficiency projects.

Awareness of the implications of climate change and Kyoto protocol policy development remains low. There are a relatively small number of large enterprises reasonably informed on the implications but the 1,452 companies with 50-99 employees are, generally, “behind the 8 ball”.

More critically, the 17,790 companies with 10-49 employees, many of whom are engaged in export markets, are woefully “disengaged” from discussion on the issue and have not factored the inevitable costs of ratification into forward planning. (And I should note these figures do not include the around 40,000 enterprises involved in farming.)

There is continual reference to the opportunities and innovative developments that will accrue from Kyoto ratification. If this is the case then it is from the SME’s that such opportunities and innovations will need to emerge.

Yet where is the consultation, promotion, incentivisation and, most importantly education, that will encourage and promote these opportunities?

While it is true that the Government has launched, and is expanding, programmes such as the Grants for Private Sector R & D, access and understanding of the availability of such funding remains problematic for many of those 17,790 companies.

Jargon and “Wellington-speak” remain far too prominent - how many such companies, for example, immediately recognise what a “Current Position Analysis” is? That’s how one of the funding programmes is described on the Technology New Zealand web-site.

There is an urgent need to clear the funding pathways and remove the information obstacles for the SME’s. As noted earlier, awareness among these enterprises is low - but they hold the key to nationwide energy efficiencies and emission reductions.

The resources currently being devoted to a rushed, ill-planned and foreshortened “consultation” process would be far better employed in developing programmes and campaigns that truly allowed New Zealand enterprises to fully exploit their innovative skills.

This is surely both a more prudent and obvious route to fostering growth and innovation and achieving positive environmental outcomes.

The Government must give serious attention to this sector of the economy, the one that is the most essential and critical to the future health of the economy.

Climate change policy makers need to be aware that a number of other resource use and policy actions have generated scepticism within the commercial community over the likelihood of growth and innovative opportunities emerging from Kyoto Protocol ratification.

These include the continuing inaction over the Resource Management Act amendments, compliance costs associated with the Hazardous Substances and New Organisms Act, energy conservation and waste strategies that lack credible cost benefit analysis and the continuing impacts of sharply higher electricity costs last winter.

Business New Zealand believes far greater attention needs to be given to actively encouraging innovation rather than presenting policy initiatives that are often perceived as impediments.

While I have stressed the importance of the SME sector it should also be noted that growth strategies and national economic and social goals do face serious threats if existing or potential major industrial investment is unduly prejudiced.

I refer here to investment decisions made by large high energy using regional manufacturing facilities and the impacts that early ratification may have on regional employment, social well-being and economic development.

Industries such as cement facilities, steel makers and pulp and paper processors operate on relatively thin margins and are subject to volatile international pricing structures. In short, while they compete globally and regionally, the jobs they provide are local New Zealand jobs.

Simply the suggestion that there could be potential added costs for energy inputs may cause overseas owners to review investment plans for New Zealand located facilities. In addition, if added energy costs were to be faced here but not in a non-Annex 1 country closer to their markets this could become a very strong incentive to relocate some or all production to such a country.

The extreme volatility of last winter’s electricity market has had a negative flow on effect in terms of the perception of New Zealand as a favourable investment environment.

This must be impacting on investment decision-making and we could well see plant upgrades and expansions shifted to facilities elsewhere.

This situation cannot be allowed to escalate. Energy pricing and Government moves on the Kyoto Protocol are not unrelated. A robust evaluation of the key requirements for attracting major industrial investment needs to be conducted prior to any ratification moves.

Now - to a word on international competitiveness. As has been explained many, but not yet enough, of the 17,790 SME’s discussed earlier are involved in export markets. The companies involved are often trading in highly competitive and volatile market places.

If one country’s products and services face costs beyond those faced by a trading partner or competing nation that country will be placed in a position of competitive disadvantage.

While the potential costs of measures associated with the Kyoto Protocol are far from clear, it must be assumed there is the potential for added costs for our exporters.

This issue is of critical importance. Recent figures show that of the top twenty export destinations for New Zealand production, the top three, Australia, USA and Japan, have not yet committed to ratification and of the remaining seventeen, eleven are non-Annex 1 countries.

It is of particular concern that our two top export markets have made quite specific comment regarding their unwillingness to ratify at this stage, with both citing potential trade inequities.

Energy has historically been one of the very few competitive advantages New Zealand enjoys and it is a significant input to the production process for many of our exporters. With limited opportunities to switch to lower emission sources the export community may therefore face significant input cost increases not faced by competitors elsewhere.

It is also important to note that many of our commodity-based exports compete with non-Annex 1 countries.

Given the importance of exports in advancing our national growth goals Business New Zealand believes it is essential that the various sectors of our export economy are subject to rigorous and extensive analysis prior to any consideration being given to ratification.

We would also draw to the Government’s attention the obvious contradiction between the intent for early ratification and our official stance at international trade negotiations.

In fora such as the WTO and APEC New Zealand regularly argues for the early elimination of trade distortions. Applying some of the domestic fiscal policy measures that have been suggested in terms of Kyoto in advance of similar measures from our trading partners would appear to be introducing exactly the kind of distortionary measures we argue against elsewhere.

It is also a fundamental of New Zealand’s trade policy that any concessions we may offer should capture equal or greater benefits.

We do not, therefore, believe that the current stance of the Government is the correct one. Ratifying ahead of our trading partners and in the absence of robust analysis of the wider economic and growth consequences is not an economically or socially prudent course to pursue.

An economy of our small size, location and fragility should not be a leader in terms of potentially added costs.

In summation - It would, therefore, appear logical for the Government to reassess its ratification programme.

Serious concerns have been raised regarding international competitiveness and what the effect will be on our export economy. The forest sector has called in to doubt the alleged benefits accruing to the country from our plantation forestry “sinks”.

Major regional employers have suggested any cost increases from Kyoto measures could lead to significant impacts on local economies and the risk of certain high energy use enterprises relocating to countries not subject to the provisions of the Protocol may increase significantly.

The kind of uncertainty that rushed consultation and limited analysis generates does not contribute positively to the avowed aims of economic transformation and growth.

The Prime Minister’s statement of 12 February adds to this uncertainty and makes it even less clear what the Government’s actual policy intentions are. And the recently released National Impact Assessment continues the fudge, merely being an advocacy piece for immediate ratification.

The health of the economy also influences the ability of a nation to deliver on the desirable social and environmental outcomes that we all want. First class social services and a clean and healthy environment are possible only in prosperous, growing first world economies.

I thank you for your attention and trust you enjoy the rest of the seminar.

Peter Whitehouse

Adviser - Environment & Technology

Business New Zealand

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