NZIER media release – for immediate release

Wednesday 30 April 2008

GOVERNMENT’S PLAN TO REDUCE EMISSIONS WILL HURT ECONOMY

The Government’s proposed Emissions Trading Scheme, intended to ensure New Zealand plays its part in helping reduce global emissions of greenhouse gases, is likely to hurt the economy more than necessary, says a report issued today by the New Zealand Institute of Economic Research (Inc).

Households, provincial economies, agriculture, energy producers, transport, and most other industries will all feel the pain as the proposed scheme is phased in at a cost to the country by 2025 estimated at more than $4.5 billion – more than four times as great as the cost of the Government directly funding emission reductions.

Paying directly for emission reductions, (whether from actions in other countries to reduce emissions or action in New Zealand), will also make a greater contribution to a reduction in global emissions than could be achieved as a result of an ETS forcing a reduction in New Zealand emissions, says the NZIER Report. New Zealand produces an estimated 0.4% of the world’s emissions.

The reason is that the Scheme makes firms in New Zealand less competitive than firms in countries that have not imposed the cost of greenhouse gas emissions.

COST FALLS ON AGRICULTURE AND RURAL REGIONS

New Zealand is the only country in the world known to be including agriculture in an ETS scheme, despite very limited opportunities for this sector to control its emissions.

“Agriculture, which delivers more than a third of the country’s export earnings, will be particularly hard hit because it cannot make quick adjustments and its ability to do so is largely reliant on unknown future improvements in technology, says Dr Brent Layton, the CEO of NZIER.

“We can reduce the amount of agricultural products we produce – at great cost to the economy – but the slack would simply be taken up by a less efficient overseas producer not covered by an ETS Scheme.

Rural economies in Southland and Northland would face a double hit from the loss of sheep, beef and dairy farmers as well as contraction in the refining and metal production sectors. Rural economies generally suffer more that the service based economies of Auckland and Wellington.

“Cost imposed by an ETS cannot be recovered by putting up prices. New Zealand will be competing with countries who have imposed no ETS costs on their agriculture producers. Either way, through reduced production or lower profit margins, in its current design the ETS Scheme planned by the Government will reduce New Zealand’s earnings from agriculture, a vital sector in our economy.

“Other countries can make spectacular gains by increasing the efficiency of electricity generation plants, but New Zealand is already a world leader with 70% of our electricity produced from renewable sources, and accordingly, small scope for gains in efficiency.”

Dr Layton says the impact of the Government’s current ETS proposals on an already faltering economy will be major, and include rising prices, reduced export earnings and reduced employment, as the country’s standard of living falls further behind Australia.

MAJOR IMPACTS

The NZIER report says that if the Government’s current ETS is implemented unchanged, then:

In 2012 the cost to the New Zealand economy of trying to reduce emissions in New Zealand would be more than eight times as great as the Government paying for credits from overseas projects and schemes that have succeeded in reducing global emissions

In 2012, the equivalent of 20,000 jobs will be lost as the economy adjusts.

By 2025, GDP will fall by almost $6 billion, household spending will be down by $3000 per household and hourly wage rates will be down by $2.30 in today’s prices.

The rural economy will be particularly hard hit with dairying land possibly dropping in value by 40% in 2025 and sheep and beef farms losing 23% of their value.

“The Government’s desire for New Zealand to play its part in reducing global warming is admirable,” says Dr Layton. “Many New Zealanders will support the principle. Clearly, we would all want the best environmental outcome at the least possible cost to our economy, our standard of living and our international competitiveness.

“What we have been focussed on is the effectiveness of the proposed ETS, the particular difficulties which face New Zealand in reducing emissions, and whether there are more effective ways of New Zealand meeting its international commitments without doing such damage to the economy.

As long as there is no comprehensive global commitment, paying directly for emissions reductions out of general taxation is cheaper and more effective than the ETS as it is currently designed.

If the Government intends to proceed with the ETS, then it should amend the allocation and phase-out rules to minimise the costs to the economy.

The report is available at www.nzier.org.nz

ENDS

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