Agriculture and the ETS

Federated Farmers asks the right question:

The Ministry for the Environment is also starting a series of regional ETS consultations as a pre-regulatory move; change is on the way. What we do know is that Kyoto's first commitment period comes to a halt at the end of this year and we have to set a national "carbon budget" to 2020. Will we sign up to Kyoto's second commitment period or revert back to United Nation's looser Framework Convention on Climate Change?

Big emitters in the G10 members have signaled retreat. Canada, Japan and Russia have all stepped back from Kyoto while the United States never made it to the start line. Minister for Climate Change, Tim Groser, believes we have to have an ETS or overseas trade will become problematic. That's incorrect. Canada, when faced with a multi-billion dollar bill for its coal fired power stations, withdrew from the Kyoto Protocol last year. There has been no impact on its exports and not even calls here to boycott Maple Syrup. We are also yet to see Greenpeace activists chaining themselves to Toyota dealerships, in protest of Japan's decision not to sign up to a second commitment period.

I'm generally a fan of revenue-neutral carbon taxes set at relatively low levels but capable of being ramped up as more of our trading partners adopt them. But I've also wondered whether we'll be Python's lonely Sergeant-Major marching up and down the square by himself on Kyoto penalties, with the rest of the squad headed off to see a film. Recall that Kyoto penalties are only binding if we choose to sign on for the successor agreement. If few are signing on, there may be more effective things we can do on climate change than buying carbon credits from defunct Russian factories.

Post Kyoto

Andrew Leach discusses the mechanics of Canada's withdrawal from Kyoto. In short, if Canada gives notice of Kyoto withdrawal before year-end, it suffers no penalties from current non-compliance. To become compliant, Canada would need to spend perhaps $19 billion on international carbon credits. But the only penalty for non-compliance relevant to Canada, even if they stay in, is a harsher target in a second period regime from which they're abstaining anyway.

Meanwhile, we're getting set to sign on for the second Kyoto period, if any deal goes forward, though Tim Groser seems less keen on any deal that doesn't include the US or major developing-country emitters.

I've noted before that NZ's excess emissions are only a cost on the public purse if we choose for them so to be; if there's no second Kyoto period, there may be no point in buying up credits for first-period non-compliance.

But there's one consideration here relevant that isn't for Canada: non-compliance also keeps us out of the international market for selling carbon credits. And that would hit forestry guys selling credits abroad. And so there could be distributional issues domestically if New Zealand were to be non-compliant.

Disclaimer, as always: I reckon buying insurance against bad case global warming worth the investment. But I'm not convinced that New Zealand's ETS is at all worthwhile unless it's part of a global agreement for emission abatement. Absent that, I still reckon we do better by making higher variance plays on technology development.