The Kyoto Question

There are two extremes to the arguments, as the Government defends its intention to ratify the Kyoto Protocol on climate change against business-sector complaints it is being much too hasty. We could be overwhelmed either by an environmental catastrophe or by an economic one.
The Government is, for its part, adamant it won’t wreck the economy by ratifying the protocol and implementing raft of policies to meet its commitment. Business leaders, on the other hand, doubt the environment will be ruined if the Government moves more cautiously.
Alex Sundakov, director of the Institute of Economic Research, argues that in the short term at least, the issues are solely economic. For short-term read 10 years. The Kyoto Protocol will have no environmental effects in its first commitment period, from 2008 through to 2012, but ratifying countries hope to lay the groundwork to encourage other countries to sign up for environmental targets to be achieved.
The New Zealand Government insists ratification is the right thing to do to provide the leadership for others to follow. The United States government is equally adamant it is the tactically wrong thing to do, arguing that if other countries can’t be persuaded to sign up from the beginning, it will be harder to corral them later.
History will determine which approach is indeed correct. Meanwhile, New Zealand is taking an enormous economic punt, while the US is taking no chances at all. If New Zealand is wrong, it will have paid heavy price.
Until government policies are announced it is impossible to gauge the economic effects on New Zealand. In the absence of hard policies, economists who have attempted to work out the ramifications have generally only succeeded in creating confusion. The Government refers to analyses showing small gain for gross national product by adopting Kyoto principles. Business interests simultaneously commissioned study by IER to show the economy will take beating.
Sundakov regards his institute’s analysis as “somewhat more careful and better considered than some of the others” but agrees the authors of other studies would similarly defend their reports. In any case, he says, the differing reports demonstrate the complexity of the problem.
Sundakov then suggested to the Government that his team be commissioned to work jointly with the Australian Bureau of Agricultural and Resource Economics (ABARE) which undertook study for the Government. Sundakov maintains the IER’s model better represents the New Zealand economy than ABARE’s but his institute’s model doesn’t have the international components ABARE can boast. He suggested the two should work to prepare paper combining the strengths and eliminating the weaknesses of the different models.
At year-end Sundakov was awaiting decision on his proposal but, he says, one thing is plain to him: the difficulties in reaching simple answer are reason for being very cautious and there will be no second chances.
The key point shown by the institute’s analysis is that we can have either:
* domestic policies which achieve significant reductions in carbon gas emissions, but there is no way we can escape significant economic costs; or
* policies which protect various New Zealand sectors from adverse effects and reduce the overall economic impacts but, none of those policies will achieve significant reductions in emissions.
Economic effects are already apparent, meanwhile, as major businesses held back on significant investment decisions late last year. They were waiting until they could assess the real costs of ratifying the Kyoto Protocol to counter the effects of climate change.
New Zealand Refining, for example, stalled decision to go ahead with $160 million upgrade of the Marsden Point Refinery to facilitate the production of fuel with lower sulphur and benzene levels. Company bosses wanted some feel for the likely costs to the business of complying with New Zealand’s climate change commitments, either direct or indirect, but needed to know the Government’s policies.
Similarly, Fletcher Building delayed $60 million upgrade of its Golden Bay cement works in Whangarei because it was unclear about the Government’s intentions. According to Radio New Zealand report, Fletchers could import cement from low-cost Asian countries outside the Kyoto Protocol and close the local plant. Fletcher Building considers it could be on hiding to nothing trying to compete, even though New Zealand companies which survived the reforms of the past two decades are highly efficient.
Shutting down the cement business in this country to enable New Zealand to do its bit for climate change will, of course, do nothing to lower the total carbon emissions spewed into the atmosphere.

Bob Edlin is regular contributor to Management magazine.

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