The Kyoto Protocol: issues for New Zealand’s participationNZIER – Kyoto Protocol: issues for New Zealand’s participation ii • Ratification should also be predicated on the

NZIER – Kyoto Protocol: issues for New Zealand’s participation

The Kyoto Protocol: issues forNew Zealand’s participation

Trade realities and New Zealand’s role in theinternational response to the threat of global warming

REPORT TO THE CLIMATE CHANGE PAN INDUSTRY GROUP

February 2002

The Climate Change Pan Industry Group includes:

4 THE GREENHOUSE POLICY COALITION(for further information see www.gpcnz.co.nz)

4 NEW ZEALAND FOREST INDUSTRIES COUNCIL

4 ROAD AND TRANSPORT FORUM OF NEW ZEALAND

4 TODD ENERGY

4 BUSINESS NEW ZEALAND

4 PETROLEUM EXPLORATION ASSOCIATION NEW ZEALAND

4 MEAT INDUSTRY ASSOCIATION

4 CARTER HOLT HARVEY

4 WELLINGTON REGIONAL CHAMBER OF COMMERCE

4 BUILDING INDUSTRY ASSOCIATION

The Institute, its contributors, employees and Board shall not be liable for any loss or damagesustained by any person relying on this report, whatever the cause of such loss or damage.

The New Zealand Institute of Economic Research (NZIER) ,based in Wellington, was founded in 1958 as a non-profitmaking trust to provide economic research and consultancy

services. Best known for its long-established Quarterly Survey of

Business Opinion and forecasting publications, Quarterly

Predictions and the annual Industry Outlook with five-yearlyprojections for 22 sectors, the Institute also undertakes a widerange of consultancy activities for government and privateorganisations. It obtains most of its income from researchcontracts obtained in a competitive market and trades on itsreputation for delivering quality analysis in the right form, andat the right time, for its clients. Quality assurance is providedon the Institute’s work :

• by the interaction of team members on individual projects;

• by exposure of the team’s work to the critical review of a broader

range of Institute staff members at internal seminars;

• by providing for peer review at various stages through a project by

a senior staff member otherwise disinterested in the project;

• and sometimes by external peer reviewers at the request of a client,

although this usually entails additional cost.

Authorship

This report has been prepared at NZIER by Alex Sundakov,Jean-Pierre de Raad and John Ballingall.

NZ INSTITUTE OF ECONOMIC RESEARCH (INC.)

8 Halswell St. Thorndon

P O BOX 3479 WELLINGTON

NEW ZEALAND

Telephone: 64 4 472 1880

Fax: 64 4 472 1211

Website: www.nzier.org.nz

NZIER – Kyoto Protocol: issues for New Zealand’s participation i

EXECUTIVE SUMMARY

This report provides an assessment of the economic impact of Kyoto Protocol policies on

New Zealand, with a focus on international competitiveness issues. The report also considers

the likely evolution of climate change policies internationally, and what that means for policy

options open to New Zealand.

We conclude that early ratification does not represent the best means for New Zealand to

achieve a balance of what we assume to be Government’s policy objectives, namely:

1. Encourage the creation of a global policy regime that would help mitigate the risks of global

warming. Since New Zealand’s own emissions are within the margin of error of global

levels, this policy objective is primarily satisfied by actions that encourage the main

emitting nations to take action. The key question is what specific actions, promises and

threats by New Zealand would best contribute to inducing the desired global behaviour.

2. Ensure that New Zealand does not bear a disproportionate burden of global adjustment.

This relates to emission reduction targets for New Zealand, other negotiated rules and

domestic policy options. We assume that New Zealand’s interest is best served by doing

the minimum to achieve the first objective.

3. Protect New Zealand from the risk of treaty failure. Irreversible changes should only be

made against secure expectations of action by the rest of the world. As long as uncertainty

remains about the actions of other global players, New Zealand should aim to keep its

options open.

4. The cost of the global regime to reduce the rate of climate change must not exceed the cost

of mitigating the consequences of such climate change.

The main reason why early ratification is not the preferred option is that the formulation of

global climate change policies is not a one-off step. Rather, these policies remain uncertain and

the environment is dynamic. Hence, it is in New Zealand’s interests to retain as much leverage

as possible over the future development of global policies. An unconditional commitment now

reduces such leverage, making it less, rather than more, likely that a viable global regime will

emerge. 1

We recommend that New Zealand would be more likely to achieve an overall balance of the

objectives set out above if our ratification of the Kyoto Protocol was conditional on:

• Ratification and a credible commitment to implementation by those key countries by whom

a decision not to participate in the first commitment period would sharply deepen the costs

of that period for New Zealand. This would be particularly true of Australia and Japan.

• Successful completion of negotiations for the second commitment period, which would

ensure that the main emitting developing countries, such as China and India, accept non-

trivial binding targets from 2012. The negotiations would also need to ensure that the

former communist countries accept binding targets once their ‘hot air’ is depleted, and that

New Zealand is not disadvantaged by the targets negotiated for the remaining Annex I

countries.

1 Because New Zealand’s influence on the world economy and environment is relatively small , i t is

assumed that New Zealand has some, but minimal influence over the behaviour of other countries. Thisapplies equally to the analysis of moral persuasion and of negotiated positions.

NZIER – Kyoto Protocol: issues for New Zealand’s participation ii

• Ratification should also be predicated on the development of viable domestic policies,

which would carry New Zealand over the first commitment period without undue damage.

We arrive at this conclusion in part through the analysis of the likely changes in New Zealand’s

competitiveness during the first commitment period – the time when our main competitors face

no binding targets.

Impact on New Zealand

The official view is that, whilst the costs of climate change are potentially large because much

of our economy is weather-dependent, overall the economic costs to New Zealand of

implementing the Kyoto Protocol are likely to be small and, with an ability to claim credits from

forestry, might actually produce a net benefit to New Zealand. (New Zealand climate change

programme. 2001. p17)

The precise impact will depend very much on the policy implemented domestically. But there

are a number of reasons why the burden on New Zealand looks to be higher than expected, and

disproportionately high compared to other Annex I countries:

• Energy is a key input in New Zealand, and the possibilities to switch to lower emission

energy sources or other inputs at reasonable cost are limited. Increasing the cost of

emissions will reduce our economic growth prospects more than other, less energy

intensive economies. This will do little for our aim to climb up the OECD’s GDP per capita

rankings.

• The choice of 1990 as a benchmark is particularly disadvantageous to New Zealand. In

contrast to all other Annex I countries, New Zealand’s energy intensity has been increasing

due to the significant structural changes of the late 1980s. Over the period 1990-1998

emissions (including land use change and forestry) had risen by about 5%, compared to a

0% target for 2008-2012.

• Our industries are particularly vulnerable to competition from countries outside the

Protocol. More so than other Annex I countries, our primary commodity-based exports

tend to compete with those from non-Annex I countries. A rise in production costs due to

Kyoto will threaten our competitiveness.

• Our geography puts us at a disadvantage. Apart from high transport emissions per unit of

GDP, energy intensive industries (such as wood processing) are at risk of relocation to the

non-Annex countries en-route to our main markets. This will particularly impact on the

low-skilled labour predominant in these sectors.

• Forest sinks offer only limited potential to offset the abatement costs.

Prospects of an effective global policy

We also consider current international trends with respect to climate change policy.

Developing countries are exempt from emission targets during 2008-2012. The idea is that they

would take on binding targets after 2012. But they have few incentives to accept any

meaningful targets, as that would constrain economic development objectives, and the loss of

the competitive advantage gained over Annex I countries during the first period.

Annex I countries are already starting to question the wisdom of a policy that puts the

competitiveness of their economies at risk, without achieving environmental objectives. The US

was first out of the starting blocks. That sentiment will be fuelled by a rising awareness that –

given the lack of progress to date – most Annex I countries are unlikely to be able to meet their

Kyoto targets at reasonable cost.

As 2008 closes in, and the costs of meeting emissions targets become real, domestic debates on

who should pay what will heat up. The fuel price protests throughout Europe in 2000 gave a

NZIER – Kyoto Protocol: issues for New Zealand’s participation iii

taste of the level of public tolerance for increased taxes now in return for long-term

environmental benefits. The subsequent retreat on eco-taxes in key EU countries illustrates the

lack of appetite to incur the political costs. It seems likely others will follow the US, either

explicitly by quitting Kyoto, or, more likely, implicitly by watering down the domestic impact

through exemptions to industries most exposed to international competition, and missing and

then re-negotiating down the targets.

NZIER – Kyoto Protocol: issues for New Zealand’s participation iv

CONTENTS

1. Introduction .............................................................................................. 1

2. Emissions and energy use in NZ ............................................................ 3

2.1 Sources of greenhouse gasses ......................................................................................3

2.2 Energy and the economy ...............................................................................................4

2.2.1 Transport...............................................................................................................7

2.2.2 Electricity generation .............................................................................................9

2.3 Conclusion.....................................................................................................................9

3. Threats to NZ trade performance.......................................................... 10

3.1 The trade in energy-intensive goods ............................................................................10

3.2 Threats to New Zealand's exports ................................................................................11

3.2.1 Dairy products .....................................................................................................13

3.2.2 Cattle meat products............................................................................................14

3.2.3 Chemicals ...........................................................................................................15

3.2.4 Paper products ....................................................................................................17

3.2.5 Wool products .....................................................................................................18

3.2.6 Machinery products .............................................................................................19

3.2.7 Non-ferrous metals products................................................................................20

3.2.8 Wood products ....................................................................................................21

3.3 Competition within New Zealand..................................................................................22

3.4 Labour market .............................................................................................................22

3.5 Conclusion...................................................................................................................23

4. A fair share for New Zealand?............................................................... 24

4.1 The additional burden of using 1990 as benchmark year..............................................24

4.2 Land use change and forestry......................................................................................26

4.3 Conclusion...................................................................................................................27

5. A comparison with Australia ................................................................. 28

5.1 Australian emissions profile .........................................................................................28

5.1.1 Substitution to lower emission energy sources .....................................................29

5.2 Impact of Kyoto on Australia’s economy.......................................................................29

5.2.1 Energy exports ....................................................................................................30

5.3 Australian prospects in meeting its Kyoto emission target.............................................30

5.4 Conclusion...................................................................................................................31

6. Kyoto and the developing countries .................................................... 32

6.1 The impact of phased negotiations...............................................................................32

6.2 What incentives to join? ...............................................................................................34

6.3 Conclusion...................................................................................................................36

NZIER – Kyoto Protocol: issues for New Zealand’s participation v

7. Progress by the Annex I Countries....................................................... 37

7.1 Emission trends and the Kyoto gap..............................................................................37

7.2 The evolution of climate policies...................................................................................39

7.2.1 European Union...................................................................................................40

7.2.2 Japan, US, Canada, and Australia .......................................................................40

7.2.3 Transitional economies........................................................................................43

7.3 Conclusion...................................................................................................................43

8. What are our options? ........................................................................... 44

8.1 Early ratification ...........................................................................................................45

8.2 Domestic policies.........................................................................................................46

8.3 Conclusion...................................................................................................................46

9. References.............................................................................................. 47

APPENDICES

Appendix A: Emission tables ........................................................................ 49

FIGURES

Figure 1 Trends in New Zealand's emissions of GHGs................................................. 4

Figure 2 Contribution to total New Zealand emissions by sector................................... 4

Figure 3 Emissions as a proportion of Gross Domestic Product ................................... 5

Figure 4 Value of energy input per $ of GDP in NZ and the OECD............................... 6

Figure 5 Energy consumption by sector........................................................................ 7

Figure 6 Transport emissions per unit of GDP .............................................................. 8

Figure 7 Threats to New Zealand's exports: a schematic representation .................... 12

Figure 8 New Zealand's dairy exports by destination.................................................. 13

Figure 9 New Zealand's meat product exports by destination ..................................... 14

Figure 10 Share of New Zealand's chemicals products exports by destination ........... 15

Figure 11 Share of New Zealand's paper products exports by destination.................. 17

Figure 12 Share of New Zealand's wool exports by destination .................................. 18

Figure 13 Share of New Zealand's machinery exports by destination ......................... 19

Figure 14 Share of New Zealand's non-ferrous metals exports by destination............ 20

Figure 15 Share of New Zealand's wood exports by destination................................. 21

NZIER – Kyoto Protocol: issues for New Zealand’s participation vi

Figure 16 NZ capacity utilisation................................................................................. 25

Figure 17 Australian exports 1994 .............................................................................. 30

Figure 18 Historic and projected CO2 emissions......................................................... 33

Figure 19 CO2 emissions in key Annex I regions: 1980-99 ......................................... 38

Figure 20 CO2 emissions by the top 6 European emitters: 1980-1999........................ 38

Figure 21 Emissions per $1000 GDP.......................................................................... 41

Figure 22 Canadian Exports ....................................................................................... 42

TABLES

Table 1 New Zealand's greenhouse gas emissions ...................................................... 3

Table 2 Sector contributions to GDP – key Annex I countries....................................... 5

Table 3 Energy related CO2 equivalent fossil fuel emissions 1999................................ 6

Table 4 New Zealand's export markets by distance...................................................... 8

Table 5 Trade in energy intensive products for OECD regions (1994) ........................ 10

Table 6 Export profile: selected Annex One countries................................................. 11

Table 7 Competitors to New Zealand's dairy exports .................................................. 13

Table 8 Competitors to New Zealand's meat products exports ................................... 15

Table 9 Competitors to New Zealand's chemicals exports .......................................... 16

Table 10 Competitors to New Zealand's paper products exports ................................ 17

Table 11 Competitors to New Zealand's wool exports ................................................ 18

Table 12 Competitors to New Zealand's machinery exports ....................................... 19

Table 13 Competitors to New Zealand's non-ferrous metals exports .......................... 20

Table 14 Competitors to New Zealand's wood exports ............................................... 21

Table 15 Manufacturing employment.......................................................................... 23

Table 16 Emission trends summary............................................................................ 26

Table 17 Australian CO2 emissions and removals ...................................................... 29

Table 18 Top ten sources of CO2 emissions............................................................... 33

Table 19 Emissions and targets for Annex I countries ................................................ 39

Table 20 Comparison of Annex I emissions................................................................ 49

Table 21 Emissions by region 1990-2020................................................................... 50

NZIER – Kyoto Protocol: issues for New Zealand’s participation 1

1. INTRODUCTION

The New Zealand Government intends to ratify the Kyoto Protocol in 2002. This international

agreement seeks to manage the impact of human activity induced global warming by first

limiting, and eventually reducing, global emissions of greenhouse gasses (GHG).

The response to climate change is one of the most complex risk management issues facing

New Zealand and the world. Nothing is straightforward. The effects of climate change are

uncertain:

• The potential costs and benefits are spread unevenly across the globe and across economic

sectors.

• There is also considerable uncertainty about the degree to which viable changes in

greenhouse gas emissions associated with human activities will alter the direction of

climate change.

• The effects of the Kyoto Protocol on global emission levels are themselves uncertain. It is

generally recognised that the implementation of the first commitment period (2008-2012) by

developed countries will do very little to change the trend in greenhouse gas emission

growth. Rather, the initial implementation of the Protocol is intended to generate a political

and economic environment in which the developing nations will be willing to sign up to an

emission reduction regime.

• There is clearly a risk that the actions by Annex I1 countries will not generate the desired

buy-in from the rest of the world.

• There is also a significant risk that some Annex I countries will not fulfil their obligations,

while many former communist countries may withdraw from the agreement once they no

longer enjoy the benefits of ‘hot air’.2

The key problem from New Zealand’s national interest perspective is that the economic costs of

implementing the Protocol are highly concentrated on the first commitment period. This is

because during this period – if New Zealand were to ratify – we would be imposing on

ourselves significant economic costs which would not be faced by our main competitors – both

in the imports and exports markets. New Zealand’s relative position in world markets would

deteriorate until all countries around the world face the same marginal cost of greenhouse gas

emissions. This will not happen until the second commitment period at the earliest.

There are no easy answers to how New Zealand should best manage these risks. If

New Zealand uses policy instruments during the first commitment period which affect our

competitiveness, New Zealand would be incurring significant immediate economic costs. In

return, it will be buying some improvement in the probability that human generated

greenhouse gas emissions will eventually be contained, which will increase the probability that

the effects of climate change will be mitigated, which may reduce the future costs on

New Zealand and the rest of the world of dealing with the negative effects of climate change. It

1 Annex I to the Kyoto Protocol lists the countries which, by ratifying, accept the responsibility for

limiting greenhouse gas emissions. This includes most industrialised countries, South Korea, Singapore,

Israel and Taiwan, and the European former communist countries ( i .e . i t does not include the Asianrepublics of the former Soviet Union).

2 ‘Hot air’ is the term used to describe actual reductions in emissions already achieved by these countries

due to the collapse of heavy industry in the post-Soviet period. Hot air makes these countries netcreditors during the first commitment period. This gives them a strong incentive to participate during

2008-2012 as they can sell their excess credits. In subsequent periods, these countries would no longerenjoy such benefits, and may not be willing to constrain their economic growth.


is very difficult to assess any of these probabilities. There is a non-trivial risk that New Zealand

may incur the immediate costs under the Protocol, and then still be faced with the cost of

dealing with the effects of ongoing climate change.

There may also be some risks to New Zealand from not ratifying the Protocol. If the Kyoto-type

regime does become a global standard eventually, there may be some benefits from being an

early adopter. There may also be some risk that other developed countries which ratify the

Protocol could eventually seek to impose some trade restrictions on countries that are outside

the regime.

Hence, the key issues facing New Zealand’s policy-makers are:

• Do the expected benefits, given their magnitudes and probabilities, justify the expected

costs, particularly of the first commitment period?

• How do the benefits and costs of immediate ratification compare to the benefits and costs of

delayed action, such as ratifying at the same time as our major competitors?

• What are the tools available to New Zealand to manage various risks?

Against this background, this report investigates:

• The structural and sectoral differences between New Zealand and other developed

economies (in particular, and in most detail, Europe and Australia) to understand the

differential impacts.

• The likely development of global climate policy.

• The policy options open to New Zealand in the context of an evolving climate policy stance

in Europe, Australia, Canada and the US.

We conclude by developing a recommended policy approach to manage various complex risks

faced by New Zealand.


2. EMISSIONS AND ENERGY USE IN NZ

This section of the report compares the sources of greenhouse gas emissions in New Zealand

and in other Annex I countries. The differences are important, because they lead to different

burdens of adjustment and impose different dynamic constraints on economic growth.

2.1 Sources of greenhouse gasses

In New Zealand, carbon dioxide from energy and methane from agriculture are the two main

sources of greenhouse gas emissions (Table 1). This mix is unusual among OECD countries,

where carbon dioxide predominates. This reflects the relative importance of the agricultural

sector to the New Zealand economy.

Table 1 New Zealand's greenhouse gas emissionsCO2 equivalent (Gg)1

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Carbondioxide

25,399 25,882 27,763 27,136 27,199 27,206 28,223 30,210 28,824 30,523

Methane 35,211 34,478 33,857 33,896 34,105 34,144 34,103 33,494 33,558 33,594

Nitrous oxide 11,849 11,725 11,738 11,887 12,048 12,097 12,041 12,062 12,231 12,397

Other3 605 653 646 247 300 310 414 384 397 318

Total 73,064 72,737 74,004 73,166 73,651 73,757 74,782 76,151 75,010 76,831Source: Ministry for the Environment (2001).

Notes: 1. 1 Gg ( Gigagram) equals 1 kiloton

The data refers to gross emissions

Other refers to the sum of hydrofluorocarbons, perfluorocarbons, and sulphur hexafluoride.

In 1999, carbon dioxide accounted for around 39% of gross emissions. This share has been

growing since 1990, reflecting growth in the transport and energy generation industries in

particular, as well as the manufacturing & construction industries. Methane accounts for

around 44% of New Zealand's gross greenhouse gas emissions, down from 48% in 1990, mainly

due to changes in the levels and mix of livestock (see Figure 1). Nitrous oxide represents

around 16% of total GHG emissions.

By contrast, CO2 is the main greenhouse gas in the rest of the developed world, primarily from

fossil fuel combustion. In 1996, 84% of US emissions came from fossil fuel combustion, while

methane accounted for 10% (EIA 2000).

These compositional differences are significant because at present there are no economically or

technologically viable means of reducing methane emissions from ruminant animals. Hence,

any emission constraints in this area would more likely be associated with output declines.


Figure 1 Trends in New Zealand's emissions of GHGsPercent of total gross emissions

0

10

20

30

40

50

60

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Carbon DioxideMethaneNitrous OxideOther

Source: Ministry for the Environment (2001).

When expressed by economic sector, emissions from agriculture accounted for 55% of gross

emissions in 1998, and emissions from fuel combustion and industrial processes 41% (Ministry

of Economic Development 2000). The vast majority of New Zealand's methane emissions come

from pastoral agriculture, with 88% stemming from ruminants. Of this ruminant methane, 51%

was from sheep, 23% from beef cattle and 23% from dairy cattle (Joblin, 2001). These

proportions have changed over the 1990s, with sheep now accounting for relatively less of the

methane emissions, and dairy cattle more. This reflects the continued conversion of sheep

farms into dairy farms. Non-agricultural sources of methane in New Zealand include landfills

and energy.

Figure 2 Contribution to total New Zealand emissions by sectorMt CO2 equivalent

24.1

2.39

42.83

-21.43

3.14

27.53

2.74

41.18

-20.76

2.79

-30.00

-20.00

-10.00

0.00

10.00

20.00

30.00

40.00

50.00

All energy Industrial Processes Agriculture Land Use Changeand Forestry

Waste

19901998

Source: Ministry of Economic Development 2000

2.2 Energy and the economy

New Zealand is the only OECD country where energy-related greenhouse gas emissions

relative to GDP have increased since 1980. While there has been some decline from the peak in


1991, the emissions ratio has been relatively stable since the mid-1990s. This appears to be a

characteristic of commodity dependent economies, such as New Zealand, Canada and

Australia, compared to ongoing declines in other industrial countries. Japan is unusual in this

regard.

Figure 3 Emissions as a proportion of Gross Domestic ProductMillion metric tons CO2 equivalents per US$1000 GDP

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Canada United States Australia Japan

New Zealand United Kingdom Germany

Source: Energy Information Administration 2001

Table 2 shows that, as in many other OECD countries, the service sector has become more

important. But compared to other OECD countries:

• The share of the more energy intensive industries, such as those in the primary sector, has

in fact increased over time, although it has fallen back since the mid-1990s due to the

decline of the petrochemicals sector. The contribution of agriculture to New Zealand GDP

is 2-6 times larger than in other Annex I countries.

• The contribution of services to New Zealand's GDP increased by 2.0% during the 1989 -

1999 period. Other Annex I countries increased their share of GDP due to services by up to

8.5%.

• The size of the service sector in New Zealand is smaller relative to others once the energy

intensive transport industry is excluded. The service sector (excluding transport industries)

in the US and Australia, for example, accounted for about 65% of total GDP in 2000,

compared to less than 50% in New Zealand. Growth in the relative share of the service

sector came at the expense of light manufacturing.

Table 2 Sector contributions to GDP – key Annex I countries

Country Agriculture Industry (total) Services

1989 1999 1989 1999 1989 1999New Zealand 8.2 7.8 29.4 27.7 62.5 64.5

Australia 4.6 3.3 29.4 26.4 66.0 70.4

Japan 2.6 1.7 40.9 36.1 56.5 62.2

United States 2.0 1.7 29.1 26.1 69.0 72.2

Canada 2.9 2.5 34.2 32.8 62.9 64.7

France 3.9 3.0 30.2 25.0 65.9 72.0

Germany 1.9 1.2 38.9 31.1 59.7 67.7

United Kingdom 2.0 1.2 36.3 28.6 61.8 70.3

Source: OECD 2001

Another way of illustrating the same point is that, compared to the rest of the OECD,

New Zealand had the 2nd highest value of energy inputs per dollar of GDP in 1998.


Figure 4 Value of energy input per $ of GDP in NZ and the OECD

Dollar of energy input per $ of GDP in OECD and European countries (NZ$, 1998)

0.00

0.01

0.02

0.03

0.04

0.05

0.06

0.07

0.08

0.09

Japan EuropeanUnion

OECDPacific

OECDEurope

UK OECD Australia OECD NorthAmerica

US NZ Canada

Source: NZIER

Using more energy per dollar of output than other countries does not mean energy is used

inefficiently. Rather, it reflects the availability of energy inputs relative to other inputs. It also

reflects the overall comparative advantage: New Zealand is relatively good at producing

commodities that are energy intensive, in particular dairy and meat, forestry and wood

products, petrochemicals and aluminium.

A closer look at New Zealand’s CO2 emissions from energy consumption (fuel combustion)

shows that transport accounts for 42% of emissions in 1999, thermal electricity generation 20%,

and the manufacturing industry 21%.3 In 1999 diesel, petrol and other liquid fuels accounted for

51% of emissions; gas 35.5%, and coal 11.1% (MED 2000). Table 3 provides an international

perspective on these 1999 data.

Table 3 Energy related CO2 equivalent fossil fuel emissions 1999

Emission source NZ 1 Industrialised World 2 US 2 Australia 3

Oil 51% 49% 42% 30.1

Gas 35% 20% 22% 13.3

Coal 11% 30% 36% 56.6

Source: MED 2000 (1), Energy Information Administration (2), Australian Greenhouse Office (3)

In terms of emissions, the thermal electricity generation and the transport sector have also been

the fastest growing over the last decade (up by 4.9% and 3.2% respectively), in line with

increased energy consumption. This is not surprising. Since New Zealand was an early

adopter of large-scale hydro generation, thermal generation represents the main marginal

source of energy. Transport sector growth has been largely driven by the rapid growth of

commodity sectors and tourism, as well as the number of cars on the road.

The above differences between New Zealand and other Annex I countries are significant in

terms of the relative costs of containing emissions:

• As the only agricultural economy among the Annex I countries, New Zealand will be

largely on its own in having to develop technologies for containing agricultural greenhouse

gas emissions during the first commitment period. This is a relatively heavy burden for a

3 In 2000, transport accounted for 45% of emissions, electricity generation 18.2%, and the manufacturing

industry 23.1%.


small country. Other countries, which share common emission problems, will be able to

spread the costs and risks of research.

• The high share of transport in New Zealand’s energy emissions makes economic incentives

relatively less effective in New Zealand. Fuel demand in transport is relatively insensitive

to price. Hence, New Zealand will find it relatively difficult to align its policy instruments

with other developed countries. This again imposes an additional adjustment burden on a

small country.

• New Zealand’s greenhouse gas emissions are largely produced by the sectors which are the

key drivers of this economy. By contrast, in most other Annex I countries, the bulk of

emissions comes from mature, low growth sectors. Hence, the dynamic effects of imposing

emission constraints are likely to differ.

• Unlike most other Annex I countries, the marginal sources of energy in New Zealand are

more greenhouse gas emission intensive than the existing sources. In other words, average

emissions will keep rising as we add more gas and then coal-fired electricity generation. By

contrast, most other Annex I countries, at the margin, are shifting from coal to gas, reducing

their average emission intensity. This is being done for economic, rather than

environmental, reasons.

2.2.1 Transport

Data from the US Energy Information Administration allows an international comparison of

how energy consumption is distributed by sector. The main observation is the large share of

energy consumed in New Zealand’s transport sector, compared to other OECD countries.

Figure 5 Energy consumption by sectorShare of total energy consumption 1998

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

New Zealand Australia Canada United States Japan France Germany UnitedKingdom

Transportation Residential Industrial and commercial

Source: Source: EIA Country Briefs, Ministry of Commerce for New Zealand

Transport-related greenhouse gas emissions per unit of GDP closely follow this pattern: the

OECD (1999) found that for New Zealand these were amongst the highest in the OECD (see

Figure 6).


Figure 6 Transport emissions per unit of GDP1996 data. Tonnes of carbon dioxide per $US million.

0

50

100

150

200

250

300

350

400

Luxe

mbo

urg

Can

ada

USA

N. Z

eala

nd

Aus

tral

ia

Mex

ico

Icel

and

Gre

ece

Kor

ea

Spai

n

UK

Ger

man

y

Fran

ce

Japa

n

OECD average

Source: OECD (1999)

Notes: OECD GDP data at 1991 prices and purchasing power parities

New Zealand's economic structure and geography generates a greater than average dependence

on road transport. The key export industries of dairy, meat products and wood all involve

extensive transportation, from farms and forestry plantations spread across New Zealand to

processing plants to international gateways4 and markets. This contributes to our greater

emission intensity per unit of GDP.

The relatively small population spread out over a relatively large land mass also contributes to

our high reliance on road transport. In all, New Zealanders travel 503 vehicle kms for each $US

1000 of GDP. This is similar to the Australians and Americans, but compares to an average of

408 in the EU-15 countries (OECD 1999). Since New Zealand’s per capita GDP is substantially

lower than either in the US or in Australia, this highlights our relatively high mobility needs.

The problem with transport related emissions is that there are currently few feasible options to

reduce these, without significant changes to the structure of the economy, car and truck use, or

fuel conversion. In other words, the marginal abatement costs would be high in this sector.

Table 4 New Zealand's export markets by distanceDistance, km No of countries % of total NZ exports

d<7,000 2 23.7

7,000<d<11,000 18 35.3

11,000<d<13,000 20 3.2

13,000<d<15,000 18 18.4

15,000<d<17,000 14 1.4

17,000<d<20,000 27 17.9

Source: NZIER 2001

4 Most external trade is carried by sea: almost 85% of New Zealand exports by value, and over 99% by

volume (Statistics New Zealand). However, initially international transport itself will not be subject tothe Kyoto Protocol restrictions.


2.2.2 Electricity generation

The bulk of New Zealand’s electricity generation (about 65% in 1998) comes from hydro-plant.

While hydro-generation has environmental impacts, particularly on establishment, it does not

emit greenhouse gases in contrast to coal, gas, and to a lesser extent geothermal generation. In

1998, coal accounted for about 5% of capacity, and gas for 20%. The remaining capacity comes

from geothermal and wind. Coal is currently used to meet peak demand, but the Ministry of

Economic Development predicts that coal will provide a growing share of marginal base-load

capacity.

MED analysis (2000) shows that demand for electricity has grown largely in line with GDP over

the last 30 years; to fuel future economic growth, 2200 MW new capacity is being

commissioned. As New Zealand has already developed a major hydro capacity, only a limited

amount (18%) of that new capacity will come from hydro, with over 30% to come from coal

(other main sources are 13.5% from gas and 12% from geothermal generation). As a result,

coal’s share is estimated to grow to 14% in 2020, while the shares of gas and hydro generation

drop to 15% and 52% respectively.

As a consequence, the business-as-usual scenario is that carbon intensity of electricity and

overall energy consumption in New Zealand will grow, notwithstanding any abatement

technologies or fuel efficiency improvements. Combined with a forecast growth in electricity

demand, emissions from this sector are set to grow.

This contrasts sharply with the situation in Europe and Australia. Europe has traditionally

relied on coal for much of its base-load capacity. Since the early 1990s, most European countries

have been switching to gas as a result of electricity market and coal subsidy reforms. This

development has been underpinned by access to substantial gas reserves in the North Sea, and

an increasing reliance on gas delivered from Russia. In other words, in Europe the switch from

more emission intensive electricity generation to less emission intensive practices has been

occurring for economic reasons, with incidental environmental benefits. In contrast,

New Zealand is, in effect, being penalised for its early adoption of hydro-power generation,

with only limited development potential left under the existing non-emitting technologies.

MED estimates that a carbon charge to reduce emissions by 13% would raise electricity prices

by 12-13%, while coal prices would increase by 34%.

2.3 Conclusion

The above international comparisons of the sources of emission indicate that the costs for

New Zealand of adjusting to the Kyoto Protocol emission restrictions are likely to be higher

than for most other countries likely to participate in the first commitment period. In fact,

New Zealand’s economic structure, its per capita GDP and the structure of its emissions is more

in line with many of the ‘developing’ countries, which are not part of Annex I. This creates

significant risks for New Zealand in being an early adopter of the emission reduction targets.


3. THREATS TO NZ TRADE PERFORMANCE

In principle, all emission-intensive industries in Annex I countries are vulnerable to competition

from the developing world. But some Annex I economies are more exposed than others. We

analyse the competition faced in key New Zealand export markets. In particular we check:

• The relative importance of trade in emission-intensive commodities. What proportion of

our external trade is in emission-intensive goods, compared to other Annex I countries?

• Competition in our main export markets. Do New Zealand exports compete mainly with

other Annex I countries or with developing countries?

We will also look at exposure of domestic producers who compete with imports from

developing countries, and the potential of industries shifting part of their production process to

developing countries.

3.1 The trade in energy-intensive goods

Table 5 shows that the Pacific and North American regions are more exposed to energy-

intensive trade with non-Annex 1 countries than Europe. In turn, the Pacific region is more

exposed than North America (Baron et al. 1997).

Table 5 Trade in energy-intensive products for OECD regions (1994)

OECD Region Europe NorthAmerica

Pacific

Exports of energy-intensive products to non-Annex 1 countriesover total exports

3.2% 4.9% 7.5%

Imports of energy-intensive products from non-Annex 1 countriesover total imports

1.0% 1.8% 3.7%

Share of exports (imports) of energy-intensive products to (from)Annex I countries

80.7%

(88.9%)

66.6%

(79.1%)

33.3%

(67.2%)

Net exports of energy-intensive products to non-Annex Icountries (Billion)

US $39.8 US $16.1 US $21.3

Net exports of energy-intensive products to other regions (Billion) US $53.0 US $2.7 US $8.0

Contribution of trade to GDP (Imports+Exports)/2*GDP 27.3% 13.4% 9.8%

Notes: (1) Energy-intensive goods are defined as: iron and steel, non ferrous metals, paper and pulp, chemical products

Source: Baron et al. 1997 p27

New Zealand is particularly exposed, because of its different export profile to those of other

major Annex I nations. Table 6 ranks the ten highest export earning industries in New Zealand,

Australia and other key Annex I countries. It shows that:

• After the trade and transport grouping,5 New Zealand's highest export earner is the dairy

products manufacturing sector. This sector is both energy and methane intensive. It does

not appear in the top ten export earners for the other Annex I countries in the table.

• Exports of cattle meat6 products are also vital to New Zealand's export receipts. But its

competitiveness is at risk from rising costs of cattle methane and transport emissions. This

is also a major export earner for Australia.

5 Trade and transport includes tourism (hotels and restaurants), retail trade and air, water and land

transport.

6 Cattle meat includes beef, sheep, goat and horse meat.


• Other emission-intensive export sectors that are prominent in New Zealand are wool, paper

products, and manufactured wood products, which are less significant for other Annex I

nations.

• The low emission exports of machinery, vehicles, financial and business services are far

more important to the other Annex I countries.

Table 6 Export profile: selected Annex 1 countriesTen highest export earning sectors, 1995

NZ Australia United States Canada UnitedKingdom

Germany Japan

1 Trade andtransport

Trade andtransport

Machinery Vehicles Machinery Machinery Machinery

2 Dairy products Coal Financial andbusinessservices

Machinery Chemicals Vehicles Vehicles

3 Cattle meatproducts

Minerals Trade andtransport

Paper products Trade andtransport

Chemicals Electronicequipment

4 Chemicals Non-ferrousmetals

Chemicals Chemicals Electronicequipment

Trade andtransport

Trade andtransport

5 Other food Chemicals Electronicequipment

Wood products Vehicles Publicadministration

Chemicals

6 Paper products Publicadministration

Vehicles Trade andtransport

Financial andbusinessservices

Electronicequipment

Ferrous metals

7 Wool Machinery Transportequipment

Electronicequipment

Publicadministration

Ferrous metals Othermanufacturing

8 Machinery Cattle meatproducts

Publicadministration

Non-ferrousmetals

Oil Paper products Financial andbusinessservices

9 Non-ferrousmetals

Wool Paper products Oil Ferrous metals Metal products Transportequipment

10 Wood products Financial andbusinessservices

Othermanufacturing

Financial andbusinessservices

Paper products Textiles Textiles

Source: GTAP version 4 database

3.2 Threats to New Zealand's exports

An increase in the cost of producing emission/energy intensive commodities and bringing

them to export markets will affect the competitiveness of New Zealand exports.

New Zealand export competitiveness is affected in two areas:

• Compared to other Annex I countries. Greater emission-intensity – due to greater

transport costs and greater reliance on energy-intensive processes to get our key export

commodities ready for export – would make New Zealand commodities more expensive

compared to the same goods from other Annex I countries. This will affect New Zealand’s

competitiveness both in Annex I and in developing countries.

• Compared to non-Annex I countries. A carbon charge or similar will make production of a

commodity in New Zealand more expensive relative to production in a non-Annex I

country. This will make imports of these commodities from non-Annex I countries rather

than NZ more attractive to both Annex I and non-Annex I countries.

An increase in relative production costs is equivalent in its effect to a price decline. In essence,

New Zealand’s imposition on itself of the Kyoto Protocol restrictions during the first

commitment period is equivalent to us suffering a negative world price shock. Our terms of

trade (that is, the ratio of export to import prices) worsen. This is important, since – as will be


explained in the concluding section – the dynamics of the terms of trade is a critical determinant

of New Zealand’s economic performance.

Below, we analyse these competitive threats to New Zealand's key commodity exports, as listed

in Table 6. We consider:

1. Where is each commodity exported to?

2. Who else exports these commodities to each destination?

Let us consider the example of dairy products to explain how we sought to answer these

questions (Figure 7). We first looked at which countries New Zealand exports dairy products

to. Then, for each of the top 10 destination countries, we looked at who else exports dairy

products into that country. Any non-Annex 1 countries or the US (which does not intend to

ratify the Kyoto Protocol) among the top 10 importers are then identified as threats to our dairy

export market. If any other Annex I countries choose not to ratify, they will need to be added to

the list.

It is likely that if a country figures among the top 10 sources of imports, its producers would

tend to have the necessary production capacity and market presence to expand market share

relatively quickly. In addition, new market entrants may also pose risks.

Figure 7 Threats to New Zealand's exports: a schematic representation

Other sources of dairyimports for New Zealand's

export destinations

THREAT

THREAT

THREAT

NewZealand

Dairyproducts

Exportdestinations

A1

A1

A1

A1

A1

A1

NA1

NA1

NA1

Source: NZIER


3.2.1 Dairy products

a) Destinations for New Zealand's dairy exports

New Zealand's dairy exports are primarily sent to the United Kingdom, Japan, Malaysia and

the former Soviet Union (FSU). The top 10 destinations in the chart below account for around

67% of New Zealand's dairy exports.

Figure 8 New Zealand's dairy exports by destinationPercent of total exports

0

2

4

6

8

10

12

14

Uni

ted

Kin

gdom

Japa

n

Mal

aysi

a

Form

er S

ovie

tU

nion

Res

t of

the

Mid

dle

East

Tai

wan

Aus

tral

ia

Phili

ppin

es

Cen

tral

Am

eric

aan

d C

artib

bean

Res

t of

Nor

thA

fric

a


b) Potential threats to New Zealand's dairy exports

Table 7 Competitors to New Zealand's dairy exports

Source of imports Export destinationUK Japan Malaysia FSU Middle

EastTaiwan Australia Philippin

esCentralAmerica

NorthAfrica

1 REU Australia NewZealand

Germany REU Australia NewZealand

Australia REU REU

2 NewZealand

NewZealand

Australia REU Denmark REU REU REU NewZealand

UnitedStates

3 Germany REU REU NewZealand

NewZealand

NewZealand

Denmark NewZealand

UK NewZealand

4 Denmark UnitedStates

Germany UnitedStates

Australia CEA EFT UnitedStates

Denmark Germany

5 Canada Denmark UnitedStates

CEA Germany UnitedStates

Germany Germany USA Canada

6 EFT FSU UK Finland UK Denmark UnitedStates

UK CentralAmerica

Denmark

7 Australia UK CEA Denmark CEA FSU CEA Singapore Germany CEA

8 UnitedStates

Germany Denmark Sweden UnitedStates

Argentina UK CEA Canada Australia

9 Sweden EFT Canada Canada Finland MiddleEast

Canada Argentina Australia Finland

10 FSU Canada Finland EFT Canada SouthAfrica

Sweden India EFT CentralAmerica

Notes: (1) FSU = Former Soviet Union. REU = Rest of Europe. I, N, S = Iceland, Norway and Switzerland. CEA = Central European Associates (incl. Bulgaria, Hungary, Poland, etc). EFT = Iceland, Norway, Switzerland, Liechtenstein.


As the preceding chart shows, New Zealand's dairy exporters compete mainly with Annex I

countries in their main markets. The direct threat appears to come from the US, which is only

now beginning to expand as a dairy exporter, and from the growing dairy industries in Latin

America.

This threat is significant, particularly in relation to future growth. Moreover, prices in many

markets are increasingly being set at the margin by new competitors.


The key risk to New Zealand dairy industry, however, is that European countries will protect

their farmers from the effects of the Kyoto Protocol. International dairy prices are heavily

influenced by the European subsidy levels. These subsidies are politically motivated, and are

determined by the desire to provide an acceptable level of income to the incumbent farmer

population in the European Union. It is highly unlikely that these political imperatives will be

altered by the Kyoto Protocol. While the WTO rules would constrain overt new subsidies to

compensate for production cost increases, it is very likely that other measures will be found to

insulate European dairy producers from the effects of Kyoto polices. Since agriculture is a

marginal activity in Europe, such political settlements can be sustained by European economies.

3.2.2 Cattle meat products

This category includes products from sheep, bovine cattle, goats and horses.

a) Destinations for New Zealand's meat products exports

North America (beef) and the European Union (sheepmeat) are the main destinations for

New Zealand's meat products exports. In 2001 each market was worth approximately $1.5

billion. North Asia and the Middle East are other key export markets for meat products. The

countries in the chart account for around 85% of New Zealand's meat products exports.

Figure 9 New Zealand's meat product exports by destinationPercent of total

0

5

10

15

20

25

Uni

ted

Stat

es

Uni

ted

Kin

gdom

Res

t of

Eur

opea

nU

nion

Japa

n

Can

ada

Ger

man

y

Kor

ea

Tai

wan

Res

t of

Mid

dle

East C

hina


b) Potential threats to New Zealand's meat products exports

New Zealand product mainly competes with meat from Australia, the US and South American

beef producers (Argentina, Brazil, and Uruguay), as well as from European producers in their

home markets.

Beef and lamb trade in the US and EU is subject to quotas. For example, New Zealand has a

230,000MT beef quota to the US, whereas Argentina and Uruguay each have a quota of

20,000MT. Similarly, New Zealand’s quota to the EU is many times greater than that of

Argentina and Australia. These quotas limit the competitive threat from other exporters to our

main destination markets. In this case, the increase in production costs from climate change

policies is more likely to be borne in the form of reduced profit margins rather than through

loss of market share.

Overall , New Zealand’s meat products exports appear highly vulnerable to the price distortions

during the first commitment period of the Kyoto Protocol.


Table 8 Competitors to New Zealand's meat products exports

Source of imports Export destinationUnitedStates

UK REU Japan Canada Germany Korea Taiwan MiddleEast

China

1 Australia REU REU UnitedStates

UnitedStates

REU UnitedStates

Australia REU UnitedStates

2 NewZealand

NewZealand

UK Australia NewZealand

Argentina Australia UnitedStates

Australia NewZealand

3 Canada Brazil Germany NewZealand

Australia NewZealand

NewZealand

NewZealand

NewZealand

Australia

4 Argentina Argentina Denmark Canada Argentina Denmark Canada Canada India Canada

5 CentralAmerica

SouthernAfrica

Argentina Argentina Brazil UK RAP Japan Uruguay REU

6 Brazil Australia UnitedStates

China EFT Brazil Japan China Argentina RAP

7 Mexico Uruguay NewZealand

RAP REU CEA EFT RAP Germany Argentina

8 Uruguay SouthAfrica

Brazil Chile Uruguay Uruguay REU Chile UnitedStates

Taiwan

9 Japan Denmark Uruguay REU UK SouthAfrica

FSU REU Turkey Denmark

10 REU EFT CEA Thailand SouthernAfrica

Australia Taiwan Singapore UK Finland

Notes: (1) FSU = Former Soviet Union. REU = Rest of European Union (incl. Austria, Belgium, France, Greece, Ireland, Netherlands, Portugal). CEA = Central European Associates (incl. Bulgaria, Hungary, Poland, etc). EFT = Iceland, Norway, Switzerland, Liechtenstein. RAP = Rest of Andean Pact (incl. Bolivia, Ecuador, Peru).


3.2.3 Chemicals

This category includes products such as fertilisers, industrial chemicals, resins, paints,

pharmaceuticals, cosmetics, tyres and tubes, and other rubber and plastic products not listed

elsewhere.

a) Destinations for New Zealand's chemicals exports

Australia is New Zealand's largest export market for chemicals, accounting for 28% of the total

market. Japan and the United States are the other two key markets. The countries in the chart

account for around 90% of New Zealand's chemicals exports.

Figure 10 Share of New Zealand's chemicals products exportsby destinationPercent of total

0

5

10

15

20

25

30

Aus

tral

ia

Japa

n

Uni

ted

Stat

es

Kor

ea

Res

t of

Eur

opea

nU

nion Ger

man

y

Res

t of

Wor

ld

Tai

wan

Uni

ted

Kin

gdom

Chi

na


Note: The Rest of World aggregation contains 45 very small countries.


b) Potential threats to New Zealand's chemicals exports

Whilst exports of chemicals are important to the New Zealand economy, the New Zealand

chemical industry is a relatively small player in all destination markets except Australia.

There are many threats to New Zealand's exporters of chemicals – the US, China, Singapore,

Korea, Taiwan, and Malaysia, none of which have emission targets in the first commitment

period. The Middle East also poses a strong threat.

The largest single export in this category is 2 – 2.4 million tonnes of methanol per annum

manufactured by Methanex from natural gas. As this manufacture involves significant process

emissions, ongoing production in New Zealand may no longer be viable under climate change

policies. As the world demand for methanol is not likely to be affected by such changes, and

may increase in response to climate change policy - a significant amount of methanol is used to

produce an additive in gasoline to make it clean burning - emissions are likely to shift to other

countries. This could possibly include Australia, which has signalled that it is likely to

indemnify the process emissions from the gas industry.

Table 9 Competitors to New Zealand's chemicals exports

Source of imports Export destinationAustralia Japan United

StatesKorea REU Germany Rest of

WorldTaiwan UK China

1 UnitedStates

UnitedStates

Canada Japan REU REU REU Japan REU Taiwan

2 REU REU REU UnitedStates

Germany EFT CEA UnitedStates

Germany Japan

3 Japan Germany Japan REU UK UK Singapore REU UnitedStates

Korea

4 UK China Germany Germany UnitedStates

UnitedStates

Germany Germany EFT UnitedStates

5 Germany Korea UK China EFT CEA China Singapore Sweden FSU

6 NewZealand

EFT China MiddleEast

Japan Japan UK Korea Japan REU

7 China UK EFT UK FSU China Thailand China China Hong Kong

8 EFT Taiwan Mexico FSU CEA Sweden Japan Canada Denmark Germany

9 Singapore MiddleEast

MiddleEast

Malaysia MiddleEast

Denmark UnitedStates

UK FSU MiddleEast

10 Korea Sweden CentralAmerica

Indonesia Sweden FSU EFT EFT CEA Singapore




3.2.4 Paper products

a) Destinations for New Zealand's paper products exports

Australia and Japan are the main Annex I destinations for New Zealand’s paper and pulp

exports. The rest of the exports are destined mainly for Asia, where there are competing paper

and pulp product manufacturers.

Figure 11 Share of New Zealand's paper products exports bydestinationPercent of total

0

5

10

15

20

25

30

35

40

45

Aus

tral

ia

Japa

n

Indo

nesi

a

Tai

wan

Kor

ea

Hon

g K

ong

Mal

aysi

a

Res

t of

Wor

ld

Tha

iland

Chi

na


b) Potential threats to New Zealand's paper products exports

The United States has a strong presence in most of New Zealand’s paper product export

markets. Major threats to New Zealand's exporters of paper and pulp products stem from

Asian non-Annex countries - in particular from Singapore, Korea, Indonesia and Taiwan.

Brazil, Chile, and South Africa also present significant risks.

Table 10 Competitors to New Zealand's paper products exports

Source of imports Export destinationAustralia Japan Indonesia Taiwan Korea Hong

KongMalaysia Rest of

WorldThailand China

1 UnitedStates

UnitedStates

UnitedStates

UnitedStates

UnitedStates

Japan Singapore REU UnitedStates

Taiwan

2 NewZealand

Canada Canada Japan Canada Korea Japan CEA Japan UnitedStates

3 UK Finland Singapore Canada Japan UnitedStates

UnitedStates

Germany Canada Hong Kong

4 Finland Brazil REU Germany Indonesia China Canada Singapore Singapore Korea

5 REU REU SouthAfrica

Chile Brazil Germany Indonesia UK REU Japan

6 Germany NewZealand

NewZealand

Indonesia Chile Taiwan Taiwan Brazil FSU Canada

7 Canada Chile Japan Sweden FSU REU REU UnitedStates

Sweden REU

8 Japan Germany Germany REU REU Canada Finland China SouthAfrica

Indonesia

9 Indonesia China Chile SouthAfrica

Finland Indonesia Germany Sweden Germany Finland

10 Singapore UK Brazil Hong Kong Germany UK UK NewZealand

Indonesia Germany




3.2.5 Wool products

a) Destinations for New Zealand's wool exports

The largest market for New Zealand's exports of wool products is China, which receives around

31% of total wool exports. Other Asian markets include Japan and Hong Kong. Europe is also

a key destination for New Zealand wool exporters. The ten countries in the chart below

account for around 87% of total wool exports.

Figure 12 Share of New Zealand's wool exports by destinationPercent of total

0

5

10

15

20

25

30

35

Chi

na

Res

t of

Eur

opea

nU

nion

Hon

g K

ong

Uni

ted

Kin

gdom

Ger

man

y

Japa

n

Res

t of

Asi

a

Aus

tral

ia

Uni

ted

Stat

es

Indi

a


b) Potential threats to New Zealand's wool exports

The key threats to New Zealand exporters of wool are China and Argentina. Other threats

include Uruguay, Brazil, South Africa, Taiwan and Malaysia.

Table 11 Competitors to New Zealand's wool exports

Source of imports Export destinationChina REU Hong

KongUK Germany Japan Rest of

AsiaAustralia 2 United

StatesIndia

1 Australia Australia NewZealand

Australia Australia Australia NewZealand

NewZealand

Australia Australia

2 NewZealand

NewZealand

Argentina NewZealand

NewZealand

China China UK NewZealand

China

3 FSU China Taiwan REU Argentina NewZealand

Australia Rest ofAsia

UK NewZealand

4 UK Argentina UK SouthAfrica

China REU Argentina Argentina Uruguay FSU

5 Argentina UK Rest ofWorld

Rest ofAsia

REU Brazil UK FSU REU

6 Rest ofWorld

REU SouthAfrica

MiddleEast

SouthAfrica

UK REU Canada UK

7 Uruguay Germany Malaysia Uruguay FSU Malaysia UnitedStates

Brazil Argentina

8 REU SouthAfrica

Singapore EFT UK Argentina Uruguay SouthAfrica

SouthAfrica

9 Chile FSU FSU Argentina Uruguay SouthAfrica

MiddleEast

REU Korea

10 Taiwan Brazil Australia FSU CEA Uruguay Rest ofWorld

Chile Uruguay


Only four countries register as providing exports of wool to Australia.



3.2.6 Machinery products

This category includes machinery and equipment - engines, agricultural equipment, metal and

wood working equipment, office equipment, electrical appliances, etc.

a) Destinations for New Zealand's machinery exports

Australia accounts for 44% of this export market. The United States and the United Kingdom

are the other two key markets for New Zealand exporters of machinery.

Figure 13 Share of New Zealand's machinery exports bydestinationPercent of total

0

5

10

15

20

25

30

35

40

45

50

Aus

tral

ia

Uni

ted

Stat

es

Res

t of

Wor

ld

Uni

ted

Kin

gdom REU

Mal

aysi

a

Hon

g K

ong

Japa

n

Sing

apor

e

Ger

man

y


b) Potential threats to New Zealand's machinery exports

The main threats stem from the US and Asia, with China, Taiwan, Korea, and Malaysia all

competing strongly with New Zealand's exports. In the key export market – Australia – the US

is the key competitor, alongside the other Annex I countries. As the US will remain outside the

Protocol for the first period at least, our main competitor in our main market will gain in

relative terms.

Table 12 Competitors to New Zealand's machinery exports

Source of imports Export destinationAustralia United

StatesRest ofWorld

UK REU Malaysia HongKong

Japan Singapore Germany

1 UnitedStates

Japan REU REU REU Japan Japan UnitedStates

Japan REU

2 Japan Mexico Singapore Germany Germany Singapore Taiwan Korea UnitedStates

UnitedStates

3 Germany Canada Germany UnitedStates

UnitedStates

UnitedStates

UnitedStates

China Malaysia Japan

4 REU REU Japan Japan UK Korea Singapore Germany Korea EFT

5 UK Germany UK EFT Japan Taiwan Korea Taiwan Taiwan UK

6 China Korea CEA Malaysia EFT Germany REU REU REU CEA

7 Taiwan Taiwan UnitedStates

Sweden Sweden REU Malaysia Thailand Germany Korea

8 EFT UK China MiddleEast

China UK China Malaysia Thailand China

9 NewZealand

China Australia China CEA EFT UK EFT China Denmark

10 Singapore Malaysia Denmark Singapore Denmark China EFT Singapore UK Sweden

Notes: (1) FSU = Former Soviet Union. REU = Rest of European Union (incl. Austria, Belgium, France, Greece, Ireland, Netherlands, Portugal). CEA = Central European Associates (incl. Bulgaria, Hungary, Poland, etc). EFT =Iceland, Norway, Switzerland, Liechtenstein. RAP = Rest of Andean Pact (incl. Bolivia, Ecuador, Peru).



3.2.7 Non-ferrous metals products

a) Destinations for New Zealand's non-ferrous metals exports

New Zealand exports non-ferrous metals (such as aluminium) mainly to Japan, Australia, and

South East Asia. Japan receives 54% of New Zealand's total exports of non-ferrous metals, and

the ten destinations in the chart account for 97% of this total.

Figure 14 Share of New Zealand's non-ferrous metals exports bydestinationPercent of total

0

10

20

30

40

50

60

Japa

n

Kor

ea

Aus

tral

ia

Tha

iland

Indo

nesi

a

Uni

ted

Stat

es

Mal

aysi

a

Phili

ppin

es

Sing

apor

e

Tai

wan


b) Potential threats to New Zealand's non-ferrous metals exports

Clearly, New Zealand’s survival in this market will critically depend on any exemptions or

protections granted to the exporters of non-ferrous metals. The costs of such protections will

impact elsewhere in the economy.

Table 13 Competitors to New Zealand's non-ferrous metals exports

Source of imports Export destination

Japan Korea Australia Thailand Indonesia UnitedStates

Malaysia Philippines

Singapore Taiwan

1 FSU Japan NewZealand

Australia Australia Canada Japan Australia Japan Japan

2 UnitedStates

Chile Germany Japan Chile FSU Australia Japan Indonesia Australia

3 Australia Australia REU SouthernAfrica

MiddleEast

SouthAfrica

Singapore Korea FSU UnitedStates

4 Brazil UnitedStates

UnitedStates

UnitedStates

Japan Mexico Taiwan Singapore Malaysia Chile

5 SouthAfrica

FSU Singapore Taiwan FSU REU UnitedStates

Taiwan Australia Korea

6 China MiddleEast

UK Malaysia China Germany SouthernAfrica

Indonesia UnitedStates

Singapore

7 Canada China EFT MiddleEast

Germany Japan India MiddleEast

Taiwan RAP

8 Chile Philippines Chile REU Singapore EFT China UnitedStates

Germany SouthAfrica

9 EFT REU Japan Chile Korea Chile Chile REU REU REU

10 MiddleEast

Canada Malaysia Korea UnitedStates

Brazil MiddleEast

Germany China Canada




3.2.8 Wood products

a) Destinations for New Zealand's wood exports

New Zealand's exports of wood products (such as wooden containers, manufactured furniture

and fixtures) head mainly to Australia and Japan, which account for around 35% each of

New Zealand's total exports of wood products. The ten destinations in the chart below receive

97% of New Zealand's total exports of wood products.

Figure 15 Share of New Zealand's wood exports by destinationPercent of total

0

5

10

15

20

25

30

35

40

Aus

tral

ia

Japa

n

Uni

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Stat

es

Tai

wan

Kor

ea

Res

t of

Wor

ld

Chi

na

Tha

iland

Kon

g K

ong

Phili

ppin

es


b) Potential threats to New Zealand's wood exports

New Zealand faces a large number of threats to its wood products exports from the US and

non-Annex I countries, mainly from Asia. Malaysia, Indonesia, China, and Taiwan are

New Zealand's largest non-Annex I competitors in wood product exports. Chile and Brazil also

pose significant risks.

Table 14 Competitors to New Zealand's wood exports

Source of imports Export destinationAustralia Japan United

StatesTaiwan Korea Rest of

WorldChina Thailand Hong Kong Philippines

1 NewZealand

Canada Canada Indonesia Indonesia REU Indonesia Malaysia China Malaysia

2 REU Indonesia Mexico Malaysia Malaysia CEA Malaysia Rest ofWorld

Malaysia UnitedStates

3 Indonesia UnitedStates

Taiwan China UnitedStates

UnitedStates

Taiwan UnitedStates

REU Brazil

4 Malaysia China REU UnitedStates

China Malaysia UnitedStates

Japan Indonesia Taiwan

5 UnitedStates

Malaysia China REU REU Singapore Singapore REU UnitedStates

REU

6 Canada Taiwan Indonesia Canada Japan Denmark Korea Indonesia Taiwan Japan7 China Thailand Malaysia Japan Canada Germany REU Germany UK Indonesia8 Taiwan Australia Brazil Germany Chile Rest of

WorldRest ofWorld

Brazil Germany Thailand

9 Germany REU Thailand Chile Germany Sweden Japan China Canada Germany10 Rest of

WorldChile Germany New

ZealandNewZealand

UK Canada Singapore Japan Korea




3.3 Competition within New Zealand

New Zealand producers of emission-intensive products will also be faced with additional

competition in the domestic markets. The cement and steel sectors have been widely identified

as already being under threat, since their output is perfectly substitutable by imported product,

and imports are already highly price competitive. Other manufacturers – such as in the wood

products and refining industries– will face increased competition.

3.4 Labour market

Depending on the policies implemented domestically, the Kyoto Protocol in its current form

may lead to significant labour market dislocations.

One possible response may be that labour resources freed up from the declining emission-

intensive sectors would be re-directed to other productive uses. Some observers have even

claimed that this could help transform New Zealand from a primary commodity-based

economy to a knowledge-based economy. But looking at New Zealand’s past experiences, such

transformation is difficult and likely to be slow. In particular, while New Zealand would be

giving up one of its existing sources of comparative advantage, it is not clear what would take

its place.

Also, it is not clear that the affected labour can easily be re-employed by new knowledge-based

enterprises that some predict will emerge. The incidence of job losses (or stunted growth) in the

export sector is most likely to fall on those with low skills, a relatively large proportion of which

are Maori and women (KiwiCareers, 2000).7 Looking at the labour content of trade, Deardorff

and Lattimore (1999) find that New Zealand’s exports largely embody labour with lower

qualifications, while our imports largely embody highly qualified labour.8 The adoption of

Kyoto-related policy instruments that affect New Zealand’s competitiveness will therefore also

have significant consequences for New Zealand’s social and regional development objectives.

Of the 1.4 million people in full time equivalent employment in 2001, about a quarter are

directly engaged in industries that are likely to be immediately affected by the emission

reduction policies, namely those in manufacturing, transport, agriculture, and mining.

Manufacturing is the largest employment area in the New Zealand economy, employing

238,040 full time equivalents (FTEs), or 17% of the total workforce (Business demographics,

Statistics New Zealand). Some of the largest employers in this sector are the energy-intensive

industries with an export focus that would be most exposed to reduced competitiveness or

leakage under Kyoto.

The relatively high proportion of labour employed in the directly affected industries, and the

relative reliance on low skilled labour in New Zealand compared to other Annex I countries

again highlights the likely burden of adjustment.

7 For more information, see http://www.careers .co.nz/ET/et- indoc.htm#nine

8 Deardorff and Lattimore examine the factor intensities of New Zealand's trade. See New Zealand TradeConsortium Working Paper (number 3) online at http://www.nzier .org.nz


3.5 Conclusion

Until emission reduction measures become global – which will not happen at least until after

2012, but more likely after that – New Zealand will suffer a relative deterioration in its external

environment if it ratifies the Kyoto Protocol and adopts policy instruments that harm its

competitiveness. Our existing exports will come under more intense competitive pressure, and

perhaps more importantly, growth dynamics will be altered. Additional world demand for our

key export commodities is more likely to be captured by the US and by non-Annex I countries.

Moreover, New Zealand will become even more at risk of the agricultural subsidy regimes in

other developed countries.

Past experience suggests that, to some extent, such a negative terms of trade shock will be

absorbed by lower real exchange rate. This will reduce the consumption opportunities of

New Zealand households, but will protect producers to some degree. However, past terms of

trade shocks have also always had real consequences for GDP growth. There are two main

reasons for this:

• Domestic markets are not perfectly flexible. In particular, as political pressure is brought to

protect the purchasing power of households (including access to public goods, such as

health), the benefits of a lower real exchange rate (export competitiveness) tend to get

eroded.

• Negative terms of trade shocks tend to result in lower investment in New Zealand, as other

investment destinations become more attractive.

The magnitude of the negative shock will depend on the level of the emission charge applied in

New Zealand. The economic impacts of a small charge may be minor, but equally it would

have little impact on New Zealand’s emission levels. It is not clear what the purpose of such a

regime would be. Any carbon that were to alter our greenhouse emission levels would also be

significant for the economy.

Table 15 Manufacturing employmentIndustries with more than 700 full time equivalent employees

Industry FTEs Industry FTEsMeat Processing 20430 Forestry 1630

Log Sawmilling 7420 Timber Resawing & Dressing 1460

Dairy Product Manufacturing N.E.C. 6080 Concrete Slurry Manufacturing 1410

Wooden Structural 5330 Metal Container Manufacturing 1410

Logging 4700 Corrugated Paperboard Container Manufacturing 1340

Fruit And Vegetable Processing 4600 Paper Product Manufacturing N.E.C. 1290

Food Manufacturing N.E.C. 4280 Concrete Product Manufacturing N.E.C. 1180

Services To Forestry 3700 Milk And Cream Processing 1120

Sheet Metal Product Manufacturing N.E.C. 2700 Fabricated Wood Manufacturing 960Architectural Aluminium Product Manufacturing 2610 Iron And Steel Casting 960

Structural Steel Fabricating 2520 Construction Material Mining N.E.C. 930

Structural Metal Product Manufacturing N.E.C. 2480 Fertiliser Manufacturing 930

Pulp, Paper And Paperboard Manufacturing 2440 Aluminium Rolling, Drawing,Extruding 880

Wood Product Manufacturing N.E.C. 2310 Aluminium Smelting 850

Synthetic Resin Manufacturing 1990 Gravel And Sand Quarrying 790

Plywood And Veneer Manufacturing 1980 Solid Paperboard Container Manufacturing 720

Basic Iron And Steel Manufacturing 1970 Concrete Pipe And Box Culvert Manufacturing 710

Bacon, Ham And Smallgood Manufacturing 1890 Non-Ferrous Metal Rolling, Drawing, Extruding 710

Poultry Processing 1840Source: Statistics New Zealand

Notes: (1) N.E.C. stands for 'Not elsewhere classified'.


4. A FAIR SHARE FOR NEW ZEALAND?

The discussion above has highlighted two key issues:

• In contrast to most other Annex I countries, the New Zealand economy is highly dependent

on the production of greenhouse gas intensive commodities. It also has limited scope for

switching to lower emission energy sources.

• In contrast to other Annex I countries, placing a price on greenhouse gas emissions will

have a widespread competitive effect on New Zealand’s key export industries.

To some extent, these disadvantages may be offset by the targets and other conditions

negotiated under the Kyoto Protocol. For example, Australia has taken a strong position to

protect its national interest, and has negotiated a relatively generous target and other conditions

which minimise the impact on the Australian economy.

The Government has claimed that it has similarly negotiated a position which compensates for

the above disadvantages:

• New Zealand’s emission target is set at 100% of the actual 1990 emissions, while the average

for Annex I countries is a 5% decline below that level.

• New Zealand will be able to claim carbon sinks from the post-1990 plantation forests in the

first commitment period. Overall, the annual level of forest sinks about equals the annual

emission reduction target for New Zealand.

In this section, we consider whether the above two factors indeed compensate for

New Zealand’s relative disadvantage.

4.1 The additional burden of using 1990 as benchmark year

Over the period 1990-1998 emissions (including land use change and forestry) had risen by

about 5%, compared to a 0% target for 2008-2012. 1990 is an arbitrary choice as a benchmark

year for carbon emissions. It happens to be not a great choice for New Zealand, because this

year was part of a period of poor economic performance and negative net migration.

Benchmark based on low economic performance

As Figure 16 shows, during 1990 New Zealand was close to the bottom of its capacity utilisation

cycle. During the late 1980s, New Zealand’s economy went through a prolonged period of

below-par growth, as it undertook both macro and microeconomic adjustment. Not

surprisingly, emissions could be expected to grow strongly once the adjustment shock was

over, and the economy renewed growth. In this sense, 1990 for New Zealand is almost the

opposite of what it was for the former communist countries: for us it was almost the last year of

poor output growth, and the floor from which the economy would recover; for them it was

almost the last year of high levels of industrial production.


Figure 16 NZ capacity utilisationProportion

0.78

0.80

0.82

0.84

0.86

0.88

0.90

0.92

Mar

-85

Dec

-85

Sep-

86

Jun-

87

Mar

-88

Dec

-88

Sep-

89

Jun-

90

Mar

-91

Dec

-91

Sep-

92

Jun-

93

Mar

-94

Dec

-94

Sep-

95

Jun-

96

Mar

-97

Dec

-97

Sep-

98

Jun-

99

Mar

-00

Dec

-00

Source: NZIER. Quarterly Survey of Business Opinion

In 1990, the level of capacity utilisation was about 5 percent below normal in New Zealand. By

contrast, this was a period of strong growth in other developed economies. Hence,

New Zealand’s slightly higher than average emissions target expressed in terms of 1990

emissions, at best, accounts for the fact that New Zealand was at the time at the trough of its

business cycle.

High population growth raises the per capita burden

A second reason why 1990 is a poor benchmark year relates to New Zealand being an

immigrant country, with relatively high population growth rates compared to other Annex I

countries. Net migration levels tend to mirror New Zealand’s economic performance. Due to

the economic adjustment costs of the late 1980s, this was a period of net negative migration.

Again, this trend reversed during the economic recovery of the 1990s.

Table 16 shows the average annual change in emissions for New Zealand and some key Annex I

countries (see Table 20 for a full list). Compared to the Annex I average, New Zealand’s CO 2

emissions grew more quickly since 1990. However, our per capita emissions growth was

significantly lower during that period. This was due to the influx of new migrants.

The main issue is that setting emission targets in absolute rather than per capita terms makes

sense for the countries of Western Europe and for Japan, where populations are either stable or

even declining in some cases. However, absolute targets impose additional burdens on

demographically dynamic countries, such as New Zealand. As long as New Zealand retains a

positive immigration target, the burden of absolute emission targets is going to be greater for us

than for most other developed countries. The obvious parallels are with the US, Canada and

Australia, all countries with forecast population growth: the US has opted out of the Kyoto

Protocol, and neither Australia nor Canada appear to be on a fast track for ratification.


Table 16 Emission trends summaryMillion metric tonnes of CO2 from the flaring and consumption of fossil fuels

Total CO2 emissions CO2 emissions per capita CO2 per $1000 GDP

Annual average% change1980-1989

Annual average% change

1990 - 1999



1990 - 1999



1990 - 1999

Canada 0.7 1.7 -0.6 0.7 -2.0 -0.5

United States 0.6 1.2 -0.2 0.3 -2.4 -1.6

Japan -0.1 1.3 -0.7 1.1 -3.5 0.2

Australia 2.5 2.6 1.1 1.6 -0.7 -0.5

New Zealand 3.3 1.3 2.6 0.0 1.5 -1.0

France -3.1 0.6 -3.6 0.2 -5.1 -0.8

Germany -0.7 -1.6 - - - -

Italy 0.8 0.8 0.8 0.6 -1.2 -0.4

Netherlands -0.2 1.1 -0.6 0.5 -1.9 -1.3

United Kingdom -0.2 -0.7 -0.3 -1.0 -2.7 -2.5

World Total 1.9 0.2 -0.1 -0.9 - -

Annex 1 average 0.7 1.1 -0.1 0.2 -2.0 -0.9Source: Energy Information Administration

Notes: 1. 1990 US Dollars calculated using market exchange rates.

4.2 Land use change and forestry

New Zealand will enjoy a substantial volume of carbon sequestration benefits from the post-

1990 forestry plantings. However, among the provisions negotiated in the Kyoto Protocol two

in particular work against New Zealand’s interests, and offset the positive effects of the sinks

regime.

First, the forestry arrangements negotiated for the first commitment period assume that

emission occurs when a tree is harvested, rather than allowing for carbon stored in the wood

products. There is no scientific basis for this: the rule is a simplification designed to reduce

measurement and monitoring costs. There is some possibility that the rule will be changed for

subsequent commitment periods.

However, during the first commitment period, this rule creates an artificial distortion between

tree growing and wood processing. As a result, sinks constitute a subsidy to growing trees, but

discourage on-shore processing. This is because there is an incentive to split the activity: locate

growing in Annex I countries, where it would attract the benefit of sinks, and locate processing

outside of Annex I countries, where it would not attract a carbon charge.

The negotiated rules for the treatment of carbon stored in wood products do not contribute to

global emission reduction objectives, but impose an additional burden on New Zealand. This is

because a significant proportion of New Zealand’s future economic growth could – in the

absence of such distortions – come from further wood processing. In fact, there is a

considerable risk that the currently negotiated arrangements would lock New Zealand into the

relatively low end of the total forestry value chain.

Second, the rules negotiated for carbon sinks under the Clean Development Mechanism (CDM)

are likely to encourage further growth of plantation forestry in non-Annex I countries. The

CDM allows additional forests in non-Annex I countries (subject to rules defining additionality)

to claim the benefits of carbon sinks. This gives those countries a strong competitive advantage

over Annex I forest growers, because it allows convenient co-location of Kyoto forests and non-

Kyoto processing. In effect, the CDM rules, as they have been negotiated, reduce the relative

value of sinks to New Zealand forest growers.


In addition, the CDM rules appear to work against the objective of encouraging non-Annex I

countries to join the Kyoto regime. CDM offers such countries the ability to enjoy some of the

economic benefits of the regime, without having to accept any of the costs. This ‘have your cake

and eat it too’ situation would be particularly difficult to give up.

Apart from the two issues discussed above, it is important to emphasise that the ability of sinks

to offset the effects of the Kyoto Protocol on New Zealand’s economic growth will depend

critically on domestic policy, which is still undecided. As long as sinks and emission liabilities

are separable, access to sinks does not affect the marginal cost of the liability. In other words,

while some forest owners will benefit from the ability to sell the sinks into the international

markets, the competitive effects on the New Zealand economy described in the previous

sections will not be mitigated.

Access to sinks has the potential to mitigate the negative terms of trade shock if sinks are used

to reduce the marginal cost of the emission liability. This, however, poses two problems. First,

such mitigation can only work if sinks ownership is retained by the Government. Apart from

any issues of property rights, this would further deepen the competitive disadvantage of

New Zealand forest growers, particularly if other Annex I countries do allocate sink rights to

forest growers. Second, such a regime would inevitably contribute to faster emissions growth

in New Zealand because it blunts incentives for emission constraint.

4.3 Conclusion

Overall , New Zealand appears to have failed to negotiate sufficient room within the rules of the

Protocol to offset the relatively high burden of adjustment faced by this country. This can be

contrasted with Australia, which has been able to achieve a broad range of concessions,

including a generous target of 108% of its 1990 emissions.


5. A COMPARISON WITH AUSTRALIA

New Zealand often compares its performance and policies to those of Australia, because of

relatively close historical, geographical, social and economic ties. Like New Zealand, energy-

intensive commodities feature highly in Australia’s export profile (see Table 5), and its

emission-intensity is among the highest in the world. Like New Zealand, Australia’s geography

means that the distances to markets are large, and that its industries are exposed to competition

from non-Annex I countries. Australia’s population is forecast to grow by 29.6% between 1990

and 2020, compared to EU’s 1.7% [2nd report to UNFCCC]. New Zealand, Canada and the US

are forecast to experience population growth of over 20% over the same period.

So what is the impact of Kyoto likely to be on Australia and how does Australia intend to meet

its target?

5.1 Australian emissions profile

The Australian Greenhouse Office (2001) estimates that, excluding land clearing, emissions in

1999 were 17.4% above 1990 levels. With an estimate of net land clearing, emissions would

have been about 7.3% higher than 1990 levels. While not strictly the same measure, and subject

to uncertainties (particularly around land clearing), this can be broadly compared to Australia’s

Kyoto target of an average of +8% over 2008-2012.

Emissions per dollar of GDP decreased by 13% over the same period, particularly due to the

growth of the services sector vis-à-vis the energy intensive sector, as well as through increased

efficiency and recovery. Emissions per capita were 5.8% above 1990 levels (AGO 2001).

Like New Zealand and in contrast to other Annex I countries, Methane is a relatively important

greenhouse gas. But in contrast to New Zealand, Methane makes up just 25% of emissions, and

a significant proportion (21%) is attributable to coal mining and gas and oil production. CO2 is

the key greenhouse gas in Australia, making up 68.4% of emissions. Electricity generation is the

source for more than half of those, with transport accounting for just under a quarter of Carbon

Dioxide emissions.

Change in emissions in the other sectors has been relatively low. The reduced emissions from

industrial processes are attributed to process and plant changes in the aluminium industry.

While there is great uncertainty around the measurement of land use change, it has a significant

impact on total emissions. Emissions from land use change are reducing. Most of the land

clearing activity occurred in the 1960s and 1970s, but due to a mix of regulations, remaining

opportunities, and new land management practices, land clearing will continue to decline as a

source of emissions.


Table 17 Australian CO2 emissions and removalsCO2 equivalent

Sector 1990 Mt CO2 1999 Mt CO2 Change Mt CO2 % Change

Energy 299.5 346.6 65.1 21.7%Stationary 208.5 259.8 51.3 24.6%Transport 61.5 73.9 12.4 20.3%

Fugitive 29.5 30.8 1.3 4.4%

Industrial Processes 12.0 9.7 -2.4 -19.8%

Agriculture 91.2 93.8 2.7 2.9

Forestry, Other -27.3 -25.9 1.4 -5.1%

Waste 14.9 16.0 1.1 7.6%

Gross 417.6 484.1 66.5 15.9%

Net emissions 390.3 458.2 67.9 17.4%Source: Australian Greenhouse Office 2001

5.1.1 Substitution to lower emission energy sources

Domestically, coal makes up 50% of CO2 emissions. Unlike New Zealand, coal accounts for a

high share of base-line electricity generation (80% in 98/99, ABARE 2000). New coal fired

plants are due to come on line in Queensland in 2002.

Gas accounted for 10% of electricity generation in 98/99. Lack of sufficient inter-state pipelines,

and the slow development of the national electricity grid has until now hampered the

expansion of gas fired electricity plants. Australian known gas reserves more than doubled

recently from 19.4 trillion cubic feet in 1998 to 44 Tcf in 1999 (EIA June 2001. Country Profile:

Australia). Major expansion of this industry is, therefore, possible. The large gas reserves and

potential to expand the supply grid suggests that the most likely effect of Australia ratifying the

Kyoto Protocol would be to speed up the growth of this sector. Not surprisingly, the gas

industry is one of the strongest pro-ratification lobbies in Australia.

There is also some potential for renewable energy sources. Wind and solar energy are

examples, with 350,000 homes equipped with solar hot water systems (Department of the

Environment 1997). There is some hydro-power capacity already (e.g. , Tasmania and Snowy

Mountains), accounting for about 9% of electricity production. (Interestingly, the share of

hydro has declined about 30% from 1990 levels due to capacity constraints.) In the mid 1990s, 13

hydro-power facilities were in the pipeline throughout Australia (e.g. the 1996 Ord River Dam

in Western Australia), but this new capacity pales in comparison to coal and oil as energy

sources.

5.2 Impact of Kyoto on Australia’s economy

Exports of energy, energy-intensive manufactures, and primary products are an important

source of income. Cheap energy, from coal and more recently gas, is one of Australia’s key

sources of comparative advantage.

Japan accounted for 29% of all Australian exports in 1994, followed by Korea (8%), and the US

(7.5%). Taiwan and China are also key destinations. Australia is the world’s largest coal

exporter (to Japan, Korea and some European countries). Other main exports are metals,

minerals and agricultural produce, all of which are relatively emission intensive (see Figure 17).

The Asia-Pacific region is a key export market, which means that from 2008 Australian

exporters could find it harder to compete with the Asia-based producers.

In its discussion paper on ratifying the Kyoto protocol, the Joint House and Senate Standing

Committee on Treaties cited findings that GDP would fall by around 1.9%, mainly due to lower

competitiveness of the coal and aluminium industries as well as other mineral resources. One

submission suggested that proposals to expand the aluminium industry with 3 new smelters,


for example, could be shelved as a result of Kyoto, with the opportunity shifting to developing

countries instead.

Figure 17 Australian exports 1994Percent of total export value

0%

2%

4%

6%

8%

10%

12%

14%

Tra

de &

tra

nspt

Coa

l

Min

eral

s ne

c

Non

-fer

r m

etal

s

Che

mic

als

Publ

ic a

dmin

Mac

hine

ry

Cat

tle m

eat

prod

s

Woo

l

Fin

& b

us s

erv

Oth

er fo

od

Ferr

ous

met

als

Gas

Whe

at

Suga

r


5.2.1 Energy exports

Coal is a key source of domestic energy, but more than half of the coal is also exported, mainly

to Japan for steel production. Coal waste in mining results in some emissions, but most

emissions occur at the point of combustion. Kyoto would affect Australia’s coal exports and

domestic consumption through weaker demand as the cost of emissions from coal combustion

rises. For example, a carbon tax or similar on coal burning in Japan – which takes about 70% of

Australia’s coal exports for power generation and steel production – is likely to weaken

demand. As discussed later, one of Japan’s key planks to meeting its Kyoto targets was to

expand its nuclear power capacity, which would substitute for coal.

Australia, however, is also a major uranium exporter, and may benefit from any expansion in

the global nuclear power capacity. However, concerns around safety of plants and nuclear

waste disposal in the EU and Japan indicate that support for such expansion is weak. Germany,

for example, has committed to reducing its nuclear capacity (although in part by purchasing

power from French nuclear plants), and whether Japan will proceed with planned expansion is

currently uncertain. This picture may change when new nuclear technology emerges.

Australia also exports gas in a liquified form, particularly to Japan. While gas is a relatively low

carbon fuel, liquification is a carbon intensive process, and some type of carbon charge would

affect Australia’s competitiveness in this market. The Australian gas industry argues, therefore,

that Australia would be penalised for emissions it incurs on behalf of the world which benefits

as gas substitutes for coal and so reduces global emissions.

5.3 Australian prospects in meeting its Kyoto emission target

Australia’s energy sector (transport and electricity generation) is the main source of emissions,

and also of projected growth in emissions over time (Department of the Environment 1997).

The projections reflect economic growth and a changing economic structure. In 1997, it was

estimated that energy sector emissions would be 40% above 1990 levels by 2010. Taking into

account all emission sources (except land clearing), total emissions were projected to grow by

28% (110 Mt CO2 equivalents) between 1990 and 2010.


The projections take into account fuel switching trends and the effect of the range of energy

efficiency and other programmes in place since the end of 1992. Given Australia’s 8% growth

target, it would need to meet the other 20% through additional emission credits from forestry

and land use change and policy measures. In gross terms, this is broadly in line with the likely

excess emissions in New Zealand from the same sectors.

But the inclusion at Bonn of revegetation and land management as creditable activities

significantly alters the balance. The rate of land clearing in Australia has reduced since the

early 1980s, and between 1990 and 1999 land clearing emissions are estimated to have reduced

by 31% (Australian Greenhouse Office 2001). Similarly forestry provided a net sink of 5% in

1999. The area of plantation forests has increased by 28% during the 1990s, and there are active

government sponsored policies to increase plantations.

This suggests that, compared to New Zealand, the Kyoto target may be relatively generous for

Australia, particularly given the scope to substitute gas for coal. The Australian Government

has also committed not to harm the LNG industry through environmental policies, and

provided for duty free importation of capital equipment unavailable in Australia. For example,

Cabinet agreed to indemnify the $4b LNG project for the NW shelf against a carbon tax. This

also indicates that other future big projects that cannot go ahead with a carbon tax may be able

to get exemption.

As noted, however, there are a great many uncertainties (particularly around land use change)

and pre-Bonn estimates of the economic impacts indicated the costs to Australia might be

significant (1.9% of GDP). In its discussion paper on the Kyoto Protocol, the Joint Standing

Committee observed that new economic opportunities might emerge, and some industries

might flourish under Kyoto (e.g., exports of new green technology, emission trading, and

renewable energy), but that other industries would pay the ultimate price. The Committee

recommended that ratification be withheld until more was known about the impact, and that

Australia’s national interest be put first in future negotiations.

“This means ensuring that:

• Australia’s economic growth, employment and competitiveness are not jeopardised;

• any abatement measures agreed to are cost effective from a domestic perspective; and

• any agreed abatement measures are environmentally effective.”

(Joint Standing Committee on Treaties, 2001, page v)

5.4 Conclusion

At all stages of the Kyoto process, Australia has taken an aggressive negotiating position to

protect its economic interests. The relative cost of adjustment for Australia is likely to be lower

than for New Zealand. Despite this, Australia has taken a cautious and slow approach to

ratification. On current timetable, New Zealand is likely to ratify well ahead of knowing what

Australia’s intentions are likely to be.

New Zealand faces significant risks from lower adjustment costs enjoyed by Australia, and

from differential implementation paths. The existing differences are likely to open further the

income gap between the two countries. The widening income gap would further exacerbate the

incentives on New Zealand workers and firms to relocate to Australia.


6. KYOTO AND THE DEVELOPING COUNTRIES

Reducing global emissions of greenhouse gases requires a global effort. The developing

countries would need to take on binding targets to constrain and reduce emissions, and each of

the Annex I countries must follow up on commitments. But what are the prospects of that

happening?

The Kyoto Protocol creates two offsetting influences on the behaviour of developing countries:

• On the one hand, actions by developed countries during the first commitment period offer a

moral lead, which may induce future action by developing countries.

• On the other hand, economic distortions between Annex I and non-Annex I countries

provide a competitive advantage to developing countries, and create an incentive for them

to maintain that distortion for as long as possible.

In assessing the likely future effects of the Kyoto Protocol, it is important to develop a realistic

view of the relative pulling power of moral persuasion and powerful economic incentives.

6.1 The impact of phased negotiations

A number of reasons are commonly used to explain why developing countries do not yet have

binding emission targets placed on them:

• The developed economies have a historic responsibility for the greenhouse gas emissions.

• As a group, the developed economies are the largest emitters of greenhouse gases, whether

considered in total or on a per capita basis. The developing countries with 77% of the world

population account for only 32% of global emissions.

• Developing countries want the same opportunities to develop their economies as had been

enjoyed by developed countries.

• Developed countries have a greater ability to pay for the action, compared to developing

countries which have relatively low per capita incomes.

In other words, it would seem morally right and fair that the developed economies take the lead

(e.g. see Grubb et al 2001). The problem is how much of a lead is fair. Will developing

countries consider that they have enjoyed sufficient differential treatment after the first

commitment period? How much growth advantage is sufficient to justify moving to a global

effort?

The economies of the developing countries are growing, and so are their emissions. Because of

their large populations, China and India already are the 2n d and 5 th largest emitters of GHG,

behind the US (see Table 18). Without a vehicle to constrain emissions of those countries too,

emissions growth will not be stabilised or even substantially slowed down. The longer the

moral lead required of the developed countries, the less chance there is that global emission

levels can be brought under control sufficiently to influence global warming.


Table 18 Top ten sources of CO2 emissionsMillion metric tons of gross carbon emissions from flaring and consumption of fossil fuels

Region/Country History Projections

1990 1999 2005 2010 2015 2020

United States 1,345 1,511 1,690 1,809 1,928 2,041

China 617 669 889 1,131 1,398 1,683

Former Soviet Union 1,036 607 665 712 795 857

Japan 269 307 324 330 342 353

India 153 242 300 351 411 475

Germany 271 230 246 252 258 267

United Kingdom 164 151 168 177 184 192

Canada 126 150 158 165 173 180

Italy 112 121 131 137 141 146

France 102 109 116 120 126 135Source: Energy Information Administration 2001

Figure 18 shows that, on a business-as-usual basis, there will be little difference in emissions

between the Annex I and developing countries by 2020. What is also clear is that, even if the

Annex I countries can stabilise emissions at 5% below 1990 levels over the 2008/12 period, the

amount of global carbon emissions will continue to grow.

Figure 18 Historic and projected CO2 emissionsMillion metric tons carbon equivalent

0

1,000

2,000

3,000

4,000

5,000

6,000

1990 1999 2005 2010 2015 2020

Total Annex I

Annex 1 meeting Kyoto

Total Developing

Projections


Notes: The ‘with Kyoto’ scenario assumes that from 2010 Annex I countries’ emissions will be at 5.2% below 1990 levels, and constant thereafter.

The base case includes impacts of any climate policies already in force.

In fact, Kyoto might raise the amount of emissions from the developing countries over their

current projections. Developing countries will become more competitive if a constraint or tax is

imposed on emissions in Annex I countries. To the extent that there is a switch to similar

commodities produced in developing countries, their output will expand, and so will emissions.

The OECD has argued against this view. Baron et al (1997) cite research findings that

environmental regulation has not had much of an impact on trade flows or location decisions.

The explanation was that environmental regulation is only one issue and that other factors –

such as infrastructure, the quality and cost of labour, access to markets, political stability, and

exchange rate variations – are often more important considerations.

However, such historical findings need to be treated with caution because in the past

environmental and energy policies have been characterised by exemptions, particularly for


those industries most exposed to competition. Exemptions reduce both the economic and the

environmental impacts of regulations. For example, Denmark, Norway, Germany, France, the

Netherlands and Italy all have forms of energy and carbon taxes in place, but sectors that are

exposed to international competition and/or are energy intensive enjoy various exemptions and

rebates (International Energy Agency 2000). If developed countries are to provide any realistic

moral leadership, most of such exemptions would have to be eliminated.

While it is true that environmental interventions – regulation or tax – form only part of

investment and location decisions, interventions are meant to affect behaviour. The impact is

likely to be most significant where energy is a key source of comparative advantage.

New Zealand, Australia, Canada and the US are more exposed in this way than Europe.

To the extent that emission-intensive activities relocate to developing countries to escape the

higher price of carbon in the Annex I countries global emissions may rise due to relatively lower

standards and outdated equipment employed in developing countries. Baron et al (2000) note

that the amount of country emissions leaked in this way could be anywhere between 0 and 35%

of emissions.

Of course, as the developing economies grow they will invest in new stock of capital. This is an

opportunity to invest in new low emitting technology. Some of that will displace old high

emission production in Annex I countries. Annex I countries may actively encourage this effect,

as the Clean Development Mechanism will allow them to claim the resulting carbon credits. As

Barrett argues:

“... [this mechanism] is potentially of huge significance, for it provides the only means

within the Kyoto framework of shifting abatement toward the non-Annex I countries. But

the CDM has a number of problems... Not only do developing countries have incentives to

offer projects that would have been undertaken anyway, but the Annex I countries have

incentives also to select these projects, if they can be acquired at lower cost...” (1998: p30).

At the same time, entrepreneurs in the developing countries are likely to face lower

environmental standards and no carbon tax or emission constraints. It is reasonable to assume

that they will compare the cost of investing in new carbon-saving production processes to the

cost of using carbon-intensive processes. The kind of technology that will be invested in will

therefore depend in part on how stringent the country’s future environmental policies are likely

to be. And that depends on whether the country is likely to commit to targets in the future.

6.2 What incentives to join?

In theory, the partial coverage is to be short lived. It is intended that from 2005 the international

community will negotiate the binding emission targets for the second commitment period,

including those for the developing countries.

As participation in international agreements can only be voluntary, countries will only

participate if the benefits are big enough. The environmental benefits will depend on other

countries keeping their end of the deal. And that depends on the economic and political

impacts of accepting targets, the potential for free-riding and whether other countries can

impose credible sanctions (Wiener 1997, Cooper 1997, Barrett 1998).

Some developing countries would benefit directly from halting or reducing the predicted

environmental impacts of global warming. For example, global warming increases the risks of

flooding for small island nations and countries with low-lying coastal areas. Others would

benefit now from taking on binding targets as it opens the door to income from the carbon

permit trade (where it can not be captured through the CDM). And others stand to gain

economically from keeping the partial coverage of the Kyoto policies. For them, binding targets

would be costly as it would mean giving up a recently acquired windfall gain in competitive


advantage, particularly if these countries invested in more greenhouse gas intensive industries

between now and 2012 (Wiener 1997). Given the nature of international treaties, what would

stop those countries from insisting on generous emission targets, or even from bowing out from

the Protocol?

Grubb et al (2001) emphasise the importance of the ‘leadership’ effect: developing countries will

join once the industrialised world has demonstrated progress. After all, many developing

countries have already ratified the Protocol (in contrast to the Annex I countries), and Bulgaria

and Kazakhstan have adopted targets unilaterally. Kyoto mechanisms – such as the clean

development mechanism and the adaptation fund – would create the systems and momentum

to set the developing countries on a carbon-decreasing path, even without binding limits.

On the other hand, ratification by developing countries in the absence of binding targets is not a

useful guide: there is little wonder they are willing to ratify an agreement that would offer them

a competitive advantage, without having to make any firm commitments in return. More

importantly, a number of the key developing countries, such as China, have already signalled

that the Kyoto Protocol may impose unacceptable costs on them.

Many of the arguments that explain why the developing countries do not have targets will still

be valid when the time comes to negotiate the second commitment period. This will give

developing countries a range of moral justifications to defend a possible withdrawal, even if

only temporarily, from a deal they can portray as unfair or too harsh, without their reputations

suffering. They would, however, benefit from any carbon reductions achieved by the

remaining countries (free-riding), and continue to enjoy improved competitiveness.

Wiener (1997) argues that, under a tradeable permits regime, developing countries are likely to

have strong economic incentives to join. For example, he notes that as long as the targets for

developing countries are set at a level at which emissions would have been without Kyoto, then

income from abatement is likely to dwarf official overseas development assistance. (Although it

is not obvious what would be the environmental benefit of targets equal to what emissions

would have been anyway).

Even so, developing countries, led by China and India, asked that a provision which would

have allowed developing countries to join on a voluntary basis was taken out of an early draft.

This suggests that they calculate economic growth to be of more value than income from

emission trading. It may also suggest a strategy to build a negotiation bloc that is able to extract

maximum concessions at a later stage. Other reasons include a dislike of the carbon trading

instrument itself. Like Europe, many developing countries want to limit the ability of countries,

and particularly the US, to buy their way out of carbon limits. Former colonies also fear ‘carbon

colonialism’, that is, a loss of control over land use to private foreign interests (Wiener 1997).

It is also not clear whether there are any real downsides to developing countries if they resist

binding targets or withdraw from the Kyoto protocol. Other countries could reduce their

abatement to stop free-riding, but that is hardly a credible sanction (Barrett 1998). The Montreal

Protocol (a treaty to phase out ozone-depleting gases) did have the option to impose trade

sanctions on the controlled substances, and this provided incentives to participate. As it stands,

the Kyoto protocol does not have similar teeth to punish non-compliance or non-participation.9

“The bottom line is that many developing countries will co-operate with developed

countries in reducing the emission of greenhouse gases into the atmosphere so long as it

does not require great commitment on their part (e.g., in terms of domestic political

conflict) and as long as the developed countries incur the extra costs associated with that

co-operation, a position that was taken at the Rio conference.” Cooper 1997 p302.

9 The possibility of border taxes has been raised, in the context of protecting competitiveness against non-

Annex I countries, rather than as a measure to induce participation.


There has been some suggestion that countries which do not ratify the Kyoto Protocol may face

trade sanctions on the carbon content of their exports. However, the introduction of such

sanctions would require substantial modifications to the World Trade Organisation rules, which

would in turn require an international consensus. Hence, such a modification is unlikely. An

ability to enforce trade sanctions would, in effect, require the abandonment of the WTO rules –

something that developed countries are unlikely to contemplate.

6.3 Conclusion

The Kyoto Protocol is a risky agreement. It takes a punt that moral leadership and a sense of

global solidarity would offset the effects of perverse economic incentives. This does not

necessarily invalidate the agreement. However, it suggests that domestic policy in developed

countries, including New Zealand, needs to take account of the treaty risks involved. In

particular, domestic policy needs to manage the following risks:

• That economic distortions between Annex I and the rest of the world will persist beyond

the first commitment period.

• That the emission targets required to induce developing countries to join may be so

generous as to negate the environmental effects of the treaty.10

• That further costly economic concessions may be required of the developed countries to

achieve a global buy in.

• That ‘leakage’ during the first commitment period seriously impedes future economic

prospects, without any environmental benefits.

10 Alternatively, but related to the next point, this may increase pressure on Annex 1 countries to accept

higher targets for future periods, to compensate for any concessions made.


7. PROGRESS BY THE ANNEX I COUNTRIES

Whether or not developing countries will take on binding targets depends in part on the

progress made by Annex I countries. We can get some insights into likely progress by:

• Looking at the trends in emissions, particularly since the early 1990s when responses to

global warming began to take shape.

• Considering how the stance in Annex I countries toward climate policies has evolved over

recent years.

Over the course of the international negotiations a number of country groupings have emerged

among the Annex I countries: the Europeans; Japan, US, Canada, Australia and New Zealand;

and the transitional economies (among the latter, Russia in particular has been aligned with the

US in this debate). Broadly speaking, these groupings are organised around the preferred

degree of flexibility that countries should have in meeting targets, the nature and depth of the

emission targets, and the participation of developing countries (Samson 2001). We have

organised our analysis along similar groupings, paying particular attention to the positions of

those nations which have been, and are set to continue to be, the major shapers of policy

positions as it evolves.

7.1 Emission trends and the Kyoto gap

As illustrated by Table 18, between 1990 and 1999, CO2 emissions from the flaring and

consumption of fossil fuels – the main source of greenhouse gas in most Annex I countries –

dropped by an average of 0.4% per year in the Annex I countries. This suggests that good

progress is being made to meet the target of 5.2% below 1990 emissions. These figures are gross

emissions from the consumption of petroleum, natural gas, coal, and the flaring of natural gas.

They exclude other greenhouse gases such as methane (still the dominant greenhouse gas in

New Zealand). These EIA data have the advantage of providing comprehensive world data

and projections and help establish the broad trends, but it means that a comparison with Kyoto

targets is difficult.

Figure 19 illustrates the trends in CO2 emissions by key Annex I regions. In summary, the

picture of flat total emissions during the early 1990s is mainly explained by the transition of

Eastern Europe and the USSR from centrally planned economies based on heavy industry

toward market economies, and the reform-related reduction in economic activity. A similar

reunification effect explains part of Germany’s experience. At the same time, the UK is

experiencing reductions in emissions linked to its energy industry reforms and the switch from

coal to gas. Combined, these trends have driven the dip in emissions from Western Europe

during the early 1990s.

At the same time, emissions continued to grow during the 1990s in the US, Japan, as well as

other large emitters such as Canada, France, and Italy. During the second half of the 1990s,

Western Europe’s aggregate emissions started to grow again at about 0.9% per annum, on the

back of economic growth and as Germany’s reunification effect dissipated.


Figure 19 CO2 emissions in key Annex I regions: 1980-99Million metric tons CO2 from the flaring and consumption of fossil fuels

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998US and Canada Western Europe Eastern Europe & Former U.S.S.R. Japan, Australia and NZ


Figure 20 CO2 emissions by the top 6 European emitters: 1980-1999Million metric tons CO2 from the flaring and consumption of fossil fuels

0

50

100

150

200

250

300

350

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998

Germany United Kingdom Italy France Spain Netherlands


So where do countries stand now in relation to the Kyoto targets? Looking at the data for 1990-

1998 published by the UNFCCC, including all relevant gases and adjusted for land use change

and forestry, it is clear that for most countries the Kyoto gap is increasing rather than closing

(see Table 19).

Except for Germany and the UK, none of EU seems to be on track to meet their targets. Table 21

illustrates this with projections out to 2020 as published by the Energy Information

Administration. It should be noted that this only refers to gross emissions from the flaring and

consumption of fossil fuels. In the 1990s, the growth in CO2 equivalent emissions by the

relatively big economies of France, Italy and the Netherlands had been offset by the reductions

in Germany and the UK, which together accounted for 42% of the EU’s 1999 CO2 emissions (see

Figure 20). The other Annex I countries look not much closer to meeting their targets.

The EU Commission currently projects its emissions to grow by 6-8% by 2010, compared to its

8% reduction target (Wettestad 2001). Germany and the UK are most likely to meet their targets

(due to changes which have already occurred), but without further measures most Annex I

countries look set to miss their targets.


Table 19 Emissions and targets for Annex I countriesIncluding land use change and forestry

Country 1990 1998 % change Kyoto target

(% from base year)

Australia 493329 519873 5.4 +8

Austria 66237 72682 9.7 -8

Belgium 134406 144396 7.4 -8

Bulgaria 152433 78084 -48.8 -8

Canada 572628 670396 17.1 -6

Czech Republic 187556 144019 -23.2 -8

Denmark 68651 75171 9.5 -8

Estonia 29402 18400 -37.4 -8

Finland 51404 66602 29.6 -8

France 494162 488943 -1.1 -8

Germany 1175088 986252 -16.1 -8

Greece 105345 124315 18.0 -8

Hungary 98536 79266 -19.6 -6

Iceland 2576 2697 4.7 +10

Ireland 48477 57269 18.1 -8

Italy 492888 517908 5.1 -8

Japan 1129359 1225588 8.5 -6

Latvia 24843 995 -96.0 -8

Liechtenstein 238 - - -8

Lithuania 42700 31563 -26.1 -8

Luxembourg 13153 9928 -24.5 -8

Monaco 111 142 28.4 -8

Netherlands 216382 234551 8.4 -8

New Zealand 51537 53990 4.8 0

Norway 42551 38561 -9.4 +1

Poland 529540 372657 -29.6 -6

Portugal 59864 70196 17.3 -8

Romania 261954 157436 -39.9 -8

Russian Federation 2648062 1122441 -57.6 0

Slovakia 73878 51136 -30.8 -8

Slovenia 16919 - - -8

Spain 276493 340604 23.2 -8

Sweden 35031 46162 31.8 -8

Switzerland 48662 47598 -2.2 -8

Ukraine 867113 386225 -55.5 0

United Kingdom 762675 694835 -8.9 -8

United States 4888792 5953978 21.8 -7Source: UNFCCC http://www.unfccc.de/resource/ghg/tempemis2.html

Note: Some countries' data are not updated to 1998. Iceland (1995), Japan (1995), Liechtenstein (only 1990 data available), Luxembourg (1995), Romania (1994), Russian Federation (1996), Slovenia (only 1990 data available).

7.2 The evolution of climate policies

The progress by Annex I countries made to date does not look promising. Individually this was

to be expected: it may be more cost-effective to buy surplus emission permits if and when

trading starts rather than to reduce emissions prior to this date. There is also uncertainty about

the precise parameters of the policies, including the subsequent commitment period, so that too

much progress now might backfire if it leads to pressure to take on more challenging (and

costly) targets later. Concerns about competitiveness and scope for free-riding would enter the

frame too.


In this section we consider the stance of Annex I countries on Kyoto over recent years and how

that is likely to evolve, by looking at key climate policy directions and pressures in key

countries.

7.2.1 European Union

The European Union (EU) is an enthusiastic promoter of the Kyoto Protocol, and has stated that

it will ratify Kyoto, regardless of the US. While the EU presents the face of Europe’s climate

policy, below the surface the conflicting perspectives of the member states have been, and

continue to be, crucial in how the EU climate policy progresses (Wettestad 2001).

So far, much of the climate policy promoted by the EU, from a community-wide CO2 tax to

proposals for energy efficiency and renewable energy requirements have been watered down in

the face of concerns from member states about international competitiveness, local impacts, and

maintaining control over domestic tax policy. This evolution of EU policy reflects the lack of

appetite to implement policies with economic and social impacts that might be difficult to

defend domestically.

Most EU members have climate policies in place. Most focus on energy efficiency measures,

promotion of renewable energy, and voluntary agreements with industry. Energy and CO2

taxes and levies are also in place (often predating climate change concerns) or are being

considered to align to an EU-wide regime. But exemptions are commonplace, particularly for

energy-intensive sectors, to protect competitiveness but also for social and regional reasons

(such as affordability of domestic heating or employment objectives). Some of the carbon-

intensive industries enjoy subsidies, such as coal in Germany, Spain and France. These

exemptions will prove difficult to unwind, which increases the likelihood that the cost of

meeting targets (e.g. buying emission permits) will be pushed onto other industries and

consumers in general.

Overall, carbon intensity from energy sector emissions has reduced in Europe as electricity

generation shifts from coal to gas. Transport is one of the main sources of growth in emissions,

but is proving to be one of the harder sectors to tackle. In 1999, taxes on gasoline in European

countries were already 67-73% (International Energy Agency 2000)). Recent attempts to put in

place or raise eco-taxes on fuel came unstuck when consumers and the transport industry

revolted against fuel price rises in Europe. The UK, the Netherlands, France, Italy and Belgium

had to make concessions on eco-taxes on fuels. Germany, with an eco-tax on energy

consumption and fuel, faced similar pressures. The UK offered climate change levy reductions

for industries entering voluntary agreements, and abandoned the scheduled road fuel duty

increase. France reduced its diesel tax and watered down its version of an energy tax on all

carbon-intensive energy sources except petrol and diesel.

The price rises had more to do with the international market for oil at the time rather than the

eco-tax, but the latter was the focus of the fuel protests. This, and the rapid back-pedalling on

implementation, gives a clear signal of the level of political willingness to support policies with

long-term international environmental objectives that incur strong industry and consumer

opposition. The US not ratifying the Protocol in its current form will be a mixed blessing to

Europe. As US demand for carbon permits falls by the wayside, the projected cost to EU of

meeting its targets could fall by as much as one half (Grubb et al 2001). But it will also serve to

increase industry fears about competitiveness.

7.2.2 Japan, US, Canada, and Australia

These countries, together with New Zealand, are united by a strong preference for maximum

flexibility in meeting emission targets. With the exception of Japan, these economies are

energy-intensive compared to the rest of the developed world. For example, measured by the


amount of emissions per $US1000 of GDP, the energy intensity of the US in 1999 was half as

much again as that of the UK, and almost two-thirds the intensity of Germany – the two key

emitters in the EU (see Figure 21).

We considered New Zealand and Australia in some detail earlier. In this section, we look at the

policy stance of the remaining countries.

Figure 21 Emissions per $1000 GDPMetric tons CO2 equivalent per $US1000 (1990 dollars)

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Canada United States Australia Japan

New Zealand United Kingdom Germany


a) US

The United States’ rejection of the Kyoto Protocol as ‘fatally flawed’ points to the key dilemma:

while the benefits of action are global (but realised in the longer term), the position of each

country is strongly influenced by its own national interests.

The energy intensive economies will be particularly affected by Kyoto. The US position is also

strongly influenced by its existing energy problems, with shortages in California the most

obvious manifestation of what the National Energy Policy Development Group terms ‘an

energy crisis’. Its 2001 report recommends action to improve energy efficiency, modernise

energy infrastructure, and increase energy supply and security.

While the US Senate unanimously rejected Kyoto in its current shape, pressure has been

mounting since Bonn for the US Administration to engage constructively with the process.

Without major changes to the Kyoto Protocol and its targets, however, it seems unlikely that the

US will join for the first commitment period. The concerns about the US economy stemming

from more recent events will only amplify those sentiments. The Pew Commission argues that

concrete domestic action may be more realistic and may pave the way for the US to join later

(Claussen 2001).

b) Japan

Japan, as the 4 th largest source of CO2 emissions in the world, was crucial to the survival of the

Kyoto Protocol at Bonn. But Japan is torn between its economic, environmental, and political

objectives (Grubb et al 2001). Japan’s energy intensity is the lowest of the developed world.

While intensity may be low, emissions are expected to continue to rise. That growth will be

fuelled by imported gas and coal. Nuclear expansion – a key plank of its emission reduction

strategy – has lost its public support, and it is thought unlikely that Japan will meet its emission

targets through technological means. How Japan’s position will evolve is unclear. There are

now obvious tensions between the environment ministry and the METI (economy, trade and

industry ministry). The METI is concerned about 1990 as a base year, which followed a period


of effort to reduce energy consumption – further cuts would be difficult. Japan is also very

sensitive to the US position – a key trading partner and ally. Japan is faced with a difficult

choice.

Recent reports indicate that domestic debate is shifting towards promotion of voluntary

industry targets.

c) Canada

Canada is the world’s 8 th largest emitter of greenhouse gasses and has been a powerful force in

negotiations. While supporting action on greenhouse gasses, Canada has also been pressing for

realistic and achievable emission targets, and maximum flexibility in meeting obligations. It has

argued for processes that give developing countries commitments and eventually emission

targets to ensure environmental effectiveness and an economic level playing field.

Canada’s position is shaped by its economic reliance on natural resources and energy intensive

exports, its closeness to expanses of nature, and the specific interests and decentralised nature

of its different provinces (Samson 2001). The degree of conflicting interests of environmental

groups, business, and provinces has meant that progress on national global warming strategy

has been slow, and so far has focused on voluntary action and energy efficiency standards. It

also faces a growth in fossil-fuel fired electricity generation, as it already has a significant hydro

capacity (62% of electricity generated in 1999) and nuclear power (14%). Ageing nuclear plants

are being replaced by gas-fired plant.

Preservation of Canada’s competitiveness has been a central plank of its official position over

the last decade. The US is Canada’s key trading partner, accounting for 78% of exports in 1997,

36% of which were energy intensive resource-based commodities (Samson 2001). Japan and the

EU are the next main key export markets. Ultimately that makes Canada’s position closely

dependent on US policy. Canada has stated it continues to support the Protocol. But if the US

does not ratify in time for the first commitment period– and this is the most likely scenario – it

will be very difficult for Canada to ratify without facing major economic costs. At best, Canada

will be seeking major concessions from the international community, given the combination of

concerns about competitiveness and the gap that still exists between its target and projected

emissions.

Figure 22 Canadian Exports% of total dollar value

0%

5%

10%

15%

20%

25%

30%

Veh

icle

s

Mac

hine

ry

Pape

rpr

ods

Che

mic

als

Woo

dpr

ods

Tra

de &

tran

spt

Elec

tron

iceq

p

Non

-fer

rm

etal

s

Oil

Fin

& b

usse

rv

Total

USA

Rest ofWorld

Source: GTAP Version 4 Database


7.2.3 Transitional economies

Of the transitional economies, Russia and Ukraine are responsible for the bulk (64%) of the 789

million metric tons of CO2 equivalent emitted by Eastern Europe and the former USSR

combined in 1999 (EIA database 2001). Emissions in those countries declined sharply in the

early 1990s, as economic activity declined and highly inefficient industry closed down. The

projected rise in emissions has not yet happened. “The process of market transition, with

associated price and institutional reforms, has tended to improve efficiency at least as fast as

economic growth” (Grubb et al 2001, p26). As Kyoto targets were based on 1990 emission

levels, these countries now have ‘hot air’ for sale (that is, ‘free’ emission credits, created by

factors other than abatement and thus with ‘no environmental integrity’).

The potential to sell their carbon credits gives Russia and Ukraine the incentives to align with

flexible policies. However, the credits will be worth significantly less without participation by

the US (as world demand for carbon credits reduces). At the same time, any prospect of an

early inclusion of the developing countries would increase the supply of carbon credits; it is

unlikely that, if developing countries were to join, they would agree to anything less than

business-as-usual targets. This would be a poor financial outcome for the transitional

economies. Even so, given their current targets, the transitional economies stand to gain from

Kyoto as long as trade in carbon permits is allowed, even at a discounted price. Increased

demand for Russian gas, to substitute for coal in Europe or Japan, would be another bonus.

However, there is a significant risk that transitional economies will pull back from their

commitments once the benefits of ‘hot air’ are exhausted. Environmental concerns (and

environmental ministries) tend to rank well below economic aspirations in those countries.

7.3 Conclusion

The EU has made it clear that it will proceed to ratify without the US, if only “to prove

arguments that it will be costly and unworkable wrong” (Grubb et al p 49). But overall, the

prospects of an effective global deal (that is, one with objectives that are achievable, and make a

positive difference to the environment at a reasonable cost) look shaky. As it stands, Kyoto will

result in a redistribution of wealth from Annex I to developing countries (and now also to the

US) with little or no reduction in greenhouse gas emissions.

The key emitting developing countries have few economic incentives to sign up to serious

targets in the medium term, and since Bonn, some of the Annex I countries will have been

revising in more depth the costs and benefits of joining Kyoto without the US.

Despite its serious flaws, it is still possible that sufficient countries sign up for the Kyoto

Protocol to enter into force, if only as an act of leadership. But there are already signs that any

actions with explicit costs on industry groups or consumers will be avoided through

exemptions. Policies which meet the Protocol requirements at relatively low economic costs are

also likely to provide little moral leadership, since they will by and large protect sensitive

sectors from the impact of emission reduction requirements.

When targets are not met, experience with other international treaties suggests that they will

simply be renegotiated. Given the scope for strategic behaviour, withdrawal and free-riding,

Kyoto may not be a sustainable solution:

“Countries can reason backwards. If future deviations cannot be prevented, why should a

country invest in abatement measures today?” (Barrett 1998, p21)


8. WHAT ARE OUR OPTIONS?

The Government has signalled New Zealand’s intention to ratify the Kyoto Protocol in

September 2002. The Government has also signalled it will seek to implement policies to make

progress on the emission targets prior to 2008.

This section considers whether an early ratification represents the best policy path for

New Zealand, given its policy objectives, and investigates other options that may be available to

achieve these objectives. We do not discuss pre-2008 action in any detail, but note that

considerable amount of work has already been done by Government’s advisors on this topic,

strongly suggesting that only no-regrets, voluntary actions can be justified prior to 2008.

So what are New Zealand’s policy objectives? We assume that the Government aims to achieve

the following:

1. Encourage the creation of a global policy regime that would help mitigate the risks of global

warming. Since New Zealand’s own emissions are within the margin of error of global

levels, this policy objective is primarily satisfied by actions that encourage the main

emitting nations to take action. The key question is what specific actions, promises and

threats by New Zealand would best contribute to inducing the desired global behaviour.

2. Ensure that New Zealand does not bear a disproportionate burden of global adjustment.

This relates to emission reduction targets for New Zealand compared to other countries,

other negotiated rules and domestic policy options. We assume that New Zealand’s

interest is best served by doing the minimum to achieve the first objective.

3. Protect New Zealand from the risk of treaty failure. Irreversible changes should only be

made against secure expectations of action by the rest of the world. As long as uncertainty

remains about the actions of other global players, New Zealand should aim to keep its

options open.

4. The cost of the global regime to reduce the rate of climate change must not exceed the cost

of mitigating the consequences of such climate change.

In assessing various options against the above objectives, we need to keep in mind the key

insights from the preceding sections:

• New Zealand’s economic wellbeing is particularly at risk during the first commitment

period, which provides a competitive advantage to non-Annex I countries. In particular,

‘leakage’ will be a problem until the Kyoto regime goes global.

• New Zealand’s relative burden negotiated for the first commitment period is relatively

greater than the burdens faced by other Annex I countries. Greenhouse emission intensive

industries are the key drivers of the New Zealand economy, compared to their relatively

minor roles in other developed economies. As an immigrant country with a growing

population, New Zealand is at a disadvantage from any targets expressed in absolute rather

than per capita terms (developing countries are likely to face similar issues).

• Developing countries face powerful incentives to string out the distortions associated with

the first commitment period for as long as possible. They will need to be induced to give

up the competitive advantage acquired under the first commitment period rules.

• Once the economic costs of implementation crystallise, other developed countries may pull

back from their commitment. Australia, in particular, is taking a very cautious approach to

ratification. New Zealand runs the risk of going out on a limb, and facing additional threats

to its competitiveness.


8.1 Early ratification

Against this background, how does the early ratification option stand up? The main arguments

for early ratification are:

• Moral leadership. In other words, there must be an implicit belief that earlier rather than

later ratification by New Zealand will increase the probability of other countries committing

themselves.

• Provision of certainty. This argument suggests that earlier ratification will provide a more

reliable basis for business planning, and hence will reduce the economic adjustment costs.

The moral leadership argument is difficult to assess. However, it is difficult to believe that the

timing of action by New Zealand will make any difference to the national benefit assessment of

the major developed and developing economies. For example, there is little evidence that

New Zealand’s leadership in trade liberalisation made any difference in convincing our trading

partners to move faster on their policies. The big difference is that trade liberalisation is of

unilateral benefit, whereas any unilateral action by New Zea land on greenhouse gas emissions

will only bring costs.

In fact, it is more likely that a combination of moral persuasion and threat will be needed to

induce developing countries into the global regime. The key threat that developed countries,

such as New Zealand, can offer is that they will pull back from their own commitments unless

others come to the party. In other words, the negotiating position for the second commitment

period would be strengthened if ratification were made conditional on a satisfactory completion

of negotiations for the second commitment period. Those negotiations are due to start in 2005,

with the ratification not necessarily required much prior to 2008. Similarly, New Zealand

would improve the likelihood of binding Annex I countries to their commitments by making its

commitment conditional on the actions by the key players, such as Australia, Canada and

Japan.

Any tie-in between New Zealand’s ratification of the Kyoto Protocol and the successful

completion of negotiations for the second commitment period would also improve our ability to

negotiate a relatively more even burden for the post-2012 period.

It is also not obvious that early ratification would provide the desired certainty. As long as

domestic policies remain uncertain, businesses would not have any basis for long-range

planning. It would make more sense to work up sustainable domestic policies prior to

ratification. In fact, ratifying ahead of knowing what these policies may be, and ahead of

knowing what action will be taken by Australia may signal to the business community a period

of policy instability and unpredictability. The worst outcome would be if investors perceive a

certainty of New Zealand willing to accept a higher burden on itself than would be acceptable

to other countries, and hence take this as a signal to locate elsewhere.

In conclusion, early ratification appears to be a relatively poor way of achieving New Zealand’s

objectives with respect to climate change policies, and of managing various dynamic risks

involved. The main reason for this is that the formulation of global climate change policies is

not a one-off step. Rather, these policies remain uncertain and the environment is dynamic.

Hence, it is in New Zealand’s interests to retain as much leverage over the future development

of policies. An unconditional commitment now reduces such leverage, and makes it less rather

than more likely that a viable global regime will emerge.11

11 All changes in probability arising from New Zealand’s actions are assumed to be marginal, but non-

zero. In other words, New Zealand is assumed to have some, but minimal influence over the behaviourof other countries. This applies equally to the analysis of moral persuasion and of negotiated positions.


8.2 Domestic policies

This report does not directly address New Zealand’s domestic policies during the first

commitment period. However, the foregoing analysis strongly suggests that New Zea land

should only ratify the Kyoto Protocol if domestic policies can be developed to offset the

competitiveness and treaty risks discussed above. In other words, domestic policies need to:

• Compensate for the high relative adjustment costs faced by New Zealand during the first

commitment period;

• Compensate for the risk of leakage during the first commitment period.

• Compensate for the inherent treaty risks – that is, ensure that New Zealand does not incur

the economic costs of adjustment to an international regime that may fail to affect global

warming.

These requirements suggest two policy conclusions. First, it is difficult to see how any national

impact assessment of ratification can precede a full elaboration of domestic policies. The

relative costs and benefits of New Zealand’s acceptance of the first commitment period targets

critically depend on the ability to develop a set of policies which achieve the above objectives.

It is not a priori obvious whether such a set exists. This work still needs to be done.

Second, it is important to develop a realistic link between domestic policies and New Zealand’s

international objectives. The analysis in this report and elsewhere suggests that there is a trade-

off between domestic policies which protect the economy and the achievement of actual

emission reductions. Hence, New Zealand faces a dilemma. One option would be to adopt

policies which protect sensitive sectors and mitigate adjustment costs (this appears to be the

strategy increasingly being adopted by other Annex I countries). However, this would result in

only marginal reductions in greenhouse gas emissions. This would undermine moral

leadership, and make it more difficult to bring in developing countries. The alternative is to

aim at actual emission reductions, incurring the related economic costs. This would highlight

the economic consequences of binding targets, and would also make it more difficult to bring in

developing countries at a later date. A careful balance – which can not be developed without

knowing what the domestic policies would be – needs to be achieved.

This point also highlights the need to pre-commit major developing countries to second period

binding targets prior to the commencement of the first commitment period.

8.3 Conclusion

In our view, New Zealand would be more likely to achieve an overall balance of the objectives

set out above if its ratification was conditional on:

• Ratification and a credible commitment to implementation by those key countries by whom

a decision not to participate in the first commitment period would sharply deepen the costs

of that period for New Zealand. This would be particularly true of Australia and Japan.

• Successful completion of negotiations for the second commitment period, which would

ensure that the main emitting developing countries, such as China and India, accept non-

trivial binding targets from 2012. The second commitment period would also need to

ensure that the former communist countries accept binding targets once their ‘hot air’ is

depleted. Ratification could also be used as leverage to improve on the negotiated

outcomes achieved for the first commitment period.

• Ratification should also be predicated on the development of viable domestic policies,

which would carry New Zealand over the first commitment period without undue damage.


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APPENDIX A: EMISSION TABLES

Table 20 Comparison of Annex I emissionsTotal CO2 emissions CO2 emissions per capita CO2 per $1000 GDP


1980-1989


1990 - 1999


1980-1989


1990 - 1999


1980-1989


1990 - 1999

Australia 2.5 2.6 1.1 1.6 -0.7 -0.5

Austria -1.1 1.4 -1.2 0.8 -2.9 -0.5

Belarus - - - - - -

Belgium -1.7 1.1 -1.8 0.9 -3.2 -0.6

Bulgaria -0.7 -5.2 -0.9 -4.4 -4.6 -2.2

Canada 0.7 1.7 -0.6 0.7 -2.0 -0.5

Czech Republic - - - - - -

Denmark -1.5 0.8 -1.5 0.4 -3.3 -1.2

Estonia - - - - - -

Finland -1.0 -1.1 -1.4 -1.4 -4.0 -2.5

Former Czechoslovakia -0.3 - -0.5 - - -

Former U.S.S.R. 2.3 - 1.5 - - -

Former Yugoslavia 3.6 - 3.0 - - -

France -3.1 0.6 -3.6 0.2 -5.1 -0.8

Germany -0.7 -1.6 - - - -

Germany, East 0.2 - 0.3 - - -

Germany, West -1.1 - -1.2 - -2.7 -

Greece 3.4 1.7 2.9 1.2 1.7 -0.2

Hungary -1.9 -1.3 -1.6 -1.0 -3.5 -1.6

Iceland 0.6 2.7 -0.3 1.5 -2.0 0.3

Ireland 0.6 4.0 0.3 3.4 -2.1 -1.7

Italy 0.8 0.8 0.8 0.6 -1.2 -0.4

Japan -0.1 1.3 -0.7 1.1 -3.5 0.2

Latvia - - - - - -

Lithuania - - - - - -

Luxembourg -1.4 -2.4 -2.0 -3.6 -4.5 -

Netherlands -0.2 1.1 -0.6 0.5 -1.9 -1.3New Zealand 3.3 1.3 2.6 0.0 1.5 -1.0

Norway 0.4 2.5 0.0 2.0 -1.8 -0.6

Poland -0.5 -0.5 -1.2 -0.7 -1.6 -3.7

Portugal 5.6 3.6 5.8 3.5 3.2 1.4

Romania 1.1 -6.0 0.7 -5.7 0.8 -3.6

Russia - - - - - -

Spain 0.9 2.8 0.6 2.7 -1.7 0.8

Sweden -4.3 0.7 -4.5 0.4 -6.1 -0.5

Switzerland -1.4 0.0 -1.9 -0.6 -3.0 -0.5

Turkey 6.2 3.6 4.0 2.2 1.9 0.7

Ukraine - - - - - -

United Kingdom -0.2 -0.7 -0.3 -1.0 -2.7 -2.5

United States 0.6 1.2 -0.2 0.3 -2.4 -1.6

World Total 1.9 0.2 -0.1 -0.9 - -

Annex 1 average 0.7 1.1 -0.1 0.2 -2.0 -0.9Source: Energy Information Administration

Notes: 1. All emissions data are in metric tons of carbon equivalent.

2. Carbon equivalent emissions per 1000 1990 U.S. Dollars, calculated using market exchange rates.


Table 21 provides EIA projections from 1990 to 2020 (without any additional policy measures).

These figures are gross CO2 emissions from the flaring and consumption of petrol, gas, and

coal, and exclude other greenhouse gases or sink effects.

Table 21 Emissions by region 1990-2020Million metric tons carbon equivalent from the flaring and consumption of fossil fuelsRegion/Country History Projections % Change 1990-

2010 (commitmentmidpoint)

1990 1998 1999 2005 2010 2015 2020

Industrialized Countries

North America 1,556 1,742 1,761 1,972 2,119 2,271 2,423 36.2

United States 1,345 1,495 1,511 1,690 1,809 1,928 2,041 34.5

Canada 126 146 150 158 165 173 180 31.0

Mexico 84 101 101 124 145 170 203 72.6

Western Europe 930 947 940 1,005 1,040 1,076 1,123 11.8

United Kingdom 164 154 151 168 177 184 192 7.9

France 102 110 109 116 120 126 135 17.6

Germany 271 237 230 246 252 258 267 -7.0

Italy 112 122 121 131 137 141 146 22.3

Netherlands 58 66 64 66 67 69 71 15.5

Other Western Europe 223 260 264 277 287 297 313 28.7

Industrialized Asia 357 412 422 447 461 479 497 29.1

Japan 269 300 307 324 330 342 353 22.7

Australasia 88 112 115 123 130 137 144 47.7

Total Industrialized 2,842 3,101 3,122 3,425 3,619 3,825 4,043 27.3

EE/FSU

Former Soviet Union 1,036 599 607 665 712 795 857 -31.3

Eastern Europe 301 217 203 221 227 233 237 -24.6

Total EE/FSU 1,337 816 810 886 940 1,028 1,094 -29.7

Developing Countries

Developing Asia 1,053 1,435 1,361 1,751 2,137 2,563 3,013 102.9

China 617 765 669 889 1,131 1,398 1,683 83.3

India 153 231 242 300 351 411 475 129.4

South Korea 61 101 107 128 144 159 175 136.1

Other Asia 223 338 343 434 511 595 679 129.1

Middle East 231 325 330 378 451 531 627 95.2

Turkey 35 50 50 57 66 75 85 88.6

Other Middle East 196 275 280 320 386 456 542 96.9

Africa 179 216 218 262 294 334 373 64.2

Central and South America 178 246 249 312 394 492 611 121.3

Brazil 62 87 88 108 139 171 212 124.2

Other Central/South America 116 159 162 204 255 321 399 119.8

Total Developing 1,641 2,222 2,158 2,703 3,276 3,920 4,624 99.6

Total World 5,821 6,139 6,091 7,015 7,835 8,773 9,762 34.6

Annex I

Industrialized 2,758 3,001 3,022 3,301 3,475 3,656 3,841 26.0

EE/FSU 1,132 704 700 761 802 876 930 -29.2

Total Annex I 3,890 3,704 3,722 4,062 4,276 4,531 4,771 9.9

Sources: Energy Information Administration and World Energy Projection System

Notes: 1. EE/FSU = Eastern Europe/Former Soviet Union.

U.S. numbers include Carbon Dioxide emissions attributable to renewable energy sources.

Documents

The Kyoto Protocol: issues for New Zealand’s participationNZIER – Kyoto Protocol: issues for New Zealand’s participation ii • Ratification should also be predicated on the