The Economic Effect of Greenhouse Policies in New Zealand

New Zealand’s share of global greenhouse gas emissions, at about one fifth of one percent, is very small. But the profile of those emissions is unique among OECD countries; more than half come from methane and nitrous oxide associated with livestock agriculture. Consequently, fulfilling its obligations under the Kyoto Protocol is potentially quite onerous for New Zealand. In this paper we use a single region, static general equilibrium model to assess the implications for New Zealand of various climate change policy options. The energy and agriculture sectors are modeled in a detailed manner to enable realistic simulations to be carried out. Choosing an optimal set of policies is made more difficult by the fact that New Zealand relies heavily on emission intensive sectors for much of its export earnings. For example, one emission intensive sector alone, dairy, accounts for over 20 percent of all merchandise exports. Avoiding carbon leakage is therefore an important consideration in selecting appropriate greenhouse policies. Our analysis shows the degree of sectoral adjustment required is substantial. In addition, the total costs depend on the uncertain level of variables such as the global carbon price and the level of afforestation activities in New Zealand, i.e. the rate of new forest planting.