The Macroeconomic Impact on New Zealand of Alternative GHG Exchange Rate Metrics

About 50% of New Zealand's greenhouse gases are not carbon dioxide, being mostly methane and nitrous oxide. Consequently the exchange rates between different gases - that is their CO2 equivalence - could have significant effects on the cost to New Zealand of meeting international emissions reduction obligations. In order to fully capture world-wide effects, including effects on agricultural commodity prioes, we link a New Zealand specific general equilibrium model (ESSAM) with a global integrated assessment model (MESSAGE)and a global spatially explicit land-use model (GLOBIOM). Results are final: We find that switching from Global Warming Potentials (GWP) to Global Temperature Change Potentials (GTP) would not benefit New Zealand economically if agriculture is priced globally, as the lower emissions liability resulting from the GTP metric for New Zealand would be offset by smaller increases in commodity prices as agricultural production costs would be lowered globally. We also find that New Zealand economic welfare is higher if New Zealand is liable for its agricultural emissions (coupled with a relatively lower carbon price, high commodity prices and global participation), than if agriculture were excluded globally and New Zealand has to face a higher carbon price coupled with lower commodity prices. This finding holds irrespective of the choice of GHG exchange metric for other non-CO2 gases, although it is marginally stronger under the GWP metric than under the GTP metric.