Counting the cost of reducing emissions

If you think that the ongoing international negotiations about how to deal with climate change are a waste of time and won’t cost you anything, think again. While not all aspects of the issue are important, some have the potential to hit us hard in the pocket. Others have the potential to deliver economic gains. This article looks at the long term (to 2050) economic implications for New Zealand of three issues: how different greenhouse gases are converted into carbon dioxide equivalents, global participation in international agreements to reduce emissions, and the inclusion of agriculture in international agreements.

About half of New Zealand’s greenhouse gas emissions are agricultural methane and nitrous oxide emissions. This proportion, however, depends on how these two gases are converted into carbon dioxide (CO2), which is the reference gas for measuring emissions. One hundred-year Global Warming Potentials (GWP) are used almost universally to compare emissions of carbon dioxide and other greenhouse gases. This metric currently values a unit of methane at 25 times the value of a unit of carbon dioxide, meaning that one tonne of methane produces as much cumulative atmospheric warming over a hundred years as 25 tonnes of CO2. The corresponding conversion rate for nitrous oxide is 298.

An alternative conversion metric uses Global Temperature Change Potentials (GTP) which are based on the actual warming caused by an emission. When measured over a one hundred year period GTP convert methane and nitrous oxide into CO2 at rates of 7 and 318 respectively.

Switching from GWP to GTP would reduce New Zealand’s total CO2-equivalent emissions by about 24% and farming emissions by about 48%. As might be expected this has led to some farming interests to promote giving a lower weight to methane. We have recently looked at the validity of this argument and come to a number of conclusions:

1. One cannot look at the costs and benefits of climate policy choices without considering the implications of international choices on commodity prices, which flow back to farmers pockets as directly as any carbon price.

2. If agriculture were to face a carbon price worldwide, New Zealand gains economically regardless of conversion metrics because higher commodity prices outweigh domestic costs of reducing emissions – to the tune of $2900 per person by 2050 in today’s dollars.

3. The gain is slightly better under GWPs than GTPs, as the greater emissions liability for New Zealand under GWPs would be offset by greater increases in world commodity prices. This is because agricultural production costs would be globally higher. The overall difference between the two metrics, however, is small at only about $300 per person.

4. One might argue that agriculture should be excluded globally from all mitigation obligations because producing food is just too important. However, our modelling shows that New Zealand would be better off if everybody reduces agricultural emissions than if nobody does. With global participation in reducing carbon emissions, including from agriculture, the resultant lower carbon prices and higher commodity prices mean that New Zealand’s economic welfare is higher than if agriculture is excluded from global agreements, as the latter results in higher carbon prices and lower commodity prices. The difference here is worth about $2400 per person household by 2050. This finding holds irrespective of whether GWP or GTP gas exchange rates are used, although it is marginally stronger under the former.

5. Worse for New Zealand than either of the two previous situations is if countries are liable for agricultural methane and nitrous oxide emissions, but choose to shelter them from a carbon price, as this reduces the increase in world agricultural commodity prices from which New Zealand would be a net beneficiary. The cost to New Zealand under this scenario is $7100 per person by 2050, relative to full global participation.

6. The higher global carbon prices are (such as in response to tighter worldwide emissions reduction targets), the stronger is each of the above findings.

Overall then, whether or not other countries impose an explicit price on agricultural methane and nitrous oxide emissions has a bigger effect on New Zealand’s economic welfare than the choice of greenhouse exchange metrics.

Our results also show that over the next decade, even the worst case scenario (where New Zealand is the only country to do anything about its agricultural emissions) would have only very small negative effects, as long as countries at least become serious about collectively reducing non-agricultural emissions.

It is in New Zealand’s interests to push for more countries to participate in international agreements to reduce greenhouse gas emissions, and to push for agriculture to be included. Focussing our attention on the wrong issues and making the wrong concessions could cost us dearly.

Enjoyed this article?

You might like to subscribe to our newsletter and receive the latest news from Infometrics in your inbox. It’s free and we won’t ever spam you.