The climate won’t thank us for ‘staying at home’

Dr Eric Crampton
2 February, 2021

It was always possible for a lot of cars to be built in New Zealand. It never made any particular sense, but it was within the realm of the physically possible. When the New Zealand government tried to encourage domestic car manufacturing, the result was overpriced vehicles of underwhelming quality.

Economist Steve Landsburg described trade between Japan and the United States as “Iowa’s car crop.” Iowa would grow corn, sell it internationally, and Japanese cars made their way to Iowa as consequence. Similarly, when New Zealand opened to imports from Japan and elsewhere, Kiwis could focus in the areas where New Zealand enjoyed an advantage. The Petone car plant closed. But Marlborough’s vineyards, Waikato’s pastures, and thousands of other businesses now help grow New Zealand’s car crop – along with its television crop, phone crop, and countless others.

Few countries can top New Zealand’s openness to international trade. For decades, Kiwis have known we cannot do everything on our own. Kiwi businesses focus on what they are good at, so that we can trade for the things that others do better.

This weekend, the Climate Change Commission released its draft report on how New Zealand should achieve the objectives of the Zero Carbon Act. It noted a raft of domestic initiatives, ranging from the entirely reasonable to the entirely dubious. But it opened one rather interesting alternative: relying on international cooperation and trade to help New Zealand do even more.

The Zero Carbon Act encourages a focus on domestic action. Rising carbon prices encourage more tree-planting. Marginal pastoral land shifts to plantations of exotic trees, with more land converting to forests as carbon prices continue to rise. Worries that the price of carbon in the Emissions Trading Scheme would result in the whole country being overrun by trees were always overstated: land prices adjust too. But as long as planting trees were the most cost-effective way of reducing net emissions, more trees would be planted.

Enter the Commission’s interesting suggestion about doing even more good for the climate.

The Commission’s report argued that the first three carbon budgets should not rely on international mitigation. But pursuing even more ambitious targets, under a new Nationally Determined Contribution (NDC), could involve New Zealand funded mitigation efforts overseas.

Just as autarky in automobiles never made much sense, neither does autarky in greenhouse gas mitigation and sequestration. New Zealand is a small place: some 27 million of the world’s 13,000 million hectares of land, and much of it is rather mountainous. Aggressive planting options here might start running out of space. But the World Wildlife Fund reports that the world lost over 15 million hectares of forest between 2004 and 2017.

Replanting forests abroad could make rather more sense than converting more land to forestry here, if programmes doing so were credible, additional to existing commitments, and if the accounting were sound.

So how could it be done?

Last October, Switzerland and Peru signed a new kind of trade agreement. Switzerland will help to finance sustainable development projects in Peru. Peru will enjoy the economic benefits, while Switzerland can count the resulting net emission reductions towards Switzerland’s own targets. Swiss drivers pay a levy when they purchase fuel; the collected levies will help fund emission reductions in Peru. And the trade agreement ensures that emission reductions in Peru are not simultaneously claimed by both Peru and Switzerland, avoiding double-counting.

In a world vastly larger than New Zealand, there are a lot of opportunities for mitigating emissions. Trees planted in the tropics can sequester more carbon than trees planted in temperate places like New Zealand. Other opportunities could also emerge.

The Climate Commission would have to be rigorous in ensuring the accounting were sound. But it would be worth the effort.

Carbon prices in the Emissions Trading Scheme, prior to Sunday’s announcement, were $38.50 per tonne. Buying and shredding one New Zealand Unit (NZU) in the Emissions Trading Scheme (ETS) prevents a tonne of carbon dioxide equivalent emissions, and costs $38.50. Contracts for April 2025 traded at $44.20; traders expect prices to rise.

But other initiatives, like the government’s push to shift schools to lower-carbon heating plants, cost about $250 per tonne – or more, depending on your assumptions about the lifespan of the newly purchased kit.

Meanwhile, Cool Effect, an American initiative providing carbon offsets, currently advertises projects with carbon abatement costs ranging from about $7 to about $32 per tonne, at current exchange rates.

If credible projects abroad cost half as much as the ETS cost of a tonne of net emission reductions, and a tenth as much as regulatory interventions, rather interesting options begin to open up. Exploring these options as part of a more ambitious NDC could prove highly worthwhile. If the Climate Commission can find credible, rigorous projects abroad that actually stack up, New Zealand could do far more good than it could by doing it all on our own here at home.

If the ETS price in New Zealand were double the cost of credible carbon mitigation efforts abroad, the government here could even consider two-for-one deals. The government could auction a tonne of carbon into New Zealand’s ETS while funding two tonnes of abatement overseas. One tonne of abatement abroad could back the unit released here, while the second tonne could be gifted to the host country to count towards its own carbon mitigation targets.

Under that kind of two-for-one approach, New Zealand would be helping poorer countries to fund their own carbon mitigation while making it easier to pursue more ambitious goals.

Most of the world’s emissions, and mitigation opportunities, are not in New Zealand. Too often, that is a rallying cry for those who would wish New Zealand to do nothing; we all need to play our part.

But playing our part to best effect, doing the most good that New Zealand can do, means finding the most cost-effective ways of abating greenhouse gas emissions – regardless of where they are. It turned out that the best way of getting cars wasn’t by building them in Petone, but by growing them in other parts of the country. It could easily turn out that the best way for New Zealand to sequester carbon is not to plant trees here, but to fund replanting efforts elsewhere.

If we could achieve twice as much or more by helping to fund mitigation efforts abroad, the climate would not thank us for pursuing less effective measures here at home instead.

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