Monday, 25 May 2015

MfE releases NZ ETS modelling work, validates our simple model.

By Suzi Kerr and Judd Ormsby, Motu Economic and Public Policy Research

Last week we posted twice on modelling work we have done. The first post looked at what sort of carbon price we might need to achieve domestic reductions of 5% below 1990 BAU. The second post looked at how linking can make achieving this target easier.

Since then the Ministry for the Environment has released both pieces of ETS modelling work they commissioned. The modelling they referred to in their discussion document was done by Infometrics, but they have also released modelling work by Landcare Research.

Both models confirmed our model’s (much simpler) analysis. If we don’t have access to international markets then ETS prices will soar if we take on even modest reductions below 1990 emissions. Our model estimated a 5% below 1990 target imposed on the NZ ETS had prices going to ~$250 by 2033 without international linkages. Infometrics model a 10% below 1990 target without international linkages as unachievable with even a $300 carbon price (see page 15 of the Infometrics report); it achieves only a return to 1990 emissions. Landcare Research have a $300 price (without linking) resulting in about a 5 – 10% below 1990 reduction in emissions (250 Mt CO2-e, see scenario U1L in table E4 on page 6 of the Landcare report).

The other scenarios by Landcare Research and Infometrics assume that New Zealand can, and will want to, buy units from overseas, something that is still uncertain given current and evolving mechanisms for international trade in emission units.

Both Landcare Research and Infometrics model the impacts of different GHG targets on the wider New Zealand economy – something that our model isn’t able to do. Infometrics summarize the effects on GDP as follows:

The key message is that in terms of macroeconomic growth rates the effects of a $50 carbon price and QELRO [Quantified Emissions Limitation or Reduction Objective] are very small, generally amounting to less than one month of economic growth.” 
(Infometrics report, page 20)

We recommend looking at these reports if you are interested in more detail about their models and the many different situations they have looked at.

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