1. T +1 (202) 466-6790 F +1 (202) 466-6797 1700 K Street NW Suite 450 WASHINGTON DC 20006 United States of America T: +64 (4) 913 2800 F: +64 (4) 913 2808 Level 2, 88 The Terrace PO Box 10-225 WELLINGTON New Zealand T +33 (1) 45 27 24 55 F +33 (1) 45 20 17 69 7 Rue Claude Chahu PARIS 75116 France ------------- www.castalia.fr Copyright Castalia Limited. All rights reserved. Castalia is not liable for any loss caused by reliance on this document. Castalia is a part of the worldwide Castalia Advisory Group. The Kyoto Protocol 19 July 2006 The Economic Reality for New Zealand

2. 1 Content  Kyoto Protocol Framework and Country Commitments  New Zealand – Economic Cost of achieving target is unacceptable  New Zealand is set to miss its target  Fiscal Cost for New Zealand range from: ­ Minimal, if Kyoto collapses ­ NZ$3 billion, if Kyoto succeeds

3. 2 Kyoto Protocol - Status Ratified, with Commitment Ratified, no Commitment Ratification Pending Ratification Declined Not a party

4. 3 Total Emissions in 2003 Not Ratified Ratified, with Commitments Ratified, No Commitments Emission Transfer 4237 1187 3046 61 (1994 Data)

5. 4 Kyoto Target for a Typical Country with a Commitment CO2 Emissions (in tonnes) 2000 1990200820122018 ??? 1 st Commitment Period 2 nd Commitment Period Target 5% buy units or earn units or carry forward with 30% Penalty Actual Forecast

6. 5 New Zealand’s Emissions 1 st Commitment Period 2 nd Commitment Period Actual GDP Forecast GDP Actual Net Emissions Forecast Emissions Target Requires: Change in economic structure Increase in energy efficiency

7. 6 New Zealand’s Emissions by Sector 2010 -9.2 Target: 61.6 Excess 12.8 (4) (1) (4) To close the gap: 4 + 4 + 1 + 4 = 13 (mt

8. 7 Electricity Sector Wholesale Electricity Price (c/kwh) Gwh per annum 12 8 Coal Wind Demand A tax on coal could increase electricity prices by 25%

9. 8 Transport 1 st Commitment Period 2 nd Commitment Period Actual emissions from cars Actual car-kilometres Forecast emissions from cars Forecast car kilometres Required to: Drive less Use smaller cars Increase energy efficiency Kilometres

10. 9 Example Mass City Highway

11. 10 Forestry Planting Year Area Planted (000 ha) Kyoto Protocol Signed 1998 4 mt CO2 requires reduction in deforestation of 5,000 ha

12. 11 Likely Outcome  Political recognition that the cost of complying is extremely high  Electricity prices, reduced travel, reduced conversions from forestry  New Zealand likely to miss target  Government’s latest figure 64 million tonnes CO2

13. 12 Net Excess Emissions During the First Commitment Period (M tonnes CO2) 2010 First commitment period 2008 - 2012 Gross emissions83.6418 Sinks(9.2)(46) Net emissions74.4372 Assigned amount61.6308 Excess emissions12.864

14. 13 Price of Emission Units  Emission Trading Schemes  Settlement Price depends on expectations for CP II ­ Low, if low expectations for CP II ­ High, if high expectations for CP II - $US30 per tonne  Flexibility mechanisms  US $ 6 per tonne CO2 last year

15. 14 Fiscal Cost of Buying Compliance Excess Emissions Quantity x Price of Unit = Fiscal Cost 64 million units x USD/Unit $0 $6 $30 NZD/Unit $0 $10 $50 = NZD $0 million $640 million $3 billion If Kyoto fails If Kyoto succeeds

16. 15 How Did This Happen?  Belief that energy use was inefficient  Belief that new economy would see us right  Belief that we could avoid leakage and reduce emissions  Belief that we would have credits from forests

17. 16 Conclusion  The growing economy and population have generated a rapid growth in emissions over the last 25 years  As long as economic growth continues, the same pattern is likely to continue in the future  There is no realistic set of policies which would BOTH: ­ Reduce the total level of emissions back to 1990 levels, AND ­ Be consistent with continued economic growth  The costs of meeting the target are likely to be unacceptable to New Zealanders  That leaves us with a fiscal cost: ­ minimal, if the Kyoto Protocol collapses ­ as high as $3 billion, if the Kyoto Protocol were to succeed