Endogenous carbon price in New Zealand: A forest-CGE analysis

Abstract

In 2008 New Zealand implemented an emissions trading scheme (NZ ETS) designed to phase-in all sectors and include all greenhouse gases (GHG). Forestry was the first sector to be included. Agriculture, a significant source of GHG, has yet to be included. After the 2015 annual conference of parties in Paris, the New Zealand government agreed to reduce GHG emissions to 30 per cent below 2005 levels by 2030. In contrast to studies introducing a carbon tax this paper uses a forest-computable general equilibrium (forest-CGE) model to derive an equilibrium carbon permit price. Two scenarios set the context for analysing the impact of the NZ ETS on carbon price, land use change between forestry and agricultural sectors, and on the New Zealand's economy. One scenario is based on domestic forestry being the only source of permits. The other scenario involves government with buying permits on the international market. Private agents cannot buy permits on market in both scenarios. Our results estimate an equilibrium carbon permit price of NZ$24 per tonne carbon dioxide equivalent (CO2e), and show that the ETS, with agriculture included, contributes to a 7 per cent reduction in total NZ’s emissions, approximately one fifth of the 2030 target.