Long-Term Challenges and Opportunities in the Natural Resource Sector: Three Case Studies
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Long-Term Challenges and Opportunities in the Natural Resource Sector: Three Case Studies New Zealand Treasury BACKGROUND PAPER FOR THE 2013 STATEMENT ON THE LONG-TERM FISCAL POSITION JULY 2013 BACKGROUND PAPER Long-term Challenges and Opportunities in the Natural Resource FOR THE 2013 Sector: Three Case Studies STATEMENT ON THE LONG-TERM FISCAL POSITION MONTH/YEAR July 2013 URL: Treasury website at July 2013: www.treasury.govt.nz/government/longterm/fiscalposition/2013 NZ TREASURY New Zealand Treasury PO Box 3724 Wellington 6008 NEW ZEALAND Email [email protected] Telephone 64-4-472 2733 Website www.treasury.govt.nz Table of Contents 1 Introduction .............................................................................................................. 1 1.1 New Zealand’s natural capital ........................................................................................1 1.2 Natural capital in the Crown accounts ............................................................................3 1.3 Policy options .................................................................................................................. 5 1.4 Case studies ................................................................................................................... 6 2 Oil and gas ................................................................................................................ 8 2.1 Key message ..................................................................................................................8 2.2 Introduction ..................................................................................................................... 8 2.3 Fiscal sustainability ......................................................................................................... 9 2.4 Economic growth and efficiency ...................................................................................14 2.5 Equity and distribution ..................................................................................................15 3 Fresh water ............................................................................................................. 16 3.1 Key message ................................................................................................................16 3.2 Introduction ...................................................................................................................16 3.3 Fiscal sustainability and economic growth and efficiency ............................................20 3.4 Equity and distribution ..................................................................................................26 4 Climate change ....................................................................................................... 27 4.1 Key message ................................................................................................................27 4.2 Introduction ...................................................................................................................27 4.3 Fiscal sustainability .......................................................................................................30 4.4 Economic growth and efficiency ...................................................................................32 4.5 Equity and distribution ..................................................................................................33 5 Conclusion .............................................................................................................. 34 List of Figures Figure 1 – Forest, energy, and mineral depletion as a percent of GNI ...............................................2 Figure 2 – Natural resource rents as a percent of GDP, 2009 ...........................................................4 Figure 3 – Environmental tax revenue as a percent of GDP, 2010 ....................................................4 Figure 4 – Comparison of international petroleum fiscal regimes .....................................................10 Figure 5 – Oil production scenarios and the present value (PV) of future royalty income ...............12 Figure 6 – GDP per cubic metre of total freshwater withdrawal, 2009 .............................................16 Figure 7 – Modelled nitrate concentrations in rivers .........................................................................17 Figure 8 – Estimated surface water allocation pressure ...................................................................18 Figure 9 – Agricultural uses as a percent of total freshwater withdrawal, 2009 ...............................19 Figure 10 – Annual revenue from targeted water rates ....................................................................24 Figure 11 – Peak summer water demand in Tauranga City .............................................................25 Figure 12 – Carbon dioxide emissions intensity, 2008 .....................................................................28 Figure 13 – Carbon dioxide emissions from transport, 2008 ............................................................29 Figure 14 – New Zealand’s historical and projected net greenhouse gas emissions .......................30 Background Paper for the 2013 Statement on the Long-Term Fiscal Position: Long-term Challenges and Opportunities in the Natural Resource Sector: Three case studies i Long-term challenges and opportunities in the natural resource sector 1 Introduction 1.1 New Zealand’s natural capital New Zealand’s cultural, social, and economic prospects are inextricably intertwined with the health and sustenance of our natural capital. What is natural capital? Natural capital includes both non-renewable natural resources (such as land, coal, oil, gas, and minerals) and renewable or recyclable resources (such as forests, fish, and water flows). Natural resources have biophysical limits, either because they are finite in quantity or because the biophysical processes for their renewal restrict the rate of replenishment. Natural capital provides a flow of goods and services that have both an instrumental value, to the extent that they contribute directly to economic production and wealth creation, and an intrinsic value, to the extent that they contribute to cultural values, national identity, and non- market uses. In addition, nature’s ecosystems and other natural systems provide essential services, eg, absorption of waste products. New Zealand is wealthy in natural resources. We have plentiful, clean water; clean air; fertile soil and a climate well-suited to humans, trees, livestock, and agriculture; long coastlines and significant aquaculture resources; significant mineral and petroleum reserves; and extraordinary biodiversity on our land and in our water bodies. The World Bank estimates that New Zealand ranks eighth out of 120 countries and second out of OECD countries in natural capital per capita; we are outranked only by petroleum- 1 exporting countries. Our natural resources are central to New Zealand’s cultural heritage, both for Pakeha and Māori. Māori draw identity and whakapapa from the environment and exercise kaitiaki responsibilities over land and resources. We have a responsibility to recognise this cultural relationship in accordance with the principles of the Treaty of Waitangi. 1 World Bank. “The Changing Wealth of Nations: Measuring Sustainable Development in the New Millenium.” (2011.) Retrieved from http://data.worldbank.org/data-catalog/wealth-of-nations Background Paper for the 2013 Statement on the Long-Term Fiscal Position: Long-term Challenges and Opportunities in the Natural Resource Sector: Three case studies 1 Natural resources such as land, water, and fish provide a large proportion of the inputs to our economic system: In 2011, export revenue from the primary industries amounted to over $31.5 billion or 2 over 70 percent of total merchandise export revenue. Agriculture and primary industries contribute over 17 percent to our Gross Domestic 3 Product (GDP). 4 Over 70 percent of our electricity is generated by renewable energies. The New Zealand economy has grown on the basis of its natural capital stocks and flows and our ability to generate wealth will be dependent on this stock for the foreseeable future. According to the OECD: The sustainability of economic growth depends on the importance of non-renewable natural resource extraction for overall income generation and the rate at which 5 environmental capital is permanently degraded in the process. Strong income growth in emerging markets will support demand for natural resources in the short- to mid-term, underpinning demand for New Zealand’s exports and further entrenching our reliance on the productive sectors for our growth, wealth, and living standards. Should we fail to plan for and manage within biophysical resource limits we will undermine the productivity of our primary sector in the long term and limit our growth potential. This in turn constrains the Government’s ability to provide for the needs of a growing and ageing population. Figure 1 shows forest, energy, and mineral resource depletion as a percent of Gross National Income (GNI) for a number of OECD countries. Figure 1 – Forest, energy, and mineral depletion as a percent of GNI 6 Source: World Bank. 2 Ministry for Primary Industries. “International Trade: Agricultural and forestry exports from New Zealand: 2011 June year end highlights.” (2011.) Retrieved from http://www.mpi.govt.nz/agriculture/statistics-forecasting/international-trade.aspx