The Productivity Commission’s zeal for net-zero

Among those holding the reins of power –  and their supporters –  there appears to be an almost passionate commitment to a goal of eliminating (net) all greenhouse gas emissions by 2050.  So passionate as, it seems, to care very little about the consequences for New Zealanders.  And since some of the easiest and least costly (probably actually net beneficial) ways to make big inroads on New Zealand greenhouse gas emissions run head-on into other passionately-held ideological commitments, those options simply get ignored as well.  None of this seems based on any robust analysis, either of the specific issues facing New Zealand, nor of the way in which the substantial costs of adjustment would be likely to fall most heavily on the poorest in our society.  Some, who should know better, seem to want to pretend that a major coerced reorientation of our economy would actually be net beneficial (in economic terms) to New Zealanders.

We’ve had another display of this sort of attitude today, with the release of the Productivity Commission’s final report into making a transition to a low emissions economy.   There is more than 600 pages of it.    In its evangelical tone –  not much detached analysis here – much of it could have been written by the Green Party.

There is, for example, no sign of any recognition that New Zealand may well benefit from global warming (consistent with previous OECD modelling and IPCC analysis). And yet, according to the the chair of the Commission in his Foreword.

We make that effort as a member of a global community with a shared interest in overcoming this challenge to our collective well-being. We cannot expect to influence others of the need to change if we cannot ourselves demonstrate the willingness and ability to play our part, to offer our assistance and to share the benefits of our experience.

It seems laughable to suppose that the world will be looking to a lead from New Zealand on these issues (if only because the pattern of our gases is so much different).  But even if they were, why would we sacrifice ourselves –  and our own lower income people –  on the altar of some issue which may well pose significant risks in other countries, but if anything is likely to make New Zealand a more pleasant, and productive, climate in which to live?  Mr Sherwin gives us no clues on the answer to that.

The report itself open with this claim on the first page of the Overview.

It is difficult to estimate accurately the economic costs of climate change, due to many uncertainties. Even so, broad estimates of the economic costs of escalating climate risks are daunting. Even at 2°C of warming, the Intergovernmental Panel on Climate Change (IPCC) estimates the annual economic cost at between 0.2% to 2% of global GDP, even if strong measures are taken to adapt to such change.

Deep in the body of the report, the Commission  –  which seems to have commissioned no modelling of the GDP impact of emissions reductions targets itself –  downplays the NZIER modelling results published in the recent official consultative document on a net zero target, which suggested GDP losses for New Zealand of 10-22 per cent if we pursue a proper net-zero by 2050 target.  But even half the potential losses NZIER estimated would be a lot larger than 0.2- 2.0 per cent (benefits) –  and recall the OECD modelling suggesting that the economic costs of climate change itself are concentrated in already warmer countries, not in temperate places like New Zealand.

The zeal to lead the world continues a page or two later

Further, by achieving a successful transition to a low-emissions economy, New Zealand has an opportunity to influence others in pursuing a low emissions economy. That influence can help reduce the risk of other countries failing to pursue mitigation pathways because they either do not know how to, or do not think it can be done while continuing to grow incomes and wellbeing. Such influence is likely to be particularly relevant in areas where New Zealand has expertise and experience (eg, techniques for pastoral GHG mitigation) and by implementing innovative policy solutions (eg, to reduce biogenic methane (CH4)).   New Zealand’s capacity to influence will be the greater if it can point to its own credible and substantial mitigation progress.

So, even though climate change won’t particularly adversely affect New Zealand, we should take a gigantic gamble –  that others might be hesitating about taking –  on the off chance that we can influence the world.   And all premised on the spurious benchmark that a net-zero target can be achieved “while continuing to grow incomes and wellbeing”.  The people who run the Commission really should know better than that: the benchmark shouldn’t be whether people in 2050 are better off economically than we are, but what difference the proposed policy initiatives will make to the outcomes we would have had otherwise.  Anything like a 10 to 22 per cent loss of GDP (relative to baseline) is enormous, and appears to be a risk the Productivity Commission has little interest in engaging with, such is their emotional commitment to the net-zero aspiration (or their political commitment to keeping onside with a new government).

And, of course, the Commission has a great deal of confidence in the ability and willingness of governments and public servants (people like them), to “get things right”, never once engaging with the generations –  centuries –  of records of government failure, or the limitations of human knowledge.  Thus we are earnestly told that one of the “problems” is

Discounting climate change pushes responses to it into the future. There is a tendency to punt policy choices into the future because of near-term costs and a belief that some disincentives will reduce in the future (eg, cheaper technology or increased cost of inaction). Yet as the future approaches (when action was due to occur), the salience of the short-term costs returns, creating a vicious cycle.

And yet in a country that has almost certainly benefited, probably modestly, from  global warming to date, it is almost certainly beneficial for us not to have taken action generations ago, when the technologies were not there to support such adjustment.

They more or less recognise some of this just a little later, in a rather incoherent paragraph

So, an important theme in this inquiry is that the long-term perspective must be introduced into politics and policymaking, domestically and internationally. Added to the long horizon is deep uncertainty about many aspects of the future. The combination of these two features requires political commitments and durability that spans many generations. Without durable and ambitious policies now, the signals for firms and households to move their production and consumption towards less emissions-intensive options will be weak, at best. The challenge is therefore how best to design the political and governance architecture in a way that effectively signals future policy intentions and provides a commitment to such intentions.

Long horizons and “deep uncertainty about many aspects of the future” in combination are not simply a good recipe for getting (good) “durable and ambitious policies”, or the sort of aspiration the Commission seems to have to make such issues –  with huge economic and social implications –  something bipartisan or even transcending politics.  But politics is about the sphere in which hard choices should be debated.

Ultimately though, laws and institutions will not endure unless underpinned by political consensus. Support across political parties is therefore vital; climate change is the ultimate intergenerational issue, and governments change. So, substantial cross-party support for the core elements of statutory and institutional arrangements will help provide policy permanence regardless of the make-up of the Government.

Even though, on the government’s own modelling, the adjustment costs are very large (and probably uncertain), the distributional consequences are severe, what other countries are doing in largely unknown and subject to change –  oh, and New Zealand itself isn’t particularly adversely affected by climate change.

A big part of the Productivity Commission’s vision of the path forward is afforestation on a huge scale.  At least they recognise –  unlike the NZIER modelling, which assumes the new forests are effective all a net gain –  that if this were to happen it would mostly displace existing uses of land for sheep and beef (although the Commission barely touches on the transitional economic implications of that –  there is, for example, no mention of the exchange rate in the entire report).  And even the Commission knows that this approach has its limits

Expanding forestry can achieve large reductions in net emissions up to 2050. Yet heavy reliance on forestry will create challenges in the longer term because it is not possible to expand without limit the land area under forest. With continued emissions reductions required after 2050 to achieve and maintain net-zero or negative emissions, New Zealand will need to find mitigation options for hard-to-reduce emissions sources.

Which might leave you wondering why we should massively reorient the economy now –  at likely considerable real economic cost –  to achieve an artificial goal of no specific relevance to New Zealand, net-zero by 2050.  The feel-good dimension might be fine for the Green and Labour parties, but we should expect more from the Productivity Commission.

Towards the end of their Overview, the Commission verges on the dishonest. There is a section headed, in big  bold letters

Many benefits from the transition
Investment and job opportunities

They note

An important framing point is to think about the potential cost of transitioning to a low carbon economy as an investment, rather than as a net-cost on the economy and taxpayers. With all nations playing their part, the return in the form of avoiding damaging climate damage is substantial.

Except that (a) the numbers don’t back this up (say a 2% of GDP global loss from climate change and a 10-22 per cent loss of GDP in New Zealand to get to net zero by 2050 (again, on the government’s own numbers)), and (b) thinking of something as an “investment” doesn’t make it a good call.  There was plenty of stuff the national accountants called “investment” during the Think Big era in the 1980s –  and actually late in any boom –  that was simply wasted resources.

They prattle about much of the investment being undertaken by the private sector, as if again somehow this was a good thing, or a sign of it being well-justified.  Regulation and taxes often force businesses to undertake investment spending that has little or no societal economic benefit.  Skewing the economy to achieve a net-zero target is not obviously different.

As for jobs

A low-emissions economy has the potential to be a major source of jobs growth in the future, with many jobs yet to be defined. The International Labour Organisation (ILO), for example, says that taking action in the energy sector alone to limit global warming to 2°C by the end of century can create around 24 million new jobs by 2030, more than offsetting losses in traditional industries.

But we already have something close to full employment.  We had something closer to full employment in the dark days when New Zealand protected every industry under the sun.  Market economies will generate jobs, and technological change mostly isn’t a threat to overall employment levels (any more than in the Industrial Revolution). The issue is what those jobs pay, and that is largely determined by productivity.  The Commission is curiously, conveniently, silent about the likely overall productivity losses –  those GDP losses NZIER identified will mostly be lost productivity.

I could go on quoting the politicised blather, but here is just one last quote from the Overview

New Zealand can achieve a successful low emissions economy, but there will be tough challenges. Delaying action will compound the transition challenge, making it more costly and disruptive, and limiting viable and cost-effective mitigation options in the future. If New Zealand fails to act, it risks being locked into a high emissions economy and missing potential future economic opportunities.

Mostly this is just rhetoric.  If we face difficult adjustments, including around animal emissions for which there are as yet few decent technological options –  beyond getting rid of the animals (and shifting production to other countries –  might it not make a lot more sense to delay adjustment, take advantage of economic new technologies as they arise, and so on.  After all, despite the rhetoric, neither Donald Trump, Xi Jinping, nor anyone else is looking to us to commit some sort of economic suttee, on the off chance of rising phoenix-like from the ashes.  The Commission, for example, is dead keen on electric cars, but presumably technology in that area will continue to improve, perhaps rapidly, and we might mostly be better off not leaping now, but waiting until the prices come further down.  Individual firms will make their own choices about long-term global market opportunities, and officials at the Productivity Commission are unlikely to be able to give them any useful guidance, about balancing costs and risks, opportunities and threats.

Longstanding readers will know that I had complained that the Commission’s draft report had entirely ignored the role that immigration policy had played in driving up New Zealand’s total GHG emissions in recent decades, and –  in particular – the way in which current immigration policy, if persisted with, will compound the economic difficulty of meeting any sort of low emissions target, let alone net-zero by 2050.  Population growth was treated as an exogenous constant in the draft report.   I made a submission on the draft report, again highlighting the issue and the fairly strong cross-country relationship between population growth and emissions growth (not only in total, not only in transport, but even in agriculture).

The final version of the report represents a very modest improvement.  There is no still no reference to immigration policy, past or present, in the entire document.  There is some more discussion of the contribution of population growth, and a single piece of sensitivity analysis that makes the rather obvious point that a lower population growth rate would lower the carbon price required to meet a net-zero target, but no recognition that in New Zealand – unlike many countries –  trend population growth is very directly influenced by specific policy choices around immigration.       As even the Commission notes, achieving a net zero target by 2050 will be “challenging”. Against that backdrop it seems remiss –  and highly political –  not to even put on the table the question of whether the target rates of non-citizen immigration should be revised down.  If the government and the Commission were serious about mitigating the costs of meeting such a target –  rather than pretending that there are real net economic gains –  they’d be taking a hard look at all the things that compound those costs, without providing much benefit to New Zealanders as a whole.  High rates of immigration –  to a country more remote than almost any other, with no demonstrated productivity gains over decades, and about to be put through the wringer of large structural changes undermining the competitiveness of much of the tradables sector –  look like a clear example.    But touching on such issues would challenge the priors of the elite, and we can’t have that it seems.

Productivity Commission documents come with this statement

The Productivity Commission aims to provide insightful, well-informed and
accessible advice that leads to the best possible improvement in the wellbeing
of New Zealanders.

Perhaps they think they aim to.  It doesn’t look as though they’ve done so with this report.  On the government’s own numbers –  ignored by the Commission –  the wellbeing of New Zealanders will be jeoparised.  But quite probably their advice will have improved the standing of the Commission with the new government.  Which is not at all the same thing.

This was the chart, from the government’s own modelling, that I included in a recent post

Six times the adverse impact on the bottom quintile as on the top quintile.  Breathtaking…..