A new paper critiquing net-zero targets

I wrote a post a few weeks ago responding, in part, to absurd claims made in a TV interview by the Green Party co-leader and Minister for (against) Climate Change, James Shaw about the economic impact of pursuing the net-zero emissions target he and the Labour Party are championing.

He says investing in meeting our climate change goals will be a massive economic boost, rather than a burden.

“What we’re talking about here is a more productive economy, with higher-tech, higher-valued, higher-paid jobs. It’s clearly a cleaner economy where you’ve got lower health care costs, people living in warmer homes, congestion-free streets in Auckland.

“It’s an upgrade to our economy. It’s an investment, you’ve got to put something in, in order to generate that return. If we don’t, the clean-up costs from the impacts of climate change will well exceed the costs of the investment we’ve got to make to avoid the problem in the first place.”

The same tone had been evident in the officials’ Executive Summary to the government’s document consulting on the emissions targets and related issues.

This is our chance to build a high value economy that will hold us in good stead for the future. By upgrading our economy and preparing for the future, we can help make sure quality of life continues to improve for generations to come.

Believe all this, and there are no hard choices, no trade-offs, just stepping into the sunlit uplands in which enchanced prosperity and feeling good go hand in hand.

In my post on the alleged “massive economic boost” on offer, I quoted some extracts from a draft paper by my former colleague (and now Tailrisk Economics) Ian Harrison.

Ian has now put the final version of his paper on his website under the heading

The price of feeling good

A review of the emission targer options in “Our climate your say”

It is well worth reading for those who want to dig a little deeper into some of the specific issues than I have done (or had the energy for).

Here are Ian’s key conclusions.

The Zero emissions by 2050 target is a $200 billion ‘feel good’ project.  Compared to the alternative, zero carbon, target, the zero emissions target could cost an additional $200 billion; is unlikely to have a material impact on the behavior on the rest of the world; on innovation in New Zealand; or generate significant ‘co-benefits’.

The major benefit will be a ‘feel good’ factor for some people, at least until the effects of the policy start to bite.

The consultation on the options was a sham.  Our Climate did not provide an assessment of the pros and cons of the three options: zero carbon; zero carbon with a cap on other emissions; and zero emissions, that were presented. The document only promoted what appears to be the preferred option of zero net emissions by 2050. The reporting of the economic analysis was fabricated to make it appear that the three options had been considered.

The economic modelling was manipulated to reduce the economic impact of the zero emissions target.  The marginal cost of emissions reductions falls with a tougher target. This doesn’t make sense. Lower cost emission improvements should occur first, so the additional reductions under the tougher target will have a higher cost. The lower marginal cost outcome was achieved by restricting the amount of afforestation offsets (which are costless in the model) for the 50 percent reduction target, and giving the zero emissions target twice the allocation. The effect of this was to push most of the economic costs into the lower target option, reducing the marginal cost of the zero emissions option.

The reporting of the economic analysis obscured many of the negative economic impacts. Most of the results were presented as the difference between a 50 percent emissions target and a zero emissions target. This obscured the losses in getting from our current position to a 50 percent fall in emissions. Some of the modelling impacts, with prudent assumptions about technical change, are severe. For example, pastoral farming outputs fall by 60 percent, and household incomes could fall in absolute terms as the policy bites.

The economic modelling is deficient and needs to done again from scratch. The critical variable in any analysis is the rate of conversion of farmland to forestry, but this has not been modelled. There is no analysis of the optimal timing of emission reductions. The implied carbon prices appear to be unrealistically high which makes it difficult to draw conclusions from the analysis,

Climate change may have positive effects on New Zealand this century.  The Ministry has not produced a report on the costs of climate change. Our assessment is that climate change may have a small positive impact this century. The main reason is that more CO2 in the atmosphere promotes plant growth and increases output, which is significant for an economy with a large land based sector. This outweighs the economically relatively minor impacts from changes in weather patterns, and the cost of mitigating the impact of sea level rises.

Changes in the incidence of extreme weather events have been exaggerated.  Only moderate changes in extreme weather events have been projected in the UN Intergovernmental report on Climate Change. For example on the incidence of storms the report says ‘ Increase in intensity of cyclones in the south in winter but decreasing elsewhere. Increase in conditions conducive to convention storm development is projected to increase by 3-6 percent by 2070-2100 compared to 1970-2000.’

The benefits of innovations that will give New Zealand an ‘early mover’ competitive advantage have been exaggerated.   Most of the reductions in emissions will come from forest plantings, imported technology (such as electric cars), closing businesses such as New Zealand Steel, and by reducing livestock numbers. Most of this does not involve much innovation. A Ministry consultant described this innovation optimism this way. To presume that climate policy could make the difference would be a kind of exceptionalism and a serious leap of faith.

Economic costs of zero emissions target are significant.  The economic cost of the zero carbon target could be in the order of $75 billion. The additional cost of the zero emissions target, which requires twice the net abatements at a higher average cost, could be around $200 billion.

New Zealand’s sacrifice unlikely to change the world.  The argument for zero emissions is that it will encourage other countries to meet their commitments. The argument that going from a zero carbon target to a zero emissions target will make a material difference to the actions of other is at best another ‘serious leap of faith’. Depending on your viewpoint the zero emissions target is either a $200 billion vanity project, or a noble sacrifice. There are much cheaper ways of trying to influence world opinion.

Cheaper ways to influence world opinion.   Four ways of getting international attention and promoting the fight against climate change are suggested. They are: Taxes on international air travel; a ban on official business class air travel; virtual attendance at climate change conferences; travel to Wellington airport by bicycle by officials.

Or, more seriously, perhaps even to chip in an additional billion dollars a year in animal science research, to focus on the most difficult – and potentially costly – aspect of New Zealand’s emissions.  It is a great deal cheaper, on the government’s own numbers, than going full-tilt for the arbitrary self-imposed net-zero-by-2050 target.

And a couple of other extracts

Emissions framework fairness. It can be argued that the emissions measurement framework is not fair to New Zealand. Nearly half of our emissions relate to agriculture, but most of the output is exported. If the assessment was done on a consumption, or carbon footprint basis, our abatement responsibilities would exclude exports and account for the emission content of imports and would be lower considerably lower than under the current system.

By contrast, Norway is a large oil and gas producer and exporter, but does not have take responsibility for the emission consequences of its exports. Norway has just
announced that it plans to be emissions neutral by 2030 (mainly by buying international carbon credits) while planning to increase its oil exploration.

New Zealand’s emission record is often painted as poor. For example, the Productivity Commission, in its Low Emissions Economy report presented a figure showing New Zealand to have the fifth highest gross emissions per capita. If the emissions were calculated on a net footprint basis, we would be well down into the low emission end of the figure.


Many other countries are not doing as much as New Zealand.  As an example, consider the case of Singapore. As a high-income country [much more so than New Zealand], which is directly in the climate change firing line, we might expect a sense of urgency and substantive actions. So what is Singapore doing?

First, it signed up to a fairly soft ‘developing country’ Paris agreement target, promising that their emissions will peak in 2030. To our knowledge they have made no commitments beyond that date. In terms of what they are actually doing, we have relied on a January 2018 report from the Singapore Energy Studies Institute.   The main action is the introduction of a carbon tax, apparently to be at a fairly low level, for large companies from 2019. Between 30 and 40 companies will be affected.

In addition:

  • 2018 has been declared the year of climate action
  • Singapore will host a special ASEAN Ministerial meeting on Climate change
  • There will be some financing subsidies.

Food for thought.  And no sign –  not in the consultative document, not in the Productivity Commission report –  of any “massive economic boost” in prospect.


Ten years on

It is the season for books and articles reflecting on financial crises of a decade or so ago, the aftermath, and whatever risks might –  or might not –  be building today.  The collapse of Lehmans –  and the wise decision of the US authorities not to bail it out –  was 10 years ago this month, and although the US crisis had been underway for at least by a year by then, the Lehmans moment seems set to take a place in historical memory around the Great Recession rather parallel to the sharp falls in US share prices in October 1929 (the ‘Wall St crash’) and the Great Depression.  Not in any real sense the cause of what followed, but the emblematic moment in public consciousness nonetheless.

I’ve just been reading the big new book, Crashed: How a decade of financial crises changed the world, by esteemed economic historian Adam Tooze.  I might come back to it in a separate post, but for now would simply caution people that it is less good than his earlier books (around the Nazi economy, and the economic history of the West after World War One running into the Great Depression) had led me to hope.

But on a smaller scale, I picked up the Listener the other day and noticed on the front cover ’10 years after the GFC, former Reserve Bank governor Alan Bollard warns of new risks’.  Conveniently, I see that the article is freely available online.  The sub-heading tantalises potential readers

Former New Zealand Reserve Bank governor Alan Bollard warns that, although lessons were learnt from the global financial crisis, new risks have emerged that could trigger a repeat contagion..

Alan Bollard writes well, and often quite interestingly.  Extremely unusually (and in my view quite inappropriately), he actually published a book on his perceptions of the previous crisis in 2010, while still very fully-employed as Governor, a senior public servant.  There were quite severe limitations as to who, or what, he could be critical of (as I was reminded last night rereading my diaries of some crisis events I was closely involved in, and the Bollard published perspective on those events).     The Bank’s early reluctance to take seriously the emerging issues, as they might impinge on New Zealand, is not, for example, something you find documented in the book.

He must be in a somewhat similarly difficult position now.  He is Executive Director of the APEC secretariat, that grouping of Asian and Pacific (loosely defined) countries and territories, that includes China, Russia, the United States, Indonesia and so on.  I dare say Xi Jinping and Donald Trump won’t be watching nervously to see what Alan Bollard is saying, but the Executive Director knows that there are quite severe limits to what public servants can say while in office.

And, thus, much of the Listener article is a bit of a, perhaps slightly rose-tinted, rehash of some of the policy responses here and abroad (I will come back to deposit guarantee schemes on the tenth anniversary, next month).  There is some loose descriptive stuff on various developments in parts of the APEC region.  There was the suggestion that some countries (actually “much of the region”) in Asia is “anxiously worrying” about whether they could face a Japan-like low productivity future but to me, Japan still looks pretty attractive by regional standards.


(New Zealand, for example, is at 42.)

In fact, I looked in vain for the promised analysis or description of the “new risks” that might “trigger a repeat contagion”.   Perhaps that was never Bollard’s intent, but the Listener had to attract readers to a fairly tame advertorial for APEC somehow.  The most we get is

We need to remember that the global financial crisis was originally triggered by a building bubble, and that is still on the minds of regulators throughout the region.


Meantime, we are very worried about the likely effects of the growing trade wars. It is too early to judge, but the stakes are high – trade growth has been the big driver behind the immense improvement in living standards through the Asia-Pacific region ……We are now on the alert for signs that these trade frictions could weaken exchange rates, hurt commodity prices, hit stock markets or cause financial volatility, against an unusual background of tightening monetary policy and loose fiscal policy in the US.

But then what more could a serving diplomat, not hired to be a high-profile problem solver (unlike, say, the head of the IMF) really say?

And it all ends advertorial style

As a big trader, New Zealand has always been susceptible to these tensions. But one international platform where they play out is coming closer: in just over two years, New Zealand will commence its year of hosting Apec. The organisation is a voluntary, consensus-driven one, where for 30 years we have promoted regional economic ties and tried out new ideas for trade and investment. As the upcoming chair of Apec, New Zealand will have to contend with continuing antiglobalisation pressures, big-economy tensions, climate-change damage and financial risks in the region. It sounds daunting, but there are many positives: We have learnt some of the lessons of the global financial crisis; banking regulation is tougher; banking chiefs are more cautious; economic demand is still growing; and the Asia-Pacific region is tied ever more closely by its trade flows.

It could have been a paragraph from a speech by one of his political masters.   I guess one wouldn’t know that one of his members (the People’s Republic of China) poses an increasing political and military threat to another (Taiwan) or –  closer to his own territory –  that few major economies have very much effective macroeconomic firepower at all when the next crisis or severe recession hits.  And really nothing at all about financial sector risks.  His final sentence –  “September 2018 should be a month much better than September 2008” –  is almost certainly true (at least outside places like Turkey and Argentina) but not really much consolation to anyone.

In his column in the Dominion-Post this morning, Hamish Rutherford touches a theme of various recent posts here: the limited macro capacity of many countries.  He rightly highlights how low global interest rates are, and the much higher levels of government debt in many countries.

To make matters worse, interest rates are already so low that some economists are speculating that if the Reserve Bank was to respond to a slowdown by slashing interest rates, in a bid to stimulate the economy, it may find that little of the money finds its way to households.

Debt levels among the world’s leading economies are, by and large, far higher than they were a decade ago. In the US, as well as threatening to kick off a global trade war, President Donald Trump’s administration is running the kind of deficit that would be wise in a recession, but at the late stage of a long economic growth cycle appears reckless.

But there was one point I wanted to take issue on.  He argues

Back in 2008, New Zealand benefited from its largest trading partner, Australia, avoiding recession and having almost no debt. This time Australia’s debt is climbing and there are doubts as to whether Canberra will have the discipline to return to a surplus, as the political state becomes more populist.

I don’t think that is true about either the past or the present.  We didn’t get any great benefit out of Australia’s fiscal stimulus in 2008/09, largely because if fiscal stimulus hadn’t been used, the Reserve Bank of Australia would probably have cut their official interest rates further.  Fiscal policy can be potent when interest rates have the effective lower limit, but they hadn’t in Australia (or New Zealand).  More importantly, and for all the New Zealand eagerness to bag Australian politics and policies, here is the OECD’s series of the net financial liabilities of the general government (federal, state, and local) for Australia and New Zealand, expressed as a share of GDP.

debt govt au and nz

Australia’s net public debt has been consistently below that of New Zealand for the entire 25 years for which the OECD has the data for both countries.  The gap is a little smaller now than it was a decade ago, and (on a flow basis) the New Zealand budget is in surplus but Australia’s isn’t.  But if there is a desire to use large scale fiscal stimulus in the next serious downturn, debt levels themselves aren’t likely to be some technical or market constraint in New Zealand, and even less likely in (less indebted) Australia.

And finally in this somewhat discursive post, a chart I saw yesterday from the BIS.

real house prices BIS

A story one sometimes hears is that low interest rates have driven asset prices sky-high setting the scene for the next nasty crisis.  Even if there are elements of possible truth in such a story, the story itself mostly fails to stop to ask about the structural reasons why interest rates might be so low.   All else equal, had interest rates been higher asset prices probably would have been lower – and CPI inflation would have undershot targets even further.  But as this particular chart illustrates, across the advanced economies as a whole real house prices now are much same as they were at the start of 2008.  That isn’t true in New Zealand (or Australia for that matter).  Interestingly, even in the emerging markets –  centre of current market unease –  real house prices are still not 15 per cent higher than they were at the start of 2008, when interest rates generally were so much higher.

But then only rarely is the next major economic downturn or financial crises stemming from quite the same set of financial risks as the last one.