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.

and

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.

James Shaw, co-leader of the Green Party and Minister for Climate Change (surely Minister against it?), tells us he is working his way through 15000 submissions on the recent climate change consultation document.  I’ve done a couple of posts here on the document, and on the NZIER modelling used extensively in it, and I’ve chided both the Minister and his department, NZIER, and the Productivity Commission for simply ignoring the fact that our large-scale non-citizen immigration policy is a discretionary policy measure that drives up New Zealand’s carbon emissions, further increasing the economic cost of any variant of a “net-zero” target the government might choose to adopt.   But I didn’t make a submission: there are only so many hours in the week, and it seems pretty clear from some recent broadcast remarks from the Minister that he thinks his own Ministry (for the Environment) is altogether too pessimistic.   A net-zero target is, he claims, a huge economic opportunity for New Zealand.   Never mind that there is precisely no analysis to support such a claim.

In any good policy development process, one wants to see evidence of a proper cost-benefit analysis having been undertaken.    What is the value of the benefits of any actions it is proposed to take, what are the costs of those actions themselves, how uncertain are each of those sets of numbers, and (not unimportantly) how might those costs and benefits change if we were simply to wait a while, or respond gradually (in ways that might, for example, give us more data).     That sort of analysis –  with inevitable imprecisions –  is perhaps all the more important when crusaders are champing at the bit to launch a really major, far-reaching, change in our economy and society, and one with –  on the government’s own numbers –  really big, adverse (ie falling most heavily on the poorest) distributional effects.

The government consultation document, drawing on the NZIER modelling (with all its limitations), did attempt to outline the costs of adopting a net-zero by 2050 emissions target.  The Ministry, in particular, was keen to play down the numbers, but they did report them: best estimates from NZIER were for a loss of GDP of 10 to 22 per cent (ie lower than otherwise).   As I noted in my earlier post, I doubt any democratic government has ever consulted on a proposal to reduce the wealth and incomes of its citizens by quite so much.

But the consultation document made no attempt to assess the economic costs (if any) to New Zealand, and New Zealanders, from the sort of climate change that is likely to occur in the absence of (global) policy responses.   There doesn’t seem to be any such analysis that has been done anywhere in, or for, the New Zealand public sector.   Former Treasury and MBIE official (and now a consultant) Jim Rose highlighted this in a recent Dominion-Post op-ed.

Estimates of the cost of global warming as a percentage of GDP to New Zealand are elusive. I drew a nil response when I asked for that information from James Shaw, the Minister for Climate Change, and from the Ministry for the Environment. Both said such an estimate was too hard to calculate.

As he notes

Fortunately, the OECD rose to the challenge in its 2015 report on The Economic Consequences of Climate Change.

Rose included this chart, drawing on the OECD’s modelling work

Very cold countries are expected to see an economic gain from climate change over the next few decades, and for temperate climate countries it looks like roughly a wash.  New Zealand is modelled with Australia, but Australia is a much hotter country, and it seems quite quite reasonable to suppose that the New Zealand numbers is isolation would be basically zero.  Given the importance of agriculture in our economy, and that warmer temperatures would improve crop yields etc in many areas, some overall economic gain seems not implausible.

Now, it is quite reasonable to point out that, in some respects, 2060 isn’t that far away, and climate effects seem to be slow to unfold.  So the OECD –  hardly a bunch of climate change sceptics – also did some modelling on the effects out to 2100.  This is from their Executive Summary

Presumably the adverse effects still differ quite markedly by geographic region.  But notice two things.  First, this OECD modelling suggests that some of these modelled costs are now sunk costs anyway (would happen even if emissions fall to zero as soon as 2060).  And second, and more importantly, recall the range of economic costs to New Zealand of adopting a net-zero (by 2050) target: 10 to 22 per cent of GDP.  In other words, even if New Zealand were exposed to economic costs of climate change at the upper end of the OECD estimates (10 per cent of GDP by 2100), it still wouldn’t be economically worthwhile to pay a price of 10 to 22 per cent of GDP 50 years earlier to prevent such outcomes.  That is basically what the government’s own numbers say.

And it is all even worse than that.   After all, on these OECD estimates, getting to net-zero (globally) by 2060 would only prevent half the losses.   And since much of modelled adjustment in New Zealand relies on sequestration (planting lots and lots of new forests, almost exclusively on land not currently used for economic purposes) –  and that can really only be done once –  it isn’t implausible to suppose that the economic costs of maintaining net zero emissions beyond 2050 would only increase further.

But somehow none of this –  material from his own ministry, from their consultants, or from the OECD –  seems to have any impact on the Minister.   He tries to draw strange parallels with the internet

“I think the New Zealand of 2050 will look as similar and as different as the New Zealand of today does to the New Zealand that we had 30 years ago. You’ve got to remember 30 years ago, the same period of time that we’re talking about, the internet did not exist. Didn’t exist, right? But you try and run your school or your home or your community group or your business without the internet today, it’s unimaginable.

“The internet has had a profound impact on our economy, on our lives. Whole new industries have been built off the back of it… but the New Zealand of today still feels in many ways a bit like the New Zealand of 1988.”

All of which is largely true (and the further into middle-age you are, the more 1988 seems like yesterday anyway), but irrelevant.   The internet (and associated applications) has been a series of new technologies that have materially changed elements of peoples’ lives.  But that is (largely) private sector innovation, and consumer adoption (or not) of the opportunities and technologies.    Perhaps a more important comparison the Minister might like to reflect on are areas of demonstrable underperformance since 1988? Our economy (per capita) is better off than in 1988. But, for example, we’ve had among the very worst rates of productivity growth of an advanced country in that 30 year period.  Productivity is what opens up options to deal with poverty and all those social issues the Greens say they care about.   Or house prices – which have moved from more or less affordable to highly unaffordable in large chunks of the country (largely as a result of well-intentioned policy choices by people with noble aspirations).

Just like James Shaw and the government of which he is now a part.  This is what he says about the economics of his proposed net-zero target

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.”

But where is his analysis?  Where are his numbers in support of this?   There is nothing of the sort in the consultation document, or in the NZIER modelling.   Without something of that sort –  tracing through the mechanisms he expcts to see these effects –  this is all dreamtime stuff, arguably either delusional or worse.   There is nothing to demonstrate why we should take seriously the Minister’s claim that markedly shifting pricing (or using regulation to the same end) against key sources of energy, and skewing pricing against our handful of large internationally competitive industries (even, unlikely at this stage, if our competitors were going to do the same thing) would mean we’d all end richer (“massively” so apparently) than if the government hadn’t adopted such policies.  It simply doesn’t ring true.

Perhaps the Minister is (deliberately?) confusing two things.   The centuries-long era of technological innovation shows no sign of having ended.  There will be technologies 50 years from now that few of us can even dream of today.  In some cases, they may leave our grandchildren considerably wealthier than we are.  In some cases, they are likely to markedly ease the costs of adjusting away from an economic structure that involves large-scale carbon emissions. But that is a quite different thing from supposing/assuming that heavy government intervention, of the sort the government is proposing, will itself make us all a lot richer.  And, as I’ve noted previously, even the NZIER modelling numbers already assume into existence big improvements in technology, in turn assuming away what would otherwise be very large economic costs of adjustment.

Perhaps those technology assumptions will themselves prove to conservative.  But wouldn’t we be a lot better off waiting to see how the technological opportunities unfold, rather than racing ahead, wishing upon a star, when –  on the OECD’s own numbers, the economic costs to New Zealanders of waiting appear likely to be modest (at worst).   And lets no forget –  and in any circumstances the Green Party rightly wouldn’t let us do so –  the distributional impact the government’s own commissioned modelling revealed.

Six times as heavy a burden on the bottom 20 per cent as on the highest-income 20 per cent.  Six times.

In his enthusiasm for rushing ahead, beyond any sort of current international commitment, James Shaw cites public opinion

“New Zealanders do want us to lead on climate change. They think our response so far has been inadequate. They think that New Zealand should act even if other countries don’t,” he told Newshub Nation on Saturday, citing a recent survey by IAG.

“They really want us to be ambitious and to do the best we can.”

That survey showed while three-quarters of Kiwis think New Zealand should take action even if other countries don’t, only one in 10 percent think the rest of the world will.

More details of that survey (or not the exact wording of the questions, probably rather leading given the commercial virtue-signalling purposes it appears to have been  commissioned for) are here.

Public opinion matters, a lot.  The public elect, and oust, governments.  But what proportion of the public does the Minister honestly suppose has any sense –  even the vaguest sense – of the sort of cost-benefit calculus implicit in combining the OECD estimates (economic costs of climate change) with his government’s own published estimates of the costs of fast New Zealand moves to zero emissions?   And the fact that the answer is likely to be well under 5 per cent isn’t really an adverse reflection on the public –  ignorant voters and all that –  but a reflection on our political parties and official/bureaucratic classes, which have fallen over themselves to avoid sharing such perspectives more widely.  The feel-good response to the end-of-the-world-is-nigh rhetoric is hard to stand against; easier to go with the flow, and if anything cheer it on.  But pointing out this pretty basic considerations –  and they aren’t hard arguments to explain –  should perhaps be something political leaders (if the word “leader” means more than just holding office) should do.

My former colleage Ian Harrison, now at Tailrisk Economics, makes a bit of a speciality of digging more deeply into some of the dubious claims that government ministries, and the like, often make (a collection of his papers is here).    He has been digging into some of the claims, and the modelling, regarding possible New Zealand emissions targets, and sent me the other day a draft of a paper he is working on, with permission to share a few excerpts.

Ian’s draft paper draws attention (more than I have, and more than the report itself does) to the pretty significant reductions in exports in the NZIER modelling.   It seems unlikely that a small economy doing less trade with the rest of the world is going be achieving a “massive boost” to prosperity.    Ian also draws attention to a point I’ve also made in earlier posts, about where the new forests are likely to go.  NZIER assumes that the new forests are on land that currently has little or no economic use.  But if agriculture is brought into an ETS (even partially and gradually) and there are substantial carbon credits from forestry sequestration, we could see a large amount of existing farmland converted to forestry.  Whatever the possible merits of such a conversion, it would further reduce exports over the decades in which the trees were growing, which in turn would be likely to have implications for the exchange rate (something not dealt with in the NZIER modelling at all).

Ian also draws attention to the way in which both the IPCC’s most recent report on Australasia (a summary of the New Zealand bits is here) does not support the notion that the economic impacts of global warming itself “would be strongly negative, or at least negative at all” this century.  He draws attention to a 2012 Ministry of Primary Industries report on the impact of climate change on land-based sectors.

The main purpose of the report was to look at adaptation and resilience issues rather than make an overall assessment of the economic costs and benefits, but two major themes suggest that the overall impact would be positive. The first is that C02 fertilisation will have a major positive impact. The second is that New Zealand farmers are very good at adapting both tactically and more strategically to climate events, which would help mitigate some of the adverse impacts, which are in any event, less quantitatively significant.

Recall that the assumed warming over the 21st is less than the temperature difference between Invercargill and Auckland (and, even setting aside growing conditions, most people would count such a shift as an improvement in the amenity value of their location –  certainly true of Wellington).

Much of the thrust of Ian’s paper is scepticism about the case –  touted by the government, with public opinion support for the time being –  for acting early and aggressively.   One argument made in official papers is that acting early reduces the risk of later sudden drastic shocks, but the basic logic of this argument seems flawed, given the absence of technology to deal with some of the major sources of New Zealand emissions.

Logic would suggest that in New Zealand more time would reduce those risks. In particular, reducing animal methane emissions per animal is challenging and will take time. The NZIER report shows that if we pursue a zero emissions target without a technical solution the impact on the pastoral sector would be devastating with output falling by 70 percent, from baseline projections, by 2050.

Another argument is that by acting early by will get economic advantages from being early into emerging technologies.

This argument is overblown and reflects wishful thinking rather than hard analysis. The reduction in emissions will not involve (much) marketable technological innovation. We will mainly grow more trees. The rest of the world already knows how to do that. We will import electric cars leveraging off innovation elsewhere.  Norway has been an earlier adopter of electric cars but no one has suggested that Norway has innovated to produce better electric cars.  We may close down some carbon intensive industries such as iron and steel and cement manufacturing. Painful, but doesn’t require much innovation that we can sell to the rest of the world.

And then, of course, there is the incredible “moral leadership” argument, recently also advanced –  stepping well out of his field –  by the Reserve Bank Governor.

Again this is wishful thinking. Does anyone seriously expect the countries that matter: the US, China and India, to be influenced by what New Zealand does.

And if, in some sense, rich countries probably should take some sort of lead in dealing with global problems

It is generally accepted that the rich countries should take the lead in reducing greenhouse emissions. However, New Zealand is not really a rich country, sitting on the margin of being an upper middle-income country. This weakens the case for New Zealand bearing a disproportionate share of the mitigation burden, particularly if the result is to push us more firmly into middle-income territory.

And there is a reminder of the elephant in the room that not even the Greens seem yet to be willing to address. Emissions from international travel and shipping aren’t in the international emissions numbers, but it doesn’t change the facts.   There are no good alternative technologies are present, and yet international shipping and aviation are probably more important to New Zealand (given distance, and being an island) than for most advanced countries.

Setting out to, in some sense, “lead the world” in this area is a recipe for severely impairing the future living standards of our own people.   Perhaps the warm inner glow of the “feel good” –  which would no doubt linger long among Greens supporters, well after most New Zealanders were living with the economic consequences –  should be added to Treasury wellbeing dashboard?  But it is likely to take an awfully large amount of “feel good” to compensate for the lost opportunities –  for rich and poor alike –  of wilfully giving up 10 to 22 per cent of future GDP (on the government’s own numbers).

A couple of weeks ago I wrote about the government’s consultative document on its proposal to target net-zero emissions by 2050, and particularly the commissioned modelling NZIER had undertaken on the likely consequences of each of several options for future real GDP.    As the consultative document itself put it

The analysis by NZIER suggests that GDP will continue to grow but will be in the range of 10 per cent to 22 per cent less in 2050, compared with taking no further action on climate change.

Those are breathtakingly large numbers (future GDP gains) for a government to simply propose walking away from.  As one comparison, high end estimates of the GDP gains from preferential trade agreements (such as CPTPP or the proposed new one with the EU) tend to be about 1 per cent each.

A couple of days ago NZIER’s final report itself was released, making it a bit easier to make sense of the reported modelling results.    There is a great deal of detail (the report is 90 pages), a considerable number of (necessary and inevitable) caveats, as well as quite a bit of editorial advocacy for their client’s wishes.

The centrepiece remains this table which I ran in the earlier post.

From reading the final report, and a few exchanges with NZIER, they would encourage people to focus on the final three columns.   In those scenarios, relative to the baseline (the first column, which is built from The Treasury’s longer-term economic projections/assumptions), the net-zero target sees productivity growth fall quite substantially, such that average annual GDP growth falls by 0.3 percentage points.  Over 33 years, that cumulates to a sacrifice of about 10 per cent of GDP  (real GDP –  per capita, since the population assumptions don’t change – in 2050 is about 10 per cent lower than it otherwise would be).     These are serious numbers: 10 per cent of today’s GDP is about $28 billion.  And the loss isn’t just for one year.  Depending on various possible assumptions, the cumulative loss the next generation would experience could easily be a couple of hundred billion dollars (in today’s dollars).

(Perhaps encouraged by their client) NZIER try to play down these numbers a bit by encouraging people to focus only on the difference between the third to last and last columns.  They argue that the 50 per cent net reduction is already government policy, and so the relevant metric is the marginal additional losses from moving to net zero.   But, of course, actual policies to deliver the previous government’s own vapourware objective (the 50 per cent reduction by 2050) aren’t in place, and that target itself is not binding in any real sense.

Some readers might think that a 10 per cent loss of future GDP isn’t too bad –  big as it is. it certainly isn’t as large as the 22 per cent loss referred to in that quote above.

But the 10 per cent of GDP annual cost by 2050 (the final scenario in the final column of the table) relies on some really rather optimistic assumptions  (and assumptions they all are, as is clearly identified in the NZIER report).

First, they assume quite a lot of technological innovation in some sectors that might be most exposed to a higher carbon price.  For example, it is assumed that by 2030 methane vaccine is readily available, commercially viable, and widely used, which would reduce methane emissions by 30 per cent.  It is also assumed that global demand for dairy and sheep/beef products falls quite substantially (even though, all else equal, this would make New Zealand poorer, it would make farmers more ready to shift away from emitting-animals).  It is also assumed that much faster improvements in energy efficiency are achieved and that (without subsidies or regulation) electric vehicles make up 95 per cent all light vehicles on the road in 2050 and 50 per cent of all heavy vehicles.

No doubt a much higher carbon price (globally) would encourage additional R&D in affected sectors, and so some of these innovations may well occur.  But in my earlier post, I described these assumptions as assistance from the “magic fairy”, because while it is probably fine to assume that big changes in relative prices, imposed by governments, will foster innovation to economise on what is being taxed more heavily, it is unreasonable to assume –  as is done here –  no offset in the rest of the economy.   On these assumptions (presumably developed jointly by MfE and NZIER) a government-driven huge change in the structure of the economy (driven away from the market baseline) is a net positive source of new economic innovation.  It doesn’t seem very likely.  It isn’t at all obvious what precedents could be cited in support of such an assumption.  On that basis, for example, putting on import licensing and exchange controls after 1938 might have been hugely positive for business innovation in New Zealand.   Enthusiasts at the time probably hoped so, but the typical reading of the evidence would suggest not.

In the consultation document these “assume innovation” scenarios were all described solely as technological innovations (as described above –  and the text is reproduced in my earlier posts).  But what becomes clear, and quite explicit, in the full NZIER report is that much of what is going on in these “assume innovation” scenarios is in fact different assumptions about increased sequestration of emissions by a permanent increase in land used for forestry.  The model can’t cope with generating increased afforestation endogenously, and so assumptions have simply had to be imposed.

In the net-zero scenario (far right column), so much additional sequestration is assumed that the authors state that it would require a 140 per cent increase in the land area devoted to forestry (a really big increase, and the baseline presumably includes not just plantation forest but forests in, eg, national parks).  The big step up in the assumed forestation between the 75% and net-zero columns is the reason why the GDP growth rates are the same in the two scenarios.

It does seem reasonable to suppose that a much higher carbon price (and in the NZIER modelling, the carbon prices goes very high on some scenarios) there will be changes in land use in favour of forestry.  But here again, the magic fairy is at work.

We assume that additional forestry planting does not materially reduce the amount of productive land available for other uses. This could be seen as assuming that additional planting occurs on scrub land, rather than substituting for sheep and beef or dairy land.
If afforestation occurs on productive land, the economic costs of imposing emissions targets will increase, as the productive capacity of the agricultural and horticultural industries will decrease, which will also have negative flow-on effects for downstream primary processing industries.

In other words, NZIER is assuming that a big change in relative prices (the carbon price) makes economic a whole lot of resource that has not hitherto been used for anything much.  I’m sure there is such land – a considerable portion probably Maori land, with all the issues around title/collateral that make it difficult to use  – but is it reasonable to assume that all, or even most, of the land newly devoted to forests will be land that wasn’t previously being used for anything?  Why, for example, wouldn’t one assume that land that has been converted from forestry to dairying in recent decades (eg much between Taupo and Tokoroa, and Taupo and Rotorua) be among the first that would be converted back to forestry?  If so, as NZIER acknowledges, there will be additional real economic losses.

As in the Productivity Commission’s draft report, this NZIER modelling makes no allowance for the possibility of a lower population growth rate (by lowering our annual immigration approvals targets).  It is quite an extraordinary omission, given the cross-country data I’ve shown previously illustrating (the rather obvious point) that more people tends to mean more emissions.  If they are your own people, there isn’t much governments can do about it, but in New Zealand a large (and increasing) part of trend population increase is about discretionary immigration policy.

One would need to have NZIER rerun their models to get really good estimates (and since they ran and published sensitivities on a variety of other alternative assumptions, there is no good reason not to have done so as regards population growth –  although no doubt to have done so would have been unwelcome at MfE and in the Minister’s office).  But since the increased afforestation assumptions are a bit like a free lunch (raise the carbon price, and a whole lot of previously unused land is brought into play, sequestering carbon emissions), one can get a sense of what a difference a similar free lunch assumption might make.  Lowering the projected population growth by 0.7 per cent per annum (the difference lowering residence approvals from 45000 to 15000 per annum would make) would reduce expected future emissions enormously, without needing the see the carbon price driven sky-high.  Perhaps then a net-zero target –  on this definition – might really be feasible with a 10 per cent sacrifice of annual GDP per capita, or perhaps even something a bit smaller.

However, even then there are areas where the NZIER numbers are underdone if the government is really serious about a true net-zero goal.  I checked the Labour Party’s and Green Party’s climate change policies, and the net-zero goal is there in a pretty stark and unqualified way.  There is no suggestion that they are only interested in net-zero emissions on some UN definition –  and fair enough, for them this is a moral cause, not a bureaucratic one.

But what isn’t always appreciated among the wider public is that emissions associated with international aviation, real and substantial as they are, are not included in the UNFCCC (UN framework convention on climate change) definitions (neither is international shipping).   This wasn’t because of any high science.

The international aviation and shipping sectors are not included in the recent Paris Agreement, which was negotiated under the United Nations Framework Convention on Climate Change (UNFCCC). The precedent for excluding these sectors from global climate agreements was set in 1998, when both sectors were excluded from national targets established under the Kyoto Protocol. This was largely due to a lack of agreement on how emissions should be attributed to particular States.

From the planet’s perspective, it doesn’t appear to matter whether the emissions comes from your car, or from Air New Zealand’s aeroplane.  In the UNFCCC numbers –  the base NZIER uses for their modelling –  it does.  But if you “care about the planet”, and want to give a strong “moral lead”, in the way the governing parties claim to, surely you need to offset international aviations as well.   Domestic aviation is included in the ETS – so I learned, New Zealand was among the first to do so –  but not international aviation.

There was a government document published on this issue a couple of years ago.  As it points out, at present the numbers aren’t unduly large

Domestic aviation accounts for 1.1 percent of New Zealand’s total emissions.

and international emissions are about 2.5 times domestic

International tourism has been booming since then.   And here are Ministry of Transport projections.

Even if we take the middle two lines, international aviation emissions would almost double by 2050.

Remember too that fuel costs are a very large proportion of airline operating costs (especially for long-haul operations) and that tourism spending is quite price-sensitive (you might be determined to take a holiday, but price affects location choice).  If the government is really serious about a moral crusade for net-zero they can’t but include international aviation in the framework (and in the goal) –  and if others were to follow their moral lead, the industry will have to have been included globally by 2050.  And what will that do to the viability of our international tourism industry –  almost everywhere is closer for almost everyone than New Zealand is, and we don’t have many unique offerings?   Given a choice between taking your electric vehicle to the Croatian coast or flying to New Zealand, the economics won’t favour New Zealand.

In other words, if the government is serious about a genuine net-zero target, they really need to start factoring in international aviation emissions, especially as these are set to rise absolutely and (especially) as a share of total emissions.  Perhaps they can just assume into existence some more forests, at no cost to other production, but it would seem highly risky to just do so.

For all these reasons, the 10 per cent sacrifice (a deliberately chosen act) of annual GDP estimated by NZIER seems to be very much at the low end of the plausible range, especially if they are serious about offsetting all emissions, not just ones that international convention negotiators happened to agree on.  The 22 per cent number comes from MfE and NZIER and doesn’t seem implausible.  Of course, any modelling, and any estimates, are inevitably highly imprecise.  Something could turn up to set all these costs at naught, but it would seem rash –  to say the very least –  to set out upon such a journey in the idle hope that something will turn up, and if not well –  never mind –  our children will simply be up to a quarter worse off than otherwise.    Productivity growth in New Zealand hasn’t been rapid in recent decades, but lopping a quarter off future incomes would be the equivalent today of simply giving up all the economic gains (in real GDP per hour worked) of the last 20 years.  Simply breathtaking.   And meanwhile people lament child poverty concerns, constraints on the health system, and so on.   Productivity is about new possibilities.  Are we really happy to give up such possibilities for the next few decades?

There is a lot of other interesting stuff in the NZIER report, but I wanted to end with the chart on the estimated distributional impact.   In my previous post, I quoted the MfE text

Our modelling suggests the households that are in the lowest 20 per cent bracket for income may be more than twice as affected, on a relative basis, than those households with an average income.

Which is quite bad enough. But it is all the more stark when you see the chart in the NZIER report, drawn from some work done for them by Infometrics  (in this chart they are looking only at the additional estimated losses from moving from the 50 per cent target to a net-zero target).

Specifically, people in the bottom two income quintiles will be hit six times as hard as people in the top quintile.    Like MfE in the consultation document, NZIER rush to the client’s defence and suggest that redistribution policies could alleviate this.   You wouldn’t thought that sort of advocacy was their role –  having been commissioned to do modelling –  but more importantly, they should know as well as anyone that when governments adopt policies to materially shrink the economy, it is even harder than usual to persuade voters in the upper quintiles to agree to give up even more to mitigate the losses the worst off are exposed to.   Redistribution tends to win more favour when everyone is getting better off.

Has any government anywhere ever consulted on policy objectives that, if seriously pursued could cut future GDP per capita by anything from –  on their own numbers –  10 to 22 per cent?  If so, I can’t imagine when.  It is a huge price to propose for what seems to be mostly a moral crusade –  hence the title about pricing the hair shirt.  If you doubt that interpretation, check out Labour climate change policy.

New Zealand must do its part, along with the rest of the world, in reducing climate pollution. It is not good enough to say we are too small to matter – most countries individually could claim the same. We must take our share in the effort however small, just as we did when dealing with CFCs, or opposing apartheid, or fighting fascism. Kiwis are not shirkers. 

Opposing apartheid will have cost almost nothing to New Zealand GDP (albeit some utility losses for some rugby supporters) –  same goes no doubt for opposing French nuclear testing in the Pacific.  And I’ve never seen any large estimates for the cost of dealing with CFCs.

What of the World War Two comparison?  I alluded to it in the my earlier post observing

Wars, of course, come at a very considerable cost –  and sometimes are worth fighting –  but again, I doubt any democracy (or perhaps even any tyranny) ever entered a war thinking that as a result of doing so they would be so much poorer 30 years on.  

Awful as wars are –  and with staggering losses of life in some countries –  there is simply no way that any of the Anglo countries, that voluntarily entered the war to resist Hitler, were 10 per cent poorer, let alone 22 per cent poorer, thirty years on as a result.

Perhaps there is a legitimate moral cause at work here, but the government is inviting citizens to offer up a fearsome price –  in lost incomes and opportunities –  all while refusing to even consider the lowest cost option for substantially reducing the volume of emissions in New Zealand.   For a country that has done so badly as regard productivity, under successive governments over many decades, it seems breathtakingly reckless.  It seems all the weirder to be proposing to take some global moral lead in a country where, as even the IPCC reports have noted, there are both gains (eg better crop yields in many areas) and losses apparently on offer from rising global temperatures.