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.

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.

 

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…..

 

Net-zero carbon emissions: a “massive economic boost”?

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

climate change 2

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

climate exec 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.

emissions distribution

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.

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).

Putting a price on the hair shirt

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.

emissions NZIER

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

aviation 1

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

aviation 2

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).

emissions distribution

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.

 

The government consults on slashing productivity growth

Since the current government took office, I’ve highlighted from time to time (eg here) the tension between the rhetoric about the desire to lift New Zealand’s productivity performance (poor for decades, woeful in the last five years or so) and to increase the outward orientation of the economy,  and the specific policy promises which mostly seem likely to work in exactly the opposite direction.

The determination to reduce carbon emissions even more aggressively than the previous government’s goal, especially while sticking with a largely unchanged immigration policy that continued to drive up the population, seemed a prime example. I didn’t have any numbers, but the direction of the effect seemed pretty clear.

But now the government has published some numbers, which really should be getting a lot of attention.    Yesterday the Green Party leader James Shaw (Minister of Climate Change) launched a consultative document on what form the “net zero by 2050” target might actually take.  Perhaps naively, I’d assumed they had meant what they said, but in fact they are consulting on three quite different variants.

  • Net zero carbon dioxide by 2050: this target would reduce net carbon dioxide emissions in New Zealand to zero by 2050 (but not other gases like methane or nitrous oxide, which predominantly come from agriculture).
  • Net zero long-lived gases and stabilised short-lived gases by 2050: this target would reduce emissions of long-lived gases (including carbon dioxide and nitrous oxide) in New Zealand to net zero by 2050, while stabilising emissions of short-lived gases (including methane).
  • Net zero emissions by 2050: this target would reduce net emissions across all greenhouse gases to zero by 2050.

The third of those was, I think, was what most people had in mind.

Somewhere in the consultative document the first of these options is described as not being that different, in overall effect, from the target put in place by the previous government.

At the front of the report, the language –  not just from the Minister but from the MfE bureaucrats is very upbeat.    From the bureaucrats’ Executive Summary

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.

To read that, you’d suppose that pursuing ambitious emissions targets would make us richer, and better off in material terms.

A few paragraphs on the MfE officials suggests that the British have already shown us the way

Our economy is already dynamic and constantly adjusting to change. Jobs are continually created and lost. For some of us, the changes through the transition could be small or not noticeable – we could be driving vehicles powered by 100 per cent renewable electricity. For others, the changes could be bigger. The transition will affect how we travel, use land and what we produce and consume. Other countries, such as the UK, have shown that it is possible to reduce their emissions while growing their economy and maintaining a high standard of living.

This is probably what they had in mind (using OECD data which still only goes up to 2015).

emissions uk nz 1

That certainly makes the UK look good relative to us.

Then again, here is the emissions data for the two countries per unit of GDP.

emissions uk nz 2

The drop in emissions per unit of GDP has been almost exactly the same, over 25 years, in the United Kingdom as in New Zealand.   Our numbers are a lot higher than those in the UK but (for example) their economy trades with bankers/lawyers etc and ours trade with sheep and cattle.   There are different opportunities and different emissions profiles.

(And, as it happens, productivity growth in the UK in the last decade –  although not prior to that – has been materially worse than that in New Zealand.)

So the upbeat story about other countries having blazed a prosperous trail doesn’t really seem to have anything to it, at least in the one example MfE cites.  The main difference between the total emissions profiles is simply that we’ve adopted policies that raised our population much faster than the population growth in the UK.  It really is almost as simple as that.

But after the upbeat introduction, a bit of realism starts to creep in.

As we reduce emissions, the economy will continue to grow but possibly less quickly.

Only “possibly” though, although one’s confidence should have been waning already when a few lines later one reads that

We will need to invest in innovation and plant a lot more trees, to ensure we maintain a strong economy over the coming decades.

Because we all know that advanced countries get and stay rich by planting (lots and lots of) trees.  At best, it seems that they are likely to be a mitigant –  absorbing carbon emissions possibly more cheaply than some other methods.  They aren’t likely to add to our productivity or per capita income.

To the credit of the Ministry, they have had some modelling estimates done, and the Minister has allowed the summary results to be published.   It is not very satisfactory that the full model results have not been published yet, in what is a fairly short consultative period.  In fact, the suggestion is that the modelling work hasn’t even been finished yet

This and future material will be published on the Ministry for the Environment website as it is finalised.

But better to have what they did publish than to have to try to get it out of them via the Official Information Act.

NZIER was commissioned to do some modelling on the impact on GDP of the various net zero target options.  This is the table reproduced in the report.

emissions NZIER

As MfE observes

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.

(Note that emissions per unit of GDP have been steadily trending down for decades as it is –  see first chart above.)

These are really big numbers.  I have never before heard of a government consulting on a proposal to cut the size of the (per capita) economy by anything from 10 to 22 per cent.  And, even on their numbers, those estimates could be an understatement.

The baseline assumptions NZIER have used produce average real GDP growth over 2017 to 2050 of 2.2 per cent.  They do not lay out the assumptions in more detail, but Statistics New Zealand population projections show average population growth over that period of 0.7 per cent per annum, so they seem to be assuming baseline productivity growth of something like 1.5 per cent.  That would be high by the standards of recent decades, but (except for rhetorical purposes) it does not matter very much: the focus is on the difference the various carbon emissions targets make to future productivity growth.

The numbers in the table do not show the unadorned comparisons.    They helpfully show the difference the varying degrees of ambition in the possible net emissions targets makes: the more ambitious the target, the worse the expected economic growth.  But in each of the three different scenarios (described in the very top line of the table), the modellers assume that the magic fairy helps out.     They assume faster rates of innovation in these particular sectors, over and above what is embedded in the baseline assumed rate of productivity growth.   This is how they describe it:

  • faster energy innovation occurs, driven by higher emissions prices and transitional policies that double the baseline energy efficiency trends across all industries and provide a shift to 98 per cent renewable energy by 2035 with the remaining 2 per cent used being gasfired generation in dry years only
  • faster transport innovation occurs, driven by higher emissions prices and transitional policies that increase electric vehicle uptake to 95 per cent of the light vehicle fleet and 50 per cent of the heavy vehicle fleet by 2050
  • faster agricultural innovation occurs, this sees a one-off innovation of a methane vaccine introduced in 2030 being adopted across all farms, which reduces dairy emissions by 30 per cent and sheep and beef emissions by 20 per cent. A reduction in global demand for dairy (11 per cent fall in 2050 output from 2015 levels) and sheep and beef (15 per cent fall) is experienced as consumer preferences shift towards lower emissions intensive foodstuffs, such as synthetic meats.

All of which might be fine, but there seems to be no allowance at all for the possibility that higher input costs etc might discourage investment in innovation (relative to baseline) elsewhere in the economy.  Affordable energy was, after all, a huge contributor to economic development in the last few centuries.

So on the best-case magic ferry scenario (the furthest right column) –  with much increased innovation in these sectors, and no offset elsewhere –  the full net zero target by 2050 would result in GDP in 2050 being a full 10 per cent lower than otherwise  (with 20 per cent of assumed overall productivity growth just given up).

If we only get the added innovation in agriculture, or only get it in transport and energy, the sacrifice is perhaps 40 per cent of all productivity growth (the difference between the 2.2% GDP growth baseline, of which productivity growth is about 1.5%, and the 1.5% and 1.6% GDP growth scenarios (in which productivity growth is only 0.8 or 0.9 per cent)).     A sacrifice of 0.7 per cent annual productivity growth for 33 years means accepting living standards 26 per cent lower than otherwise by 2050.

Again, to the credit of the government, they are also explicit about where the costs are likely to fall

Modelling shows the impact of domestic climate action would be felt more strongly by lower income households, because a higher proportion of their spending is on products and services that are likely to increase in cost as we reduce emissions across the economy.
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.

Quite breathtaking really.   We will give up –  well, actually, take from New Zealanders –  up to a quarter of what would have been their 2050 incomes, and in doing so we will know those losses will be concentrated disproportionately on people at the bottom.   Sure, they talk about compensation measures

The Government has a number of tools it could choose to use to compensate affected households for higher costs, such as tax or welfare measures.

But the operative word there is could.  The track record of governments –  of any stripe –  compensating losers from any structural reforms is pretty weak, and it becomes even less likely when the policy being proposed involves the whole economy being a lot smaller than otherwise, so that there is less for everyone to go around.  The political economy of potential large scale redistribution just does not look particularly attractive or plausible (and higher taxes to do such redistribution would have their own productivity and competitiveness costs).

I guess I am impressed that the government was willing to publish a document suggesting adopting a policy which it openly documents would come at such a large potential cost to New Zealanders (substantial even if the magic fairy comes to our aid to the extent assumed in these scenarios).  It must surely be a first in history.   No one asked the citizens of, say, 1948 Czechoslovakia if they wanted to be impoverished (relative to a faster growing West).  But it is hard to see what is in for New Zealanders –  lagging badly behind other advanced countries on productivity anyway, with constant complaints about child (and other) poverty) – to just happily sign in to such a huge economic sacrifice?   And for what?

I guess these targets are advocated by zealots, but even the zealots surely recognise that what New Zealand does is not going to change the climate, and that many countries already richer and more productive than we are are proposing adjustments that are materially less costly or demanding that what the New Zealand government is proposing here.   I am not suggesting we can or should do nothing –  there is some minimum effort probably required to ward off the threat of trade sanctions –  but surely on any reasonable cost-benefit assessment of the interests of New Zealanders, we would be confronting these costs – the wilfully given up opportunities for our kids and grandchildren –  and pulling back?  Or we might be thinking again about whether deliberately boosting the population –  bringing people to a country with high baseline emissions per unit of GDP –  is sensible for the world, or (more importantly) for our own people.  I would be keen to see a variant of the NZIER results in which the population growth (and thus baseline emissions growth) was materially lower than what is assumed, based on current immigration policy.

To repeat, I would be surprised if ever before in history a democratic government has consulted on proposals to reduce the material wellbeing of its own people by up to 25 per cent.      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.  It is simply a breathtaking proposition –  the more so in a country that at the moment struggles to achieve any material productivity growth at all.

And as a reminder of what productivity means, see this recent post.

UPDATE: One issue I didn’t spot earlier is how there can be no marginal cost in going from the 75% to the net zero option, under either of the two scenarios shown.  To one decimal place, the assumed average growth rates are identical.  Given that going from 75% to net zero involves dealing with the short-lived gases (from agriculture), which are some of the most intractable issues (without dramatically shrinking the industries), it is difficult to see that this particular model result can be plausible.   But, to the extent, that the model results are the same under the two alternative targets, it undermines the case made by some that this document represents the government trying to walk back the original commitment to (true) net zero.

 

Don’t just avoid the politically awkward issues

When in late April the Productivity Commission released its draft report on a transition to a low emissions economy, I took them to task for completely (and presumably consciously and deliberately) ignoring the role of New Zealand’s immigration policy in driving up New Zealand’s emissions –  albeit they acknowledged that “population growth” was a factor.  Perhaps more importantly, they didn’t address at all the possibility that –  however we got to where we are today – cuts to the target rate of non-citizen immigration might offer a more cost-effective way –  less damaging to productivity and the living standards of New Zealand –  of meeting the sort of carbon reduction targets governments commit themselves to.    I suggested that they were playing politics, trying to keep onside with a new government.

That still seems the most plausible explanation for the complete silence.   If they thought my argument was wrong, or had some modelling suggesting that other abatement strategies offered lower-cost adjustment, they could readily have reported those arguments and any such evidence.   But they just stayed silent.

The only real justification for having a body like the Productivity Commission –  funded by your taxes and mine –  is that they are at sufficient arms-length from ministers, and don’t just play political games, to say the uncomfortable, or to address the politically unpalatable issues and options.  Having a longer-term focus, if they don’t get traction today, they might tomorrow.

We should hope that even government departments would do that –  offering the sort of free and frank advice that Chris Hipkins was calling for yesterday – but too often they just won’t (and as I saw that last year when I OIAed MfE and MBIE and found that they’d offered no advice or analysis at all on the immigration/emissions/low-cost abatement nexus).  But it is inexcusable when an independent body like the Productivity Commission just rolls over and takes the path of least resistance.  As I noted in a post when the draft report was released

In the short run that might make it more likely they get a hearing from the government. In the long run, that sort of approach to issues won’t stand them  –  or the cause of good policymaking and analysis in New Zealand, already enfeebled enough – in good stead.

As I’ve said before, convinced as I am of my own arguments, I’m not complaining that the Productivity Commission doesn’t reach the same conclusion I do.  My complaint is that they haven’t even been willing to address the issue, when they know that it makes a real difference.    Confront the issue, look at the evidence and arguments, analyse and test them, and reach your (well-supported) conclusions (and leave the goverment to decide policy, sensible or otherwise).    But don’t just pretend there is no issue: that is a betrayal of your mandate from Parliament.

Submissions on the draft low emissions report close tomorrow.  I put in a brief submission this afternoon.

Submission to Productivity Commission climate inquiry draft report

There isn’t much new in it, but I ended this way

There probably won’t be off-the-shelf modelling exercises from other countries you can simply look to in evaluating such options  [low target immigration options] (and you are now under self-imposed time constraints, having failed to consider the issue in your draft report).    But in a sense that is the point of this submission.  The issues facing New Zealand in meeting emissions reduction objectives are different from those facing many other countries and we need analysis that takes specific accounts of the issues, options, and constraints that New Zealand itself faces.

 In conclusion, I would urge the Commission to begin to take seriously the role that rapid immigration policy led population growth has played in explaining the growth in New Zealand emissions since 1990, and the possible role that modifications to our immigration policy could play in facilitating a reduction in emissions, consistent with current or possible alternative official targets.   No doubt technological advances will offer options for relatively painlessly reducing emissions to some extent.  But those options will be available to all countries.  As official agencies already recognise, New Zealand faces some specific challenges that are quite different to those other advanced countries will be dealing with.  We make it much harder for ourselves to meet the emissions targets our governments have committed to if we persist with such an unusually large non-citizen immigration programme.    The aim of a successful adjustment to a low-emissions economy is not to don a hair shirt and “feel the pain”.  The aim should be to make the adjustment with as small a net economic cost to New Zealanders – as small a drain on our future material living standards – as possible.  Lowering the immigration target looks like an instrument that needs to be seriously considered if that goal is to be successfully pursued.   In particular, you cannot legitimately ignore the issue –  in what looks disconcertingly like a reluctance to tackle controversial or politically awkward options –  and still lay claim to being the source of independent fearless advice and analysis that is really the only good argument for having the Productivity Commission in the first place.

Leaving them with the visual reminder of the cross-country correlation between population growth and growth in total emissions (which relationship exists even just for agricultural emissions)

total emissions

and that, in New Zealand, with birth rates well below replacement for several decades, immigration is increasingly the main reason why the population is still growing much at all.

And immigration doesn’t appear to be making New Zealanders better off (higher productivity) just…..more congested, with higher house prices, and with more emissions that other (themselves costly) tools have to be adopted to offset or abate.

Productivity Commission and the path of least resistance

The Productivity Commission’s draft report on making a transition to a low-emissions economy is out this morning.   It is a 503 page document and so, of course, I haven’t read very much of it.  But electronic search is a wonderful tool.

As I noted yesterday, despite having had a fairly large (by international standards) fall in emissions per unit of GDP since 1990, New Zealand has had one of the larger increases in total gross emissions of any OECD country.  What reconciles those two observations isn’t some incredible surge in New Zealand’s productivity and GDP per capita – as is generally recognised, we haven’t done well on those scores –  but a large increase in the population.  And most of that increase in population is due to the planned immigration of non-citizens to New Zealand.  In other words, it is more or less a direct result of the policy adopted by successive governments (including the current one).

For any given set of technologies and relative prices, more people means more emissions both directly (more transport, more power) and indirectly –  people need to earn a living and so emissions associated with, for example, manufacturing or agriculture also rise.   As a rough first approximation, if we’d stayed with the rate of non-citizen immigration New Zealand had in the late 1970s and much of the 1980s, total gross emissions in New Zealand now would be at least 20 per cent lower.  For governments that want to materially reduce emissions that should be something to ponder (especially as New Zealand average units of GDP are themselves quite carbon-intensive)  It is, of course, water under the bridge now.  But the same high non-citizen immigration targets are still in place and, all else equal, will continue to drive up emissions in future.    Given those immigration policy pressures, more of a (costly) burden of adjustment has to be imposed on the economy through other instruments.   As marginal abatement costs here are widely accepted to be higher than those in most other advanced countries, the likely adverse economic effects on New Zealanders are large.

But you don’t get much of a sense of any of this from the Productivity Commission’s report.  There are quite a few references to the role of population in the growth of emissions.  It even makes one of their formal findings

Finding 2.7     Economic and population growth have been important underlying factors in New Zealand’s rising emissions. Over the last 25 years, New Zealand’s emissions per person and emissions per unit of output have decreased, but the increase in population and output has caused overall emissions to increase.

Flowing from this short discussion.

Strong population growth and economic growth have been key underlying drivers of New Zealand’s rising emissions since 1990. Between 1990 and 2015, New Zealand’s real GDP nearly doubled. During the same period, population growth was higher than most other developed countries (Figure 2.10). More people means greater consumption of goods and services that contain emissions (eg, more vehicle use, and greater demand for electricity). Economic growth (and, indirectly, population growth) means more emissions-intensive goods and services are produced, leading to higher emissions.

And there is the odd passing observation, such as that

Future population growth will provide a challenge in bringing down transport emissions.

although no apparent recognition of the connections to agricultural emissions.

But the Commission has chosen to treat population growth (past and future) as some sort of exogenous given.  For example, they report some results of some commissioned modelling exercises, and in each of the scenarios exactly the same future population growth is assumed.  That might make sense in a country where population changes were almost entirely the result of developments in natural increase (or even of the emigration choices of nationals), neither of which should be any sort of policy lever.  It makes no sense at all in a country where most of the population growth (last quarter century and next) is directly the result of policy choices.

No analytical sense that is.  But perhaps it makes sense if you are a government agency feeling your way with a new government that is strongly committed to the “big New Zealand” mentality and to current immigration policy, and where much of that government seems more interested in having New Zealanders don hair shirts and feel the pain (or alternatively conjure up imaginary futures in which a forced adjustment to net-zero emissions won’t come at aggregate economic cost to New Zealanders).  The path of least resistance politically presumably led the Commission to conclude that it was better (“safer”) not to mention immigration (policy) at all.

And so they didn’t.   In the entire 503 pages there is a single reference to immigration.

But that is just part of the (reproduced in full) Terms of Reference for the inquiry, set out by the previous government.

New Zealand’s response also needs to reflect such features as its high level of emissions from agriculture, its abundant forestry resources, and its largely decarbonised electricity sector, as well as any future demographic changes (including immigration).

It feels a lot like abdication, and not at all like the sort of free and frank analysis and advice that a body like the Productivity Commission should be providing if it is to be any long-term use.  The Commission seems to have been so scared of upsetting its liberal readers –  political and other –  that it isn’t even willing to address the issue.

It would be one thing if they’d devoted some substantive discussion to the issue and concluded, whether on the basis of reasoned analysis or modelling, that the economic benefits to New Zealanders from the immigration policy were sufficiently large, and the marginal abatement costs of other approaches in a portfolio of measures to reduce emissions were sufficiently small, that winding back non-citizen immigration targets should not be part of a preferred response strategy.  Reasonable people could debate that sort of proposition and the evidence advanced for it.  But the Productivity Commission chose to totally ignore the issue.   Since as an institution they don’t seem to be gung-ho enthusiasts for the economic benefits of New Zealand’s immigration policy (see my discussion of their narrative of New Zealand’s economic underperformance) it looks a lot like playing politics, going along with a Labour/Greens (and their acolytes) narrative.  In the short run that might make it more likely they get a hearing from the government. In the long run, that sort of approach to issues won’t stand them  –  or the cause of good policymaking and analysis in New Zealand, already enfeebled enough – in good stead.

(It was also noticeable that amid all the happy talk in the document, there was no sign of any attempt to estimate, or model, the likely real economic costs of the sorts of carbon reduction policies the Commission is dealing with.   There is an entire chapter reporting initial modelling results, but –  as far as I could see –  no reference to the implications for GDP per capita (or any of the cognate national accounts measures).  No doubt, the average New Zealander in 2050 will be wealthier than we are today, but the relevant issue for policy isn’t that baseline, but the deviations from it.  In particular, they should have focused much more attention on what the economic implications of various possible policy levers –  perhaps including immigration policy –  might be, and how best to minimise the economic costs to New Zealanders of making the adjustment the government is planning to target.     And it is fine for enthusiasts for aggressive policies to talk of unpriced externalities etc, but even with those unpriced externalities our economic performance over decades has been startlingly poor, and it isn’t obvious why removing them won’t further worsen economic outcomes.  That might be an acceptable trade-off, but there doesn’t seem to be anything much in this report suggesting just how large those costs and benefits might be.)