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.)

 

Economic growth within environmental limits

That was the title of a speech David Parker gave a couple of weeks ago.  Parker is, as you will recall, a man wearing many hats: Minister for the Environment, Associate Minister of Finance, Minister for Trade and Export Growth, and Attorney-General.  Since he was speaking to a seminar organised by the Resource Management Law Association, this speech looked like it might touch on all his areas of portfolio responsibility.

In passing, I’ll note that he clearly doesn’t live in Wellington.  He introduces his speech lamenting that New Zealand had just had its hottest summer on record.  Most Wellingtonians –  no matter how liberal (indeed, I recently heard an academic working on climate issues make exactly this point) – revelled in a summer that for once felt almost like those the rest of New Zealand normally enjoys.   The sea water was even enjoyably swimmable not just bracing or “refreshing”.

But the focus of his speech is on economic growth.

First he highlights some of New Zealand’s underperformance.

New Zealand has enjoyed relatively strong nominal economic growth over recent years, bolstered by strong commodity prices, population growth and tourism. More inputs, mostly people, have been added into the economy but, with population growth stripped out, per capita growth has been poor at about 1 per cent per annum.

That underperformance has been the story of decades now.   And poor as the growth in per capita real GDP has been, productivity growth –  real GDP per hour worked –  has been worse.  In one particular bad period, over the last five years or so, labour productivity growth has been close to zero (around 0.2-0.3 per cent per annum on average).

Parker is obviously aware of this, beginning his next paragraph “we also have a productivity problem”, but seems more than a little confused about the nature of the issue.

Capital has been misallocated, including into speculative asset classes such as rental housing, rather than into growing our points of comparative advantage.

But…….your government (rightly) keeps telling us that too few houses have been built, laments increases in rents etc.   If we are going to have anything like the rate of population growth we’ve run over recent decades (let alone the last few years) ideally more real resources would be devoted to house-building, not less.  Simply changing the ownership of existing houses doesn’t divert real resources from anything else, or even use material amount of real resources.

The Minister goes on

We aim to diversify our exports and markets as we move from volume to value. We want to change investment signals so more capital goes towards the productive economy rather than unproductive speculation.  Where we need immigration, it will be more targeted.

That last sentence sounds promising, even tantalising.  But it doesn’t seem consistent with the Prime Minister’s rhetoric, with Labour Party policy on immigration, or with the (in)action of the government on immigration policy to date.     Our large-scale non-citizen immigration programme runs on unchanged, complemented by the big increases in recent years in the numbers here on short-term work visas.    A reduced rate of population growth would reduce the extent to which real resources needed to be devoted to meet the –  real and legitimate –  needs of a fast-growing population.

The Minister also makes a bold claim

I am an experienced CEO and company director. I know from experience that we can achieve economic, export and productivity growth within environmental limits.

No doubt, as absolute statements, those claims are true. But surely the relevant question is “how much?”     After all, the message Labour and the Greens were running in the election campaign was that what apparent economic success there had been in recent years was built on “raping and pillaging” the environment –  water pollution, offshore oil exploration, emissions etc.   And yet, as the Minister notes, even that “economic success” didn’t add up to much: weak per capita GDP growth, almost non-existent productivity growth, no progress in closing the gaps to the rest of the advanced world.  And what of exports?

exports 2018The past 15 years have been pretty dreadful, and the last time the export share of the economy was less than it was in the March 2017 year was the year to March 1976 –  back in the days when (a) export prices had plummeted, and (b) the economy was ensnared in import protection, artifically reducing both exports and imports (our openness to the world more generally).

In the Minister’s own words

But economic management over recent years has put pressure on our social wellbeing and our environment. 

So how, we might wonder, is a greater emphasis on environmental protection going to be consistent with the economic growth, and the exports and productivity growth that David Parker says the government aspires to?

As Minister for Economic Development and for Trade and Export Growth, my priorities reflect the reality that our economic success will be underpinned by a more productive, sustainable, competitive and internationally-connected New Zealand.

It is great to see growth in the value of output from our productive sectors. The Government wants to work with them to ensure that the right conditions are in place for firms to thrive and trade, and that we maximise the value of the goods we produce, and encourage high-quality investment in New Zealand. We want our sectors and regions to realise their full potential.

Economic growth and trade helps us create a greater number of sustainable jobs with higher wages and an improved standard of living for all New Zealanders.

However, the Government is clear that economic growth cannot continue to be at the cost of the environment. This is not idealism: it is grounded in common sense. Protecting our environment safeguards our economy in the long term – our country has built its economy and reputation on our natural capital.

I’m not arguing against improving environmental standards, perhaps especially around fresh water.  Improvements in the environment are typically seen as a normal good: as we get richer we want (and typically get) more of it.  But those gains usually come at some (direct) economic cost.    Major change isn’t just wished into existence.

In some places, perhaps, these changes are easier than in others.  If the tradables sector of your economy is, in any case, in a transition  away from heavy industry to, say, financial or business services (perhaps the UK experience), you are naturally moving from industries that might otherwise tend to pollute heavily towards those that don’t.  And farming –  and land-based industries –  might be a small part of the economy anyway.

But this is New Zealand.  And in New Zealand probably 85 per cent of all our exports are natural-resource based, and total services exports (even including tourism) are no higher as a share of GDP than they were 15 or 20 year ago.  Not very many new industries seem to find it economic to both develop here, and then remain here.   We –  and the Minister –  might wish it were otherwise, but up to now it hasn’t been.  Instead, what export growth we’ve had has been in industries where the government is often –  and perhaps rightly –  concerned about the environmental side-effects.

In his speech, the Minister declares that as Minister for the Environment improving the quality of freshwater is his “number one priority”.  I might have hoped that fixing the urban planning laws was at least up there, but lets grant him his priority for now.    How does he envisage bringing about change?

In environmental matters there are only three ways to change the future – education, regulation and price. Of these the most important for water is regulation

And regulation comes at a cost, reducing the competitiveness of firms and industries that are no longer free to do as they previously did.  The best presumption then has to be that future growth in affected sectors will be less than previously, and less than it would otherwise have been.  Sometimes, regulatory and tax initiatives spark brilliant new technologies enabling industries to move to a whole new level.  But you can’t count on that.  You have to work on the assumption that regulation costs.  Those costs might be worth bearing, but you shouldn’t pretend they aren’t there.

The same will, presumably, go for including agriculture in the emissions trading system, however gradually.   Relative to the past, firms facing such a price will no longer be as competitive as they otherwise would have been.    And experts tell us that as yet there are few technologies for effectively reducing animal emissions –  other than having fewer animals.

And then, of course, there are the direct bans.  The ban on new offshore oil exploration permits hadn’t been announced when the Minister gave his speech, but it will –  by explicit design –  reduce output in the exploration sector and, over time, in the domestic production of oil and gas.    It might be –  as some of the government’s acolytes argue – “the thing to do”, “leading the way”, “this generation’s nuclear-free moment” [that one really doesn’t persuade if you thought the Lange government’s gesture was a mistake too], but it must come at an economic cost to New Zealanders.  An economy totally reliant on the ability to skilfully exploit its natural resources, consciously and deliberately chooses to leave some chunk of those –  size unknown –  untapped.

Again, over the course of the last 45 years –  the period of that exports chart –  we’ve had a lot of oil and gas development.  All else equal, our economic performance can only be set back without it – not perhaps this year, or next, but over time.  And it all adds up.

Reading through to the end of the Minister’s speech there is simply no credible story for how he, or the government, expects to be able to do all these things and still see some transformation in the outlook for per capita GDP growth, or growth in productivity or exports.  Indeed, there is nothing there to explain why the outlook won’t be worsened by the sorts of initiatives –  each perhaps worthwhile in their own terms.

It might be different if the government was willing to do something serious about immigration policy, rather than just carrying on with the bipartisan “big New Zealand” strategy.   When natural resources are a crucial part of your economy –  and everyone accepts they still are in New Zealand –  then adding ever more people, by policy initiative, to a fixed quantity of natural resource is a straightforward recipe for depleting the stock of resources per capita, and thus spreading ever more thinly the income that flows from those natural resources.

It is pretty basic stuff: Norway wouldn’t be so much richer per capita than the UK –  both producing oil and gas from the North Sea –  if Norway had 65 million people.  And if Norway decided to get out of the oil and gas business –  leaving underground a big part of their natural resource endowment –  they’d be crazy to drive up their population anyway.    But that is exactly the thrust of what the New Zealand government is doing between:

  • what is aspires to do on water,
  • its ambitious emissions targets, in a country with very high marginal abatement costs, and
  • the ban on new oil and gas exploration permits

even as it keeps on targeting more non-citizen migrants (per capita) than almost any other country on the planet, and as the export share of GDP has been under downward pressure anyway.

It is not as if there is a compelling alternative in which export industries based on other than natural resources are thriving, boosted immensely by the infusion of top-end global talent, in ways that might make us think that natural resource industries could easily be dispensed with and a rapidly rising population was putting us on a path to a more prosperoous, productive, and environmentally-friendly future.  Its been a dream, or an aspiration, of some for decades.  But there is barely a shred of evidence of anything like that happening in this most remote of locations.

It might all be a lot different if the government was willing to step aside from the “big New Zealand” mentality, or put aside for a moment fears of absurd comparisons with Donald Trump –  recall that (a) our immigration is almost all legal, and (b) residence approvals here (per capita) are three times those in the US (under Clinton/Bush/Obama).

If the government were to move to phase in a residence approvals target of 10000 to 15000 per annum (the per capita rate in the US), with supporting changes to work visa policies, we’d pretty quickly see quite a different –  and better –  economic climate.   We’d no longer have to devote so much resource (labour) to simply building to support a growing population –  houses, roads [rail if you must], schools, shops, offices.  All else equal our interest rates –  typically the highest in the advanced world –  would be quite a bit lower, and the real exchange rate could be expected to fall a long way.  I don’t think there is a mention in the whole of David Parker’s speech of the real exchange rate, but it is a key element in coping successfully with the sorts of transitions the Minister says he aspires to.   Farmers, for example, will be able to compete, even with tougher water regulations, even with the inclusion of agriculture in the ETS.  And more industries in other sector will find it remunerative to develop here, and remain based here.  We’d actually have a chance of meeting both environmental and economic objectives instead of –  as the government would see it –  having consistently failed on both counts.

Last year, I ran several posts (including this column) making the point that rapid population growth –  mostly the consequence of immigration policy –  was the single biggest factor behind the continued growth in, and high level of, carbon emissions in New Zealand over recent decades.  In other words, we had made a rod for our own back and then –  through the process of driving up the real exchange rate –  made it even more difficult and costly to abate those emissions without materially undermining our standard of living.  OIA requests established that neither MBIE nor the Ministry for the Environment had even explored the issue.

It wasn’t a popular view, but I stand by the argument.  In a country still very heavily dependent on natural resources, if you care about the environment, and about “doing our bit” on carbon emissions, it is simply crazy to keep on actively driving up the population.  Doubly so, if you think you can do so and still improve productivity, export growth, and overall economic performance.  The Productivity Commission is due to release soon its draft report on making the transition to a low emissions economy.  I hope they have been willing to recognise, and explicitly address, the integral connection to immigration policy in the specific circumstances New Zealand faces.  Not wishing to confront the connection –  an awkward one for the pro-immigration people on the left in particular –  won’t make it go away.

An alternative perspective on emissions and immigration

I’ve now got off my chest my annoyance at some of the “playing distraction” rhetoric David Hall used in his Newsroom piece responding to my column urging that the Productivity Commission inquiry into a transition to a low-emissions economy should at least consider the potential role of immigration (in boosting emissions in the past, and perhaps in offering a lower-cost abatement tool in future). But I wanted to come back to some of the more substantive issues Hall raises.

Bear in mind that my column was based on a submission to the inquiry the government asked the Productivity Commission to undertake.  The terms of reference which the Commission is operating under are focused on New Zealand’s own policy responses, and how to (maximise the benefits and) minimise the costs of meeting the target which the government has set.    The focus is –  rightly in my view – on national interests (costs and benefits to New Zealanders) now that the New Zealand government has already factored in its response to the (actual and perceived) global imperatives, in establishing an emissions reduction target under the Paris climate agreement.    Having determined how much reduction in emissions we will aim for, and made those commitments to other countries in an international context, the challenge now is how best to adjust, and what mix of policy instruments might enable us to deliver on those commitments.

Hall argues that “what matters from the perspective of Earth’s atmosphere is what people emit, not where they emit it”.  Maybe so, but the New Zealand government is not now making policy for the “Earth’s atmosphere”, but around an emissions reduction target it has signed up to for New Zealand.  In that context, where the emissions happen matters.

My submission was firmly set within that sort of framework –  one set by the government and recognised by the Commission.  In fact, in the Terms of Reference the three ministers were using exactly the same sort of analytical framework I was.

New Zealand’s domestic response to climate change is, and will be in the future, fundamentally shaped by its position as a small, globally connected and trade-dependent country.  New Zealand’s response also needs to reflect such features as its hjgh level of emissions from agriculture, its abundant forestry resources, and its largely decarbonised electricity sector, as well as any future demographic changes (including immigration).

The focus of my submission was, in many respects, that the Commission had simply ignored that last phrase.  Population growth matters to emissions, all else being equal, and in New Zealand –  where non-citizen immigration is so (a) important, and (b) fully within government control –  population growth can, via immigration policy, and should be considered as an instrument to reduce emissions.    It might be uncomfortable for MBIE (champions of immigration), or for the Ministry for the Environment, but the point of Productivity Commission inquiries isn’t to make life comfortable for established interests.

Hall is clearly uncomfortable with the idea –  the pretty basic fact –  that increased populations increase emissions, all else equal.   But again, discomfort doesn’t change the stylised facts.  As he acknowledges, “road transport emissions have increased by 78 per cent since 1990”, but…..

But the fault here lies with New Zealand’s over-reliance on private vehicles. Migrants (and citizens) contribute to road traffic by necessity, because alternative means of transport are less available, indeed far less so than many migrants are used to, coming from places where travel by trains, trams, cycles and footpaths is not unusual. If low-carbon alternatives in places like Auckland were more serviceable, migrants would doubtlessly utilise them, as indeed would citizens. And if the excuse for underinvestment is the lack of markets of sufficient scale, then population increase and cultural change will drive progress.

In other words, if governments and people did things differently than they actually did, emissions would have been lower.  No doubt, but that isn’t really the point.   Each of the alternatives Hall proposes would have had both public and private costs –  and the point of the exercise is to keep those costs to a minimum.  Perhaps he’d prefer a world of light rail and trains.  Most citizens don’t seem to, at least when confronted with real world costs –  and the economics of such proposals in New Zealand is generally shocking.    Actual transport emissions would have been a lot lower than they are now if, at the extreme, the population had been constant since 1990.  And if –  and it is a proposition for debate –  the immigration that so substantially boosted the population had few, no, or even negative productivity gains for New Zealanders, those emissions reductions could have been achieved at little or no economic cost at all.    There are plenty of ways to reduce emissions, but the challenge is to find the most cost-effective ones or –  in markets –  to set up the instruments in a way that allows private agents to identify the most cost-effective means of adjustment.

In my column and submission I had noted that it is generally accepted that New Zealand typically faces quite high marginal abatement costs to reduce emissions, relative to those faced by most other advanced economies.  When I wrote that, I wasn’t even thinking of it as a controversial proposition.  But Hall wasn’t happy with the claim.

This contradicts Reddell’s claim that “all informed observers recognise that the marginal abatement costs in New Zealand, through conventional means, are high”. I’ve written for Pure Advantage about the potential of forests – both production and permanent forests – to offset agricultural emissions in a way that isn’t only cost-effective but potentially profitable. This is corroborated by other “informed observers”, such as the Royal Society of New Zealand, the Parliamentary Commissioner for the Environment and Vivid Economics. The latter’s Net Zero in New Zealand report highlights other low-cost opportunities in energy efficiency, heating technologies, agricultural efficiency, and technological advances in methane vaccines and cheaper electric vehicles.

I’m happy to alter “all informed observers” to “most observers”, but I’m not resiling from the basic point.   Warwick McKibbin of ANU, who has done a lot of modelling on climate change and emissions abatement first produced estimates 20 years ago showing that that the “marginal abatement cost in New Zealand amongst the highest in the world”.  I’ve heard him repeat the point in various seminars and lectures over the years.    Why are the costs higher here?  Among other things, because a very large chunk of our emissions are agricultural, and there aren’t yet good technologies for reducing the emissions while keeping the animals.  And because our power generation is already largely hydro-based, so can’t easily be switched to alternative fuels to reduce carbon emissions.   This is an expensive place to reduce emissions –  an equal marginal cost approach would see us adopt a less aggressive emissions reduction target than most countries.    There are papers on the web from government agencies making exactly this point.

The Productivity Commission themselves recognise these points. For example, from their issues paper, on animal emissions.

Moderate emissions cuts are possible from certain agricultural technologies (eg, low-emission feds). However, a low-cost technology that delivers dramatic reductions in biological emissions appears far off, and may not emerge. While a methane vaccine could reduce CH4 emissions by up to 40%, no successful trials of such a vaccine have so far occurred.

Actually, for all the talk of alternative technologies, the Vivid Economics paper Hall links to makes much the same point about the sorts of constraints New Zealand faces.  Here is text from the Executive Summary (of a report funded by various MPS, foreign embassies and other donors).

In meeting this challenge, New Zealand is distinctive in at least three respects: its significantly decarbonised energy sector; its large share of difficult-to-reduce land sector emissions; and its large forestry sector. Elsewhere in the world, more focus has been devoted to reducing emissions from the electricity sector than from any other sector. Huge efforts and costs are now beginning to translate into progress. But for New Zealand, these challenges are of less significance. Its power sector consists primarily of hydroelectric and geothermal resources, providing firm, reliable capacity. Even with the challenge of decarbonising other parts of the energy sector (transport fuels, heat), the resulting relatively low-carbon energy mix provides the country with a considerable competitive advantage in a world that is placing increasing constraints on emissions. Yet, at the same time, the importance of the pastoral agriculture sector to the economy and social fabric of the country creates a huge challenge, although one that is laced with opportunity. Biological emissions from agriculture account for almost half of New Zealand’s gross emissions, a higher proportion than in any other developed country. While other developed countries may choose to not prioritise reducing these emissions in the short term, following suit would have important repercussions for New Zealand in meeting future targets.

Wishing it were otherwise does not make it so.  Marginal abatement costs are typically higher here than in other countries.  Those costs may well be falling –  as eg new battery technologies for example open up new options re transport emissions –  but those technologies are available to other countries too. They don’t change the specific challenges New Zealand faces relative to other advanced countries.   The emissions target we’ve committed to, whether through belief or interest, represent a new constraint on economic performance, and that constraint is more severe for New Zealand than for most, in a country with a long-term history of real economic underperformance.

Against that backdrop it would be irresponsible to simply wave our hands and pretend that immigration isn’t an issue (for us, as New Zealand, and our governments), ploughing on oblivious to the potential real economic costs of doing so.     Immigration policy needs to be considered as one strand in thinking about how best to design a New Zealand policy response, to minimise the net adjustment costs to New Zealanders.

I’d simply taken for granted what seemed like a fairly obvious point (even Hall reluctantly acknowledged it) that increased populations will have tended to increase emissions, all else equal. But until now I hadn’t had a look at the cross-country data to see if the relationship was actually there in the data.  It might not have been –  after all, countries might have responded to the rising populations by finding techniques and market instruments to lower per capita emissions sufficiently that there was no relationship left in the observed data.

Fortunately, we have quite detailed data on gross emissions for almost all OECD countries from 1990 to 2015.  In a few cases, the data are only up to 2013 or 2014, and in all the scatter plots that follow I’ve lined up the population changes with the emissons data (eg if for a country there is emissions data for 1990 to 2014, I’ve used percentage population change over that period).  But for 30 countries there is full data for all the variables I looked at.

None of these relationships are particularly tight –  these are simple bivariate relationships, and lots else was going on in each of these countries (eg in the former Soviet bloc countries, production processes had been extremely inefficiently energy-intensive).

I start with transport emissions (actually to 2015 despite the label). As Hall noted, transport emissions in New Zealand have increased a lot, as has our population.

transport emissions

Unsurprisingly, the relationship is upward sloping.

What about manufacturing and construction emissions?

manuf emissions

(That outlier up the top is Korea, which has still been massively industrialising.)

Total gross emissions?

total emissions

Hall seemed particularly perplexed, or perhaps outraged, by my points about agriculture

As I understand him, he argues that New Zealand’s high living standards depend upon dairy exports, which makes it politically infeasible to impose costs for environmental damages. The greater the population, the greater this reliance upon the dairy sector, and so the greater the reluctance to make polluters pay.

Again it seemed pretty descriptively accurate to me (whether it is an outcome he –  or I –  like or not). But even though agricultural emissions are much more of an issue for New Zealand than for most OECD countries, I was curious as to whether there was a relationship (across countries) between population growth and growth in agricultural emissions.  I didn’t have a prior expectation, but in fact this is what I found.

ag emissions

It is actually one of the tighter relationships, so I’ll repeat the proposition from my submission/column: with fewer people it seems quite plausible that we’d have had (tighter environmental regulation and) fewer cows and fewer emissions.

I could go on showing you charts all day, but I won’t try your patience.   Somewhat to my surprise there is actually even a (weak) positive relationship between population growth and per capita emissions and emissions per unit of GDP.  I’m not quite sure why that would be, although in New Zealand (and Australia’s) case, the migrants are moving to some of the OECD countries with, already, the highest emissions per capita and per unit of GDP.

The bottom line for New Zealand is that our immigration policy, which has very substantially boosted our population, has also substantially boosted our emissions over the last 25 years.   Our experience doesn’t look out of line with that of the rest of the OECD: growing populations are associated with more emissions, whether in transport, agriculture or just in total.   Given that marginal abatement costs, even if falling, are still high here relative to those in other advanced countries, it would frankly be irresponsible for any government, concerned primarily about the interests of New Zealanders, not to have the levers of immigration policy considered when assessing the best approach for New Zealand to take to meet its commitments.   The Productivity Commission should be doing so.

In the end, though, I suspect that the real difference between me and David Hall isn’t about any of these numbers.   He concluded his article

Because when it comes to global warming, it’s the carbon intensive economy, stupid. The only genuine solution is to transform the world’s high-emissions economies into low-emissions economies, so that anyone entering them by way of birth or migration can lead a prosperous low-carbon life. Our national emissions targets are a means to this global end. Focusing on peripheral issues like migration only distracts from the work that needs to be done. But that’s what happens when you tell the story of a global problem through a nationalist lens.

But all policy is national, and there is (fortunately) no supra-national government.  We’ve played our part in the international process with our emissions reduction commitments, which are ambitious given the high marginal abatement costs here.  But Hall’s approach suggests he doesn’t really care if there are cheaper, less costly, ways for New Zealand to meet its commitments, and thus reduce costs to New Zealanders (residents and voters); what he cares about is the global.  It is certainly one perspective, but it isn’t the one the government used in setting up the Productivity Commission inquiry.  In practice, it almost certainly isn’t the one New Zealand residents and voters will be using in assessing how governments handle these issues over the next 20 years and beyond.

My own column ended this way

The aim of a successful adjustment to a low-emissions economy is not to don a hair shirt and “feel the pain”. It isn’t to signal our virtue either. Rather, 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 –  including by the Productivity Commission – if that goal is to be successfully pursued.

I’m probably less idealistic than David Hall. Perhaps 30 years as a bureaucrat does that to one.  But in responding to a comment on my earlier post today I noted

My take is that, as a high cost abater, we should impose as little cost on NZers as possible to be seen by friends and trading partners to be making our token contribution (because obviously in global terms it is only token).

Giving serious consideration to cutting our (unusually large) immigration targets looks as though it  should be good economic policy and good (national) emissions-reduction policy.