Small growth impact likely from big greenhouse gas cuts, Infometrics tells government

Wednesday 10th June 2015

Major cuts to greenhouse gas emissions would have hardly any impact on New Zealand's economic growth rate, says private economic consultancy Infometrics in analysis for the Ministry for the Environment.

The April 13 paper was released to the Green Party under the Official Information Act, but only became available publicly part-way through the government's publication consultation on new climate change targets, which concluded on June 3, and is not highlighted in consultation documents.

Infometrics says the impact of reducing non-agricultural greenhouse gas emissions to 40 percent below 1990 levels - the target currently adopted by the European Union - would cost just over one-tenth of one percentage point of growth a year between 2021 and 2030, the next so-called "commitment period" for a globally negotiated new pact to tackle climate change.

The Infometrics modelling, which assumes global carbon prices rising to average $50 a tonne, also suggests that there would be very little difference between adopting a 40 percent cut target and a 5 percent cut.

New Zealand is currently offering to cut GHG's by 5 percent on 1990 levels by 2050, but is to refresh that target ahead of the global summit on climate change action scheduled for December, in Paris. Some 10,000 submissions were received on the consultation document, which focused on a per household cost calculated at between $1,270 and $1,800 for targeted cuts of 5 percent and 40 percent respectively, assuming average household income of $85,000 a year by 2027 and a $50 carbon price.

Infometrics says the impact on household incomes from a 10 percent reduction in emissions over 10 years is "not large" at an estimated 1.2 percent, rising to 1.7 percent on a 40 percent target.

Looking at national economic output rather that household income, Infometrics projects a 5 percent GHG reduction target would reduce gross domestic product by a total of 0.9 percent over the 10 years between 2021 and 2030, while assuming that the New Zealand economy would grow by an average of 2.1 percent every year during that period. With a 40 percent cut, the impact over a decade is modelled at 1.1 percent.

“John Key says reducing emissions would be ‘disastrous’ for the economy, but his own economic modelling shows the impact is marginal," newly elected Greens co-leader James Shaw said in a statement. “Why wouldn’t we choose an ambitious and fair 40 percent emissions reduction target when it would still see our economy growing 2.1 percent annually – the same amount as with a token 5 percent reduction target – according to the Government’s economic analysis?"

The Ministry for the Environment sought the modelling from Infometrics, which warns that its conclusions cannot be regarded as hard forecasts.

"The results can only ever be indicative," Infometrics says. "The interpretation ... should centre on their direction (up or down) and broad magnitude (small, medium or large) rather than on the precise point estimates that the model produces."

The report's release coincides with the announcement overnight from the G-7 meeting of the world's seven largest economies in Berlin that they would support GHG cuts of between 40 percent and 70 percent on 1990 levels by 2050, the first time they have supported a precise long term target, and predicted the end of the use of fossil fuels by the end of the 21st century.

Also published this morning are economy-wide recommendations for New Zealand from the global rich countries' club, the Organisation for Economic Cooperation and Development, including that the country should "terminate the transitional arrangements" in the emissions trading scheme which exempt trade-exposed industries with large GHG emissions from dealing with half of their total emissions.

The Infometrics report assumes that major emitters account fully for their GHG output.

It uses an approach to economic modelling that has been accepted for such work in the past and stresses that it doesn't account for non-market policies that might reduce emissions or behaviour changes by consumers or governments "if it was perceived that New Zealand was not doing enough to reduce emissions". It makes no judgment about likely trends in carbon prices.

Also unknown is the way a new global carbon pact, which may be settled at a summit in Paris in December, will treat forest plantings. These are important to New Zealand, which is counting on being able to use plantation forests as carbon sinks to offset its GHG emissions profile.

"The accounting settings agreed and applied under the new agreement will determine whether New Zealand's forestry and land use will be a carbon source or sink for purposes of meeting the target."

Agricultural emissions, which make up close to half of New Zealand's GHG profile and comprise mainly methane and nitrous oxide, "are not priced in line with current policy settings in New Zealand and the rest of the world," says the report. "Even in countries that have introduced carbon pricing, experience to date is that alternative policy approaches are being used for agricultural emissions."

The report assumes that New Zealand meets "only about one fifth" of whatever target it chooses through action in the local economy.

"The rest is met by purchasing emission units offshore," it says, because this would be a cheaper option. "One of the benefits of participating in international carbon markets through a global agreement is not only that it is cheaper (in terms of national income foregone) to meet a given emissions target, it also means that New Zealand's international competitiveness is largely maintained."

BusinessDesk.co.nz

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