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Rod Oram: So what happens if we fail?

Rod Oram reviews the Productivity Commission's landmark report on moving to a carbon-neutral economy. He finds a wealth of insight on the task ahead, but no analysis of what happens if we fail or what a radical disruption might look like.

We will achieve a stronger economy and a healthier environment by successfully transitioning to a very low emissions economy over the next 30 years, the Productivity Commission concludes in its draft final report on the subject.

While this will entail widespread changes in the economy, technology and the culture of business and government, we’ve pulled off similar multi-decade transformations in the past, the Commission reassures us.

“Looking back through history, other examples show profound change occurring over timeframes of that order or less, with the wellbeing of communities benefitting enormously from changes that, at first, appeared to be highly disruptive and threatening.”

This time around, the emergence of new technologies and businesses will provide opportunities for employment, exports and productivity gains. Many existing businesses will benefit too if they participate in the transformation. But it warned others will fall by the wayside because their technologies will become redundant or they will fail to adapt.

To spur these changes, we need a massive revamp of our innovation system and investment drivers, starting with the immediate cessation of R&D support for high emissions industries. Currently barely 10 percent of the nation’s R&D spend is on clean technologies and climate change mitigation and adaptation.

“Innovation should have priority alongside emissions pricing, targets and [carbon] budgets, and the laws and institutions supporting them. Given the imperative to reduce emissions, the Government should devote significantly more resources to low-emissions innovation than the modest and inadequate current allocation.”

Among its findings on innovation, it concludes: “The transition to a low-emissions economy will require policies that lean against path dependencies that can lock-in polluting technologies and patterns of production. These dependencies arise from market size, scale economies, the cumulative nature of knowledge, network effects, sunk investments and political pressures from vested interests.”

Overall, the biggest changes in the economy will be in land use and farming, and in transport – our two largest sources of emissions – and in forestry which is overwhelmingly our best opportunity to sequester carbon and thus reduce emissions on a net basis. 

The extensive report of 400 plus pages lays out all of these benefits and challenges across the economy. To a large extent it identifies the same opportunities in reports from the Royal Society's in 2016, Vivid Economics last year and Westpac NZ recently.

But it brings them together in a far more integrated way, particularly in terms of the Government’s crucial role in providing the institutions, policies, laws and other mechanisms required; and doing so in ways that are stable, adaptable and effective so business and all other segments of society can play their role in the transformation.It analyses all of the above in two scenarios – a very low emissions and a net zero emissions New Zealand in 2050, and against three technology scenarios:

* Policy-driven decarbonisation which features slow, sector-neutral, technological change. As a result, policy has to provide the main impetus, resulting in heavy investment in forestry to offset emissions, and reductions in emissions-intensive animal agriculture. 

* Disruptive decarbonisation in which rapid technological change “disrupts current economic structures, with new technologies and products creating new markets, destroying demand in traditional industries and accelerating turnover in capital assets.” This would see an increase in horticulture, a decrease in dairying, a reduction in the cost of renewable electricity, and rapid uptake of electric vehicles. Iron, steel and aluminium production would cease by 2025.

* Stabilising decarbonisation in which rapid technological changes stabilises existing industry structures through new mitigation opportunities, such as methane vaccines and nitrogen inhibitors for cows and biofuels for vehicles.

The Commission seems relatively neutral on which technology scenario might dominate. In reality, though, disruptive change is by far the most likely. Three rapid accelerations are driving it worldwide: the physical impact of climate change, the demand for clean technologies and the innovation responses to those factors.

The idea that technology will dawdle so government has to push policy hard is deeply improbable. Likewise, only incumbents believe they can clean up their existing technology to some extent, so they can stay in business for a long time to come.

The enormity of the challenge: our emissions now ... and where they have to be 30 years from now.

But disruptive change only heightens the need for the Government to be bold and active to ensure the economy is innovative and adaptable as possible.

The starting point is woeful, given current policy settings. There is a regulatory framework of emissions reduction targets for 2030 and 2050, and the Emissions Trading Scheme is the main mechanism for trying to achieve them. But the Commission says there is no credible commitment to a domestic low-emissions transition, a lack of stability and predictability in policy, no clear plan to meet targets, inadequate central government leadership, and poor policy coherence.Instead, it offers six hallmarks of good government practice to help guide the transition:

* A strong signal by the Government making a long-term commitment to the transition to a low-emissions economy and being transparent about future policy intentions to achieve this. 

* Getting emissions pricing right, to steer investment and change behaviour. 

* Creating laws and institutions that support stable policy settings, with clear targets and accountability for action, and that act as a commitment device to help drive the development and implementation of a long-term policy response to climate change. 

* Ensuring other supportive regulations and policies are in place, to address non-price barriers, encourage the transition, and manage serious adverse impacts on lower-income households and affected businesses. 

* Harnessing the full potential of innovation through significantly more Government resources devoted to supporting research, deployment and adoption of low-emissions innovations. 

* Supporting investment in low-emissions technology, infrastructure, and other activities, by greater transparency and mobilising new sources of finance.

The Commission identifies the two absolutely crucial legislative mechanisms at the heart of this framework: setting a 2050 emissions target and establishing an independent climate commission to oversee progress towards it. The commission would set a series of national carbon budgets that would decline over time to get us there; and it would also review the effectiveness of government policies in helping to drive the reductions. 

The UK pioneered such legislation in 2008. It is proving highly effective, leading some 20 other jurisdictions to follow suit. Our government is promising to do the same here. The biggest hurdle, though, is the National Party. It continues to seek short-term political gain by denying the scale of challenges and the opportunities from tackling them.

Fortunately, business and civil society are increasingly supportive of action because they understand the benefits from acting and the risks of not. Hopefully National will get the message soon that climate change is not a party-political issue. If they don’t, hopefully they will become unelectable.

The report's weaknesses

However, for all the wealth of insight and advice in the Commission report, there are major weaknesses in it. 

Above all, it offers no analysis of the massive economic and environmental damage we would inflict on ourselves if we respond inadequately to climate change. Nor does it explore in detail, at least in its published work, what radical disruption looks like, for good and ill. Such insight is essential for building resolve and ambition.

It paints a picture in which the economy looks rather like it is now but with just lower emissions from using some different technologies. Its comparisons with other periods of great economic change in New Zealand are unconvincing. This time the upheavals in economics, technology and business models are far more radical. Yet it offers few insights on how those are giving rise to the likes of the circular economy and the sharing economy.

Consequently, it errs towards the hope that incumbents will adapt enough. This is most worrying in the three major sectors which it identifies as the key drivers of our transformation to a low emissions economy.

The problem with dairy

First, farming. It does see changes in land use, but the dairy sector in particular remains a large monoculture with only limited reductions in its emissions or production. In some scenario production rises. That means the rest of the economy will be subsidising dairy. 

Given the great power of incumbents in any economy, we can expect our dairy industry to fight for such favorable treatment and to reject the opportunity it has to be a true global leader in the science, farming and wealth generation of climate-compatible dairying. 

The problem with forestry

Second, the Commission puts far too much faith in forestry as the biggest driver of our emissions reductions over the next 30 years. Yet, it acknowledges forestry is only cost-effective over that period and then becomes a liability because we start running out of land to plant, and old radiata pine trees stop absorbing much carbon. 

The Commission needs to do far more work on how we can achieve two big transformations in forestry: ensuring we plant far more permanent and harvestable native forests and far fewer exotics, particularly radiata pine which is a poor-quality wood; and using far more radiata pine and other species for construction, biomaterials and biofuels. Doing so would significantly reduce emissions while increasing the economic returns to forest owners.

The problem with cities

Third, the Commission’s work is lamentably weak on the built environment, producing only two findings and three recommendations. Yet, worldwide, how urban areas are built and run is the greatest challenge and the greatest opportunity of climate change adaptation. Our towns and cities are no exception. They are clustered on coastlines which are already affected by rising seas, their buildings and transport are inefficient energy users, and they have limited resilience to climate change.

The Commission makes some broad suggestions about improving codes so buildings are more energy efficient and use more low-carbon materials; and it acknowledges that compact urban forms are the most energy efficient. 

But the Commission comes with baggage. Its earlier report on urban form by and large rejected such urban design in favour of low density towns and cities. In this report it says there are still policy and other failures that work against compact urban forms but it doesn’t tackle how to solve them.

There is no end of excellent analysis it must draw on in its final report. Just one example is the Better Growth, Better Climate report in 2014 produced by the London-based Global Commission on the Economy and Climate.

Above all, the Commission needs to do a lot more work on the powerful synergies between these three sectors which are the absolute keys to maximising our opportunities to respond to climate change, while minimizing the damage from it.

If all these issues and more in a 400 plus page document is too daunting, there is a quick read. Turn to pages 410-436 where the Commission succinctly summarises its 141 findings and 53 recommendations. Hopefully they might encourage you, as an individual or with others in businesses and other organisations, to share your knowledge with the Commission. Its feedback closes on June 8 so it can produce its final report by late August.

The feedback is vital. This body of work will be the bedrock on which government, business and civil society will build a prosperous economy, a healthy ecosystem and an equitable society.

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