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Zero carbon will have ‘confronting economic costs’

The Government's proposed Zero Carbon Bill lays out three options for transitioning New Zealand to a low-emissions economy. But while the bill itself is a good idea, people haven’t absorbed the “confronting” economic costs they’ll face, lawyer Simon Watt tells Eloise Gibson.

The Government has been admirably open about the economic impacts of its proposed Zero Carbon Bill, but people haven’t absorbed what the “stark” cost figures mean, says Bell Gully partner Simon Watt.

Even under a reasonably benign scenario, economic modelling released with the public consultation document suggests people may pay 23c to 63c more for a litre of petrol, says Watt. “That’s the environment you’re looking at, compared with just under 5c (added to a litre of petrol) at today’s carbon prices. Today [a unit of carbon] is trading at about $20.50 per unit and some of the more moderate and optimistic scenarios in the discussion document suggest it could be $100-$275.”

Those costs represent the average over the 30 years taken to meet emissions targets – not the high end of the range. The actual price would likely start out lower and reach higher than the average by 2050. “I’m not sure that the penny has fully dropped yet … it does have some pretty confronting figures in it,” says Watt.

Watt supports the bill, despite its frank acknowledgement of costs.

“These carbon costs are stark but to prepare for them and to have three decades to prepare is better than having them imposed suddenly later, and the idea of incentivising the transition to a lower carbon economy is a very good one,” he says.

“It will help us achieve our emissions targets and give business much more certainty. It’s much better to have a 30-year plan to get there and not to have short, sharp shock down the track.”

To ease the economic pain, Watt advocates allowing lots of international carbon trading – and leaving some wiggle-room to change the targets, should the future costs get too steep.

“What it really highlights for me is that international carbon trading will be critical, and not just to a modest degree, to achieve the lowest realistic cost emission reductions.”

In the past, a flood of largely meaningless carbon credits hurt the carbon market’s credibility, and some campaigners fear rich countries won’t do their part to reduce emissions if they can buy reductions from other nations. But Watt believes New Zealand officials can do adequate due diligence on other countries’ carbon markets, much as they do in the context of trade, when officials take part in cross-border negotiations. Bilateral discussions and checks should ensure that any emissions reductions we purchase are genuine, he says.

Watt also supports building some flexibility into the targets, in part to help get the bill get cross-party support, helping it last to 2050. “[The cost] creates a case for ensuring there is flexibility in the carbon act to adjust over time, within reasonable parameters so it’s not too watered down … because the economic costs will become more apparent and more real.”

Bell Gully partner Simon Watt.

Whether the target can be adjusted or shifted, and whether and how to allow international carbon trading are two of the topics on which the government is seeking people’s comments.

Public consultation on the bill opened on June 7 with the release of a discussion document asking people what they think the 2050 emissions targets should be, and how they should be structured.

Each of the three possible targets has different implications for New Zealand's climate and economy: a target of net-zero carbon dioxide only (letting methane and nitrous oxide, which make up half our emissions, increase), net-zero long-lived gases (carbon dioxide and nitrous oxide) and stabilised short-lived gases like methane, or net-zero emissions for all greenhouse gases.

By offering people a middle option of stabilised, but not radically reduced, methane, the government may have been acknowledging the stark economic impacts in the document, and trying to increase the chances of winning cross-party and agricultural sector support for the bill, says Watt.

The economic analysis in the discussion document relies on two very different reports, each using different methodology. A narrower but, in its way, more detailed report by Vivid Economics suggests annual average emissions prices for 2018-2050 may be in the range of $76-$100 per ton of CO2, while a macro-economic report by NZIER suggests a range of $272-$845 per ton, depending how much innovation happens.

Neither of the modelling reports included any economic benefits that may arise from measures to cut emissions, for example, from less road congestion caused by improved public transport. Nor did they include the benefit of avoiding damage to the economy, which would have occurred if countries did not act to avoid more extreme climate changes.

Yet Watt notes the economic models also do not factor in the cost of adapting to climate change, some degree of which is inevitable even with strong efforts to curb emissions.

“The discussion document addresses adaptation and highlights the need for it but it doesn’t feature in the economic modelling, so what people may not appreciate is that the cost of carbon needed to achieve the emissions targets, which the modelling suggests would have 0.2 per cent annual impact on GDP growth rates to 2050, on top of that is the cost of adaptation. So adapting to extreme weather events, the cost of relocating and protecting infrastructure, roads, airports, railways, the cost of moving houses inland: those are costs the economy is going to have to bear in addition to adjusting to get to zero emissions.”

Given the high impact that these costs will have on some businesses, Watt believes it should be mandatory for businesses to report their climate risks to their investors. There isn’t yet an agreed accounting method for doing this, he says, but one is urgently needed. “When you think of the cost of carbon and the cost of adapting over time, it becomes really important for businesses to understand their own risk. I would push towards having better visibility of environmental risk reporting. The Productivity Commission didn’t think the Zero Carbon Act was the place to do this because it would take time to develop corporate accounting standards and it wouldn’t likely happen in time, but it’s really important that we have this information and it may well be time to mandate it, because the existing reporting standards won’t achieve the change soon enough,” he says. “We are really flying blind into this new high carbon cost environment.”

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