A rather large grain of salt.

The NZIER/Infometrics economic report, which the government has been using to claim that a -40% reduction target is too economically damaging, is severely limited. And what’s worse, the government has been, knowingly or otherwise, misrepresenting the figures in an attempt to justify their position.

However, there have also been some inaccurate criticisms of the report flying around in the blogosphere and in the media. Here I’ll try to rectify these, while drawing attention to the legitimate flaws with the report and its representation by the government. This is pretty detailed and loooooong, but hope those that are interested will find it useful.

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First let me reproduce some of the public statements made by Nick Smith. This from his interview with Guyon Espiner on TV ONE’s Q + A programme on Sunday July 26:

Nick: “[…] If we went for the target that Greenpeace is promoting of minus 40, that indicates a cost of about, you know, 15 billion dollars per year at 2020 […]”

Guyon: “So this report shows doesn’t it that wealth per person would be 46 thousand dollars per person rather than 49 thousand dollars per person.”

Nick: “Yeah that’s a cost of about three thousand dollars a year, 60 bucks a week […]”

And this from his parliamentary press release:

Key conclusions from the NZIER-Infometrics report on the macro-economic impacts of climate change policy are that:

 

• Costs range from $600, $1000, $1400 to $3000 per capita per year for 2020 emissions targets ranging from +15%, 0%, -15% to -40% relative to 1990 levels
• Costs are significantly greater if there is no international trading
• Costs are reduced by between a third and half if there is consistent action by other countries
• New Zealand’s Gross Domestic Product continues to grow under all options.

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Keith Ng in his blog at Public Address posted a rapid-fire response after Nick Smith’s appearance on Q + A. He claimed that:

1)  The report wasn’t even about emissions reduction.

2) All scenarios assumed the same level of domestic emissions.

3) The cost being quoted is not the cost of cutting emissions, rather it is the opposite: the cost if we do nothing.

Unfortunately all of these points are incorrect. What the report does investigate is the cost of meeting different responsibility targets, under a number of scenarios and assumptions

A responsibility target need not be met entirely with domestic emissions reduction; it can be partially met through the purchase of carbon credits from other countries, assuming that some form of international trading exists. This means that NZ effectively pays for emissions to be reduced or offset in another country rather than domestically. The target is a net figure, rather than gross, so it also accounts for carbon off-setting (or sequestration) measures such as forestry planting in meeting the target.

To be clear, a responsibility target (and not a strict domestic reduction target) is what we are meant to be discussing in this debate – Nick Smith has said so himself. Keep in mind that this is exactly the same as the nature of our Kyoto target.

Where Keith has gone wrong is by interpreting this statement from the report (his emphasis) -

“With international trading, New Zealand’s AAU [aka carbon credit] allowance… [is] not analogous to a domestic emissions target.[…] To be clear, this report investigates the impact of changes in New Zealand’s AAUs under the framework of an international agreement whereby New Zealand takes responsibility for any emissions above a given amount. This is not the same as investigating different domestic emissions targets and should not be interpreted as such.”

- as meaning that the report had nothing to do with domestic reduction targets. In fact (contrary to his second assertion above, which is a plain misreading of data), in all scenarios the target was met with a combination of domestic reduction and purchased carbon credits. How much is met with each varies with the international carbon price – if the carbon price is high, more domestic reduction measures are cheaper to achieve than buying carbon credits than when carbon price is low.

So the report does not calculate the cost of doing nothing; it calculates the cost of meeting different responsibility targets, which involves some domestic reduction and some carbon credit purchases. In fact, it includes one scenario where international trading is not allowed, and all the emissions reduction must be achieved domestically. It comes out quite expensive just to get back to 1990 levels!

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BUT these figures should, as Charles Chauvel said, be taken with a grain of salt. A rather large grain, in my opinion. Here are a few reasons why…

1) The figures Dr Smith is comparing for the -15% and -40% targets are calculated at different world carbon prices: $100 and $200 per tonne, respectively.

$200/tonne is stated as being a “worst-case scenario”. The -40% target is only examined at the $200 price, so a fairer comparison is not possible. But to give some idea, running the -15% target at $200/tonne sees its cost grow from $1400 to $1900.

2) The economic model used assumes no change in forestry patterns in response to a price on carbon.

The report makes this abundantly clear. It also references a study by the MAF, which estimates a secure carbon price of just $20 could induce new forestry plantings that would be absorbing up to 30Mt/year of carbon dioxide by 2020. This is over half of the net emissions reduction required to meet the -40% target (50.6 Mt below business-as-usual), so would considerably reduce the need for costly reduction measures.

Dr Smith, to be fair, has talked a bit about forestry, but mostly in relation to the negative effects when (if?) the trees are harvested, and how this could deter potential planters. I’m a bit unclear about the whole issue and it seems as if there is a lot of debate which needs to be settled with some rigorous analysis. Especially given the potential shown by studies like the MAF one.

3) The model also assumes no technology change in response to the carbon price, and cannot predict changes in the structure of the economy, such as new industry start-up.

The report states that it is unlikely for new technologies to play a role before 2020. However, it seems fairly likely that existing emissions-reducing technologies will get cheaper faster in response to a firm carbon price. From my understanding, this isn’t considered in the modelling.

4) More importantly though, the “broad-brush” approach used fails to capture the profit opportunities of many existing carbon mitigation technologies.

This is because the model assumes that the baseline scenario represents the economy operating efficiently. In other words, it assumes that all the mitigation measures must be costly, otherwise they would have already been done!

This is plain false. There are many measures (mostly in energy efficiency) that are actually profitable, but are being held back by forces other than economic rationalism. Freeing these up will actually improve our economy, not hurt it.

The government should undertake a “bottom-up” (i.e. measure by measure) study of the costs if it is actually serious about quantifying them. Nick Smith stated in a parliamentary question session that the government departments have been doing this, but he has so far released nothing. The Greens have instead beaten the government to it with their detailed “Big Affordable Climate Change” report, which gives clear examples of ways to reduce emissions that will actually benefit the economy.

5) The costs being quoted in the media assume no consistent action by industries in other countries.

As it states in the parliamentary press release though, consistent action by other countries is estimated to reduce costs by between a third and a half. It is pessimistic to assume that consistent action will not be a part of a global agreement. Once again, this shows the quoted figures being based on worst-case scenarios.

6) The cost estimations assume no government action other than a price on carbon.

They don’t account for reductions that could be made at little cost through any complementary policy measures, e.g. fuel efficiency standards. Neither, of course, can it account for any social and behavioural changes, like people choosing to drive less for non-monetary reasons.

The government can play an active role in facilitating the change. Of course, it will have to overcome its laissez-faire, anti-“nanny-state” ideology for the greater good. Again, the Greens report shows what could be possible.

7) Finally, the business-as-usual scenario which delivers a predicted annual income of $49,000 per capita, is simply unattainable.

It represents “the absence of any participation in an international agreement on emission reductions”. As Dr Smith has said himself, following this path would almost certainly mean negative trade effects, probably even embargoes.

In other words, the figure that is being held up as a measure of ‘how rich we could be in 2020’ is in fact derived from an implausible future scenario! Comparing the other scenarios to this is therefore meaningless, and Dr Smith’s statements like “-15% will cost us each $1400 per year” just distort the public opinion.

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One thing to remember in all this, too, is that even if these figures are true, the -40% scenario still sees us all $7500 richer in 2020 than today! GDP also continues to grow – we’re not going backwards. While this is acknowledged in Nick Smith’s parliamentary press release, it has been skipped over in his comments in the mainstream media. So, of course, some people have understood that we’ll be $3000 worse off than we are today if we sign up to -40%… Oh dear.

Well, as I said at the start, I hope this is useful to some people. Sorry for the lack of sound-bites…

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