Climate change: Treasury Department report says New Zealand economy is well positioned to cope

Flooding after the Ngaruroro River burst its banks in Hawke’s Bay during Cyclone Gabrielle.
Photo: Delivered / Dawson Bliss

A new financial report says New Zealand’s economy as a whole is resilient and well positioned to weather the climate change storm.

However, the “modest” change in gross GDP projected for the coming decades masked the huge impact it would have on some sectors and households, and one expert questions his conclusions altogether, saying he radically underestimates the costs.

Reducing emissions to meet New Zealand’s climate targets may result in some sectors shrinking or even disappearing, particularly those whose only way to reduce emissions is by reducing production.

Agriculture, forestry, fisheries and tourism were particularly at risk, as were the regions where these industries are dominant or the places most prone to flooding, such as Southland, Tai Rāwhiti, Northland, Waikato and the West Coast.

Poorer people would be disproportionately affected, as would Māori, the report said.

The results come from the report “Climate Economic and Fiscal Assessment Assessment 2023” by the Ministry of Finance and the Ministry of the Environment.

It is the first time the Treasury Department has produced this type of climate report, combining its own analysis with previously released reports from the Climate Change Commission, consultants and other agencies.

The Treasury said modeling of total fiscal (government revenue and spending) exposure to physical things like storms, floods and sea level rise is not yet available, but it is likely significant and will increase over time.

This report is said to have been prepared prior to Cyclone Gabrielle and other major flooding events this year.

Economy and Crown Books “Resilient”

According to the report, New Zealand’s strong institutions and economic and fiscal resilience have been in a better position to adapt to the impacts of climate change than many other countries.

It said increasing storms and droughts could push the crown’s net core debt by 3.77 percent of GDP in 2061. For comparison, net debt is expected to peak at 21.4 percent of GDP in 2023/24, and in 2022 the government promised to keep it below 30 percent.

Initial Treasury Department modeling shows that the impact of increasing droughts would reduce GDP by 0.5 percent in 2061, and greater floods and storms would reduce GDP by 0.7 percent — not far from the hit of the 1997 drought /98 on the economy.

The analysis considers only two specific types of extreme weather events in isolation and does not consider sea level rise or temperature rise.

It was not expected that the GDP impact of the emission reductions needed to meet climate targets would constitute a “material departure from business-as-usual” in most scenarios.

The Climate Change Commission previously estimated that meeting emissions reduction targets would result in a 1.2 percent drop in GDP in 2050.

It said it would also likely require an additional $38 billion in capital investment.

Who will be most affected?

According to the report, the “modest” change in GDP levels hides how big the impact will be on some sectors and households.

Some sectors may shrink or even disappear, particularly those whose only way to reduce emissions is to produce or do less.

Agriculture and forestry, fisheries and tourism are particularly exposed due to their direct dependence on climate-sensitive natural resources.

Regions such as Southland, Tai Rāwhiti, Taranaki, and the West Coast, whose economies depended on emissions-intensive industries (such as agriculture, heavy manufacturing, food manufacturing, and extraction and distribution), would be hit hardest.

Rising food and fuel costs due to the Emissions Trading Scheme are likely to hit low-income households disproportionately. Māori have been particularly vulnerable – they are over-represented in low-income households and more likely to work in high-emission sectors.

Households near the coast and in flood-prone areas were at greater risk and had to pay more for their insurance or were unable to get it at all.

It was expected that trying to lower emissions faster than currently planned and the limited amount of land available to plant trees to absorb carbon would have a larger negative impact on GDP.

However, the report found that warmer temperatures could be beneficial for New Zealand farmers compared to other countries. And it said there were improved health and environmental benefits from reducing fossil fuel use.

Impact on government books

According to the report, the overall impact on tax revenues is likely to be negative – both due to the physical risk from climate change and the possibility of slightly lower economic growth due to the transition to a low-carbon economy.

According to the report, extreme weather events and sea level rise are likely to pose the greatest risks to the value of the crown’s tangible assets. These included roads, schools and hospitals, rail systems and power infrastructure.

The costs of more frequent and damaging storms would likely increase over time, adding to New Zealand’s already significant natural hazard risk profile.

The modeling showed that a 30 cm rise in sea level – expected between 2045 and 2070 – would cost 6 billion in buildings.

Other models showed that by 2050 about 10,000 homes could become uninsurable due to coastal flooding hazards from sea level rise.

The government had to pay for adjustment measures, possible financial support for people hit by drought and floods, and increasing storms would also put the crown’s assets at greater risk.

Indirect tax costs are likely to arise due to changes in the tax base. This would have an impact on transport-related charges and taxes, as well as through environmental taxes, including the NZ ETS.

The report cited NZIER research that climate change could lead to an increase in annual growth in crown liability for natural hazards from 5.3 percent to as much as 5.7 percent by 2050.

Treasury Department analysis showed that meeting New Zealand’s international pledge to cut emissions – called Nationally Certain Contributions, or NDCs – which requires other countries to pay cuts on our behalf, will cost between 3.3 and 23.7 billion by 2030 will cost US dollars.

“A Little Far Fetched”

Professor Ilan Noy, founding professor of economics of disasters and climate change at Victoria University, told RNZ’s Morning Report on Tuesday that the report’s authors are “undertaking a mission that is almost impossible without crystal balls”.

“The tools that we have are very, very imperfect, so I think expecting it to work that accurately is a bit of an overstatement. But I think the report underestimates some problems, some concerns, and I want to stress that. “

The main problem, according to Noy, is that New Zealand had hoped to avoid emissions by offsetting them with carbon credits bought on the international market.

“The problem with that is that almost every country in the world has exactly the same plan, so everyone wants to buy carbon credits abroad,” he explained.

“If everyone buys and nobody sells, we have a problem. So we assume that there is some mysterious country that cuts its emissions much more than planned and then sells the extra to every other country in the world, but that mysterious country doesn’t exist in my opinion. No, it is not realistic to expect that we will do that.

“So there are two other ways to deal with it. One is to cut our emissions deeper – actually cut our emissions – or simply not meet the targets we set ourselves. Neither is very appetizing in my opinion.”

Ilan Noi
Photo: delivered

The cost of buying credit could range anywhere from $3 billion to $23 billion, the report said, noting that “the future price of international reductions is uncertain.” Noy said even the top number isn’t a huge amount to absorb over decades, but “it could be a lot higher if what I’m saying is right and nobody’s going to sell those or very, very few countries I’m going to sell those.” Selling permits, so I’m not sure these numbers are realistic.

“And the problem is, right, if we somehow convince ourselves that this is all manageable and we can buy these credits, then the incentives, the pressure to actually physically reduce emissions will potentially be reduced.”

He said the Treasury Department report also looks at “various reports and research projects” whose “numbers somehow don’t add up very well.”

“The problem here is that this report is not based on a consistent and internally coherent research work conducted by the Treasury Department. He’s taking various reports and research projects and stuff that’s been done over the years and trying to put them together, but they’re not internally consistent.”

They are also outdated, he said, citing “heavily the 2018 report which looked at the past decade and has unfortunately broken the record for extreme weather events every single year for the last five years”.