Friday, July 21, 2006

Climate change policy: the long-term picture

The Energy industry held its annual Energy Summit in Wellington this week. I wasn't there - the $3000 price tag seems to have been designed to keep riff-raff like me out - but Ben Thomas has drawn my attention to a piece he did in the NBR (offline) about a presentation by Solid Energy's Don Elder - and thoughtfully emailed me the powerpoints. Solid Energy has modelled the New Zealand economy and greenhouse emissions out to 2100. Here's the NBR's summary:

According to the study, price-based mechanisms such as a carbon tax are unlikely to deliver emissions reductions. A broad-based tax of $25 on each tonne of CO2-equivalent produced would reduce emissions, but would also lower GDP by over 16% - or $12,000 per person in 2100.

Exemptions on any carbon source in the economy, such as farm animals, would make meeting reduction targets impossible.

The greatest growth in emissions in this century will be transport related. This presents a more intractable problem for New Zealand than other countries, because a bigger proportion of transport is involved in our GDP, rather than private use.

However, if low-cost technology could be produced which mirrored the emissions reductions of known technologies, but across all sectors, emissions targets would be met with minimal effects on GDP.

A couple of comments on this. Firstly, the framing of "climate change policy would lower GDP" is (typically) misleading; what they are talking about is simply a marginally lower growth rate, which naturally leads to a large difference with the "business as usual" scenario if compounded over a long period of time. Even with a $25 carbon tax, the model still predicts that New Zealanders in 2100 will be almost twice as rich as they are today. They'll be less rich then if they'd done nothing - but on the plus side, will be less likely to suffer from severe drought and flooding, or interesting tropical diseases. This being simply a cost-analysis though, designed to select between different policies, those benefits of climate change policy are easily forgotten.

Secondly, to turn the weapon of the enemy against him: that $12,000 in 2100 is worth about $125 today (assuming a 5% discount rate; typically higher rates are used either to justify business investment, or to justify ignoring the long-term costs of climate change).

Thirdly, the conclusions drawn are somewhat influenced by the chosen endpoint of 2100. A "low-cost technology" path results in higher growth than a strong carbon tax, but doesn't result in lower emissions until around 2065 (it isn't even noticeably better than business as usual until after 2025 or so). But one of the absolutely solid conclusions of the IPCC is that the earlier we make emissions reductions, the more likely we are to avoid the worst effects of climate change. Avoiding real action in favour of waiting 20 years for a technological miracle seems then to be a foolish strategy.

Fourthly, to build on that point: it is absolutely clear from Solid Energy's model that a strong carbon tax will have a significant effect on emissions, while having a negligible effect on economic growth over the next 50 years. Given that that 50-year period is absolutely crucial, this suggests that we should be pursuing a carbon tax, combined with other measures to equalise carbon costs across the economy. The sorts of measures suggested in the Greens' Turn Down The Heat package, in other words.

Moving on to policy conclusions, Elder wants a technology-based policy, and is hot for us to join the AP6 coal-club - both unsurprising, as he is a coal executive. His primary reason is that price-based measures are unlikely to stimulate the necessary investment in R&D, and that

Emissions trading will help get technologies “off the shelf” - it can not get new technologies “onto the shelf”

But demanding that such technologies be developed locally seems to be setting the policy bar far too high. The size of our economy and our relative isolation has meant that New Zealand has always been a "technology taker" rather than a technology leader. Given this, encouraging the rapid and vigorous uptake of overseas developed carbon-reduction technologies - getting it "off the shelf" - would seem to be exactly what we need to do.

As for the AP6, I don't think even its members regard it as anything other than a PR-stunt designed to mask their inaction on climate change. And while the parties are committed to sharing and developing carbon-reduction technology, they also have an obligation to do so under the UNFCCC (to which all are parties). So its unclear exactly what if anything this would gain us, other than positioning us firmly in the camp of those who want to do nothing about climate change.

Despite this, Elder has a couple of good points. Firstly, the government needs to dramatically increase its investment in research on reducing agricultural emissions. These are an unusually large part of our emissions profile, and because we're unique among Annex I countries in having such a large proportion of methane, no-one else is seriously looking at it. Investing in this area directly benefits New Zealand, and any resulting technology will have a worldwide market. Despite this, the government's response always seems to be "next year". Secondly, the government needs to do more to encourage the uptake of clean technologies, by accelerated depreciation rates or tax credits. The Projects Mechanism provided some incentive (and helped kick-start wind-generation in New Zealand), but it was effort to apply for credits, and is currently on hold. We need a better and easier way to encourage this, otherwise we're going to end up paying for past dirty investment for a long time to come.