Tuesday, May 17, 2022

Climate Change: "Corporate welfare"

One of the key planks of yesterday's Emissions Reduction Plan is a $650 million fund to help decarbonise industry by subsidising replacement of dirty technologies with clean ones. But National leader Chris Luxon derides this as "corporate welfare". Which probably sounds great to the business ideologues in the Koru club. But there are two big problems.

Firstly, the biggest: its a staggeringly good deal for the government:

The $650m for corporates is going into the Government’s GIDI fund, which invests alongside businesses.

Thus far the fund has invested $68.7m while corporates have put in $117m, for a total abatement of 7.45 megatonnes of emissions.

That works out to an implied carbon price of $9.22/ton. The government internally values carbon at $150/ton, so that seems like a pretty good deal (certainly better than an Auckland motorway). If business had funded it all internally, it would have cost them $24.92. That's under a third of the current market carbon price, and has had a 2:1 return since at least Septmber 2021 (and breakeven since mid-2020), so it would have been perfectly profitable for them to do themselves. Which brings us to the second problem: that the business community are stupid, short-sighted penny-pinchers, who don't make profitable investments in decarbonisation and energy efficiency unless the government holds their hand and drags them to it. And subsidies - "corporate welfare" - are easier and cheaper than trying to change NZ's entire business culture.

This isn't news. In 2001 we established a whole agency - EECA - to help solve it. In their second New Zealand Energy Efficiency and Conservation Strategy, published in 2007, they politely laid out the problem like this:

In common with other sectors, the business sector faces barriers to the uptake of energy efficiency and conservation measures including access to capital, lack of information, weak price signals and split incentives.

These barriers tend to be higher for small and medium-sized enterprises. Other barriers include:

  • managers being subject to short payback criteria from investments
  • smaller businesses are typically not exposed to cost-reflective electricity pricing
  • the purchase and control of energy is often separated within businesses.
Their solution was a grants scheme, to help fund the profitable upgrades our business "leaders" were too stupid and short-sighted to fund themselves. We've been funding such upgrades for over 15 years, without any real controversy. The new package is a significant expansion on that approach, but its really nothing new. And now the government is properly valuing carbon on its books, we can see the value in it. Obviously it would be better if NZ businesses were smart enough to do this themselves (it being more than profitable enough), but they're not. And in the face of this market failure, government action seems justified.