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Quantifying climate change policy changes a difficult exercise

This report was first published in the Energy and Environment bulletin on April 11

The Westpac commissioned study on the economic impact of climate change and climate change policy has some assumptions which means it could be optimistic.

It argues a ‘gentle landing’ inclusion of agriculture into the Emissions Trading Scheme by 2020 will be less damaging and traumatic to the economy than doing it sharply and more severely in 2030.

Two scenarios were mapped out: the central scenario modelled an early and smooth transition by NZ businesses to help meet Paris Agreement climate obligations. The shock scenario anticipates more than a decade of inaction on emissions reduction, followed by more aggressive action from 2030.

In both scenarios there is an impact on GDP, but the modelling indicated the central scenario would create $30bn more GDP through to 2050 than the shock scenario.

The key difference between the scenarios is the timing of the inclusion of agriculture within the Emissions Trading Scheme Agriculture is phased in (2 units for the price of 1) over a 10 year period in the central scenario from 2020. In the shock scenario, the phase in period is shorter (2-5 years) and does not begin until 2030.

As in any economic modelling assumptions must be made about behaviour and events. In this model there are several assumptions which seem unlikely and if they do not happen would have more severe effects in both scenarios

One assumption in the model assumes equivalent emissions reduction action is taken by all other countries. The result is that for each commodity, the price of NZ products relative to the world price remains constant. The likelihood of the United States or the EU, for instance, putting an emissions charge on sheep and cows by 2020 or even 2030 seems fairly unlikely.

Another key assumption is any commodity exports from NZ which are lost due to changes in the economy are replaced by another export of equal value. In the case of agriculture the analysis suggests the investment in dairy will peak and shift into forestry planting and other land uses.

The problem for NZ policy makers is to reduce emissions the nature of the economy means agriculture has to be addressed somehow. Assuming the rest of the world will follow suit is optimistic.

The modelling is done by Vivid Economics and the EY compiled report says it shows NZ can decarbonise towards a two-degree target while achieving economic growth. “Agriculture faces challenges… but the industry is projected to be better off from an early, phased, introduction to the NZ ETS, rather than a more rapid entry later on. Growth is not projected to be evenly distributed. Renewable electricity sources such as wind, hydro and solar will be among those industries to prosper, alongside fishing and non-ferrous metals, while fossil fuel industries will contract.”

Each of the two scenarios represents less emissions reduction than if the Government were to attain its net zero emissions by 2050 target.

Compounded annual growth of gross domestic product (GDP) to 2050 was predicted from the modelling to be 2.015% for the central scenario and 2.005% for the shock scenario respectively. The baseline economic growth rate, absent any additional climate-based policy, is 2.04%.

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