The cost of carbon mitigation

Adolf Stroombergen of Infometrics has done a study of the projected costs of carbon mitigation for NZ households. Dr Stroombergen is the chief economist at Infometrics and has done quite a bit of work in the climate change area – including for the Government’s Emissions Trading Group. In fact his work is quoted approvingly by David Parker just three months ago. This report was commissioned by the New Zealand Business Roundtable and the Petroleum Exploration and Production Association of New Zealand.

The Government has an aspirational goal of carbon neutrality by 2050. However this report doesn’t even try to measure what the cost of that would be. A very conservative target of restoring NZ’s emission levels to 1990 levels by 2025 is studied. And this is very conservative – NZ voted in Bali to reduce emission levels by 2020 to 25% – 40% below 1990 levels. Our Kyoto target is to be at 1990 levels by 2012.

The report looks at a business as usual scenario (based on growth of over 4% which is the Govt’s target], and then a scenario where a domestic price of carbon is $300/tonne. This reduces emissions by one third, but still leaves them 90% over 1990 levels. That shortfall has to be purchased on the market at an estimated $100/tonne.

The impact on various industries is massive. Sheep farming would be 32% smaller than under business as usual. Dairy farming 28% smaller and petroleum 27% smaller.

A scenario C is also looked at, which assumes high economic growth itself leads to higher economic growth due to greater immigration and business confidence etc. You need to be an economist to follow it in detail, but the key thing for most is the figures. Under scenario C we reduce emissions by 40%, but they still exceed 1990 levels by 70% and and the cost of purchasing excess emissions on the world market is $7.2 billion.

The summary of the is:

In summary, once the effects on aggregate investment, and productivity of investment uncertainty and transitional costs are taken into account, policy action to reduce New Zealand’s emissions could lead to a fall in private consumption of 14% relative to BAU. This is about $7,000 per person in current prices or $19,000 per household. It also implies a doubling of prices relative to 2007/08 and increases in petrol prices of more than 50% Nevertheless, despite these adverse effects on households, New Zealand’s emission levels rise significantly rather than reduce relative to 1990 levels, calling into question the consistency of the government’s twin goals of growth and carbon neutrality.

I have been saying for some months that we need more data on the benefits and costs of climate change and mitigation strategies, so that they can be weighed up. This report provides some of that data.

The response from David Parker is very disappointing. In fact it could almost result in a prosecution under the Fair Trading Act. Parker claims:

There is no mismatch between the goal of raising New Zealanders’ standards of living and of becoming carbon neutral.

This is of course nonsense. Absolute nonsense. Of course there is a tradeoff between economic growth and carbon emissions. It is beyond dishonest for Parker to say there isn’t. The issue before us is how to make that trade off, and to what degree.

The Stroombergen report is not, of course, gospel. One can intelligently challenge the assumptions, the impact of technologies etc, and argue it will not be as bad as the $19,000 per household cost in the report. But to argue that there is absolutely no mismatch or tradeoff between economic growth and reducing carbon emissions is almost the equivalent of arguing the Earth is flat. It is an appalling response from the Climate Change Minister which just tries to con New Zealanders into thinking one can eliminate carbon emissions from our economy and not have it affect our standard of living.

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