"Hot Air": Searching for the winds of climate policy change

By Catherine Leining, Policy Fellow, Motu Economic and Public Policy Research

On 2 November 2014, the Intergovernmental Panel on Climate Change released its Synthesis Report 2014 with the headline "Climate change threatens irreversible and dangerous impacts, but options exist to limit its effects." The report is a strong reminder that limiting temperature increases below 2° Celsius relative to pre-industrial levels could entail reducing emissions by 40-70 percent of 2010 levels by 2050, and bringing net emissions near or below zero by 2100.  It emphasises the clear benefits of near-term action given the inertia of economic and climate systems.

A White House report issued in July 2014 also highlights the global costs of delaying action to reduce emissions.  Two key findings were:

• Based on a leading aggregate damage estimate in the climate economics literature, a delay that results in warming of 3° Celsius above preindustrial levels, instead of 2°, could increase economic damages by approximately 0.9 percent of global output… The incremental cost of an additional degree of warming beyond 3° Celsius would be even greater. Moreover, these costs are not one-time, but are rather incurred year after year because of the permanent damage caused by increased climate change resulting from the delay.
• An analysis of research on the cost of delay for hitting a specified climate target (typically, a given concentration of greenhouse gases) suggests that net mitigation costs increase, on average, by approximately 40 percent for each decade of delay. These costs are higher for more aggressive climate goals: each year of delay means more CO₂ emissions, so it becomes increasingly difficult, or even infeasible, to hit a climate target that is likely to yield only moderate temperature increases.

The global case for near-term action is clear.  What about the case for near-term action in New Zealand?

This issue has proven challenging for New Zealand so far.  In addition to economic and climate inertia, New Zealand has faced a third important dimension: political inertia.  This was the subject of Alister Barry’s 2014 documentary “Hot Air”.  Using archival footage and retrospective interviews, the film traces New Zealand’s successive attempts to price and reduce greenhouse gas emissions since 1988. Across policy cycles from the government’s initial consideration of emission pricing to the choice of voluntary greenhouse agreements, consideration and abandonment of a carbon tax and agricultural emissions research levy, the monumental passage of legislation for the New Zealand Emissions Trading Scheme (NZ ETS) and the subsequent decisions that reduced its impact, a similar story was repeated.

Attempts to shift New Zealand toward a lower-emission development pathway were resisted effectively by those with powerful interests in maintaining business as usual.  

The film struck a personal chord for me because I was closely involved in much of this process as an official.  I moved to New Zealand in 2003 to work for the government on the carbon tax and Negotiated Greenhouse Agreements with industry.  After they were scrapped, I joined the team of officials who helped to design the NZ ETS – and watched as its ambition fell away.  Then as a government negotiator, I worked to improve the Kyoto Protocol’s market mechanisms – to which the government will lose access after 2015 because it chose not to proceed with a second commitment period.  Enormous effort was invested by Ministers, officials and stakeholders throughout these policy cycles.  As each new wave of exciting possibilities approached a transformational crest, it hit a wall of opposition and receded back toward the ocean of policy tokenism and empty long-term targets.

Okay, perhaps that is too negative, and the film did downplay or overlook some areas where significant progress has been made.  We do now have an operational nationwide multi-sector ETS in place.  That is more than most countries – unfortunately now including Australia – can claim, and it is something meaningful to show for the last two decades of effort.   We have learned a lot from this experience.  Some New Zealand businesses have invested in reducing their emissions intensity, if not their absolute emissions, and are collaborating on green innovation through associations like the Sustainable Business Council, Sustainable Business Network and Pure Advantage.  Although the emissions price in the NZ ETS is too low and uncertain right now to be effective, the underlying policy architecture is sound so if we wanted to get serious about reducing emissions, we could do so with manageable design adjustments.

So why hasn’t this happened?

One reason is that we have become attached to a story that New Zealand is too small to make a difference on its own and will suffer by exposing its economy to ambitious action ahead of its trade competitors.   According to the Minister for Climate Change Issues, New Zealand’s climate change policy is about "waiting for, frankly, the rest of the world to get moving."

But there is a different, more compelling story to be told: the story of the potential gains from a meaningful New Zealand commitment to mitigation.

First, all emission reductions – whether from large or small countries – help to avoid global costs from future climate damages.  The social cost of carbon – the present economic value of avoiding future damages from a tonne of emissions – has conservatively been estimated in a US government study at a central value of US$37 per tonne CO₂, and could range up to US$109 per tonne or higher.  These figures are expected to rise over time.  Importantly, they are likely to be underestimates.   (For more information, refer to this blog post by Luke Harrington and myself on the social cost of carbon.)  Significant mitigation could be accomplished well below the social cost of carbon – indeed, some at negative financial cost.

Second, establishing an effective carbon price signal encourages earlier investment in less emissions-intensive capital, infrastructure and land use.  This can help New Zealand to avoid a more abrupt and painful economic adjustment generating stranded assets in a future of global carbon constraints and changing consumer preferences for low-emission products and services.

Third, we could be doing more to incentivise low-emission innovation and capitalise on opportunities to export mitigation expertise to other countries, particularly those in the developing world.  As an incubator of effective approaches to mitigation, New Zealand could help reduce global emissions and boost its economy at the same time.

Fourth, by modelling leadership we would be in a stronger position to advocate for mitigation by other countries.

While “Hot Air” tells one important piece of New Zealand’s mitigation story, it does not tell the whole story.  First, across past policy cycles some meaningful progress has been made and the NZ ETS gives us a foundation to build upon across government, business and civil society.  Second, if global net mitigation costs to hit a given target are going to increase 40 percent for each decade of delay, it becomes harder to maintain that a commitment to business as usual on climate change, locking us into a high-emission pathway, is in the interest of New Zealand as a whole or our relationship with global markets. Third, the story is far from finished.  New chapters are waiting to be written and the pen lies in our hands.

Note: This post first appeared on the blog for Silver Lining Global Solutions.