April 17, 2023
Hugh Parsons

Emissions will cost New Zealanders

The fiscal impact of climate change will impact many businesses and vulnerable communities.

Aotearoa New Zealand will have to reduce its emissions to avoid the penalties of climate change.

In April 2023, The Treasury, in partnership with the Ministry for the Environment (MfE), released their report outlining their Climate Economic Fiscal Assessment (CEFA). The CEFA was completed before the storms of January and March, which severely impacted Tairāwhiti, Hawke’s Bay, Bay of Plenty, and Auckland. As data on the economic impact of the storms to these regions emerges, the CEFA may be adjusted. Our latest quarterly report, the BEV, provides an explainer on the economics of disasters that includes further information on how these events can affect communities beyond accounting and Gross Domestic Product (GDP).

The impacts of Climate Change will be far reaching

The CEFA looked at the impacts of climate change at a high level. The impacts were classified into two categories: physical climate change (impacts from changes in the weather and climate) and low-emissions transition (impacts from the economy moving towards low-emission production and products). The main conclusions were:

  • Many public and private buildings will be at risk: Buildings in flood zones will find it increasingly hard to be insured. 10,000 houses could become uninsurable. The value of buildings exposed to a one percent chance of flooding every year was estimated to be $6 billion from a predicted sea level rise, in addition to the current value of buildings exposed at sea level ($12.5 billion).
  • Droughts, storms, and floods will reduce economic activity: In the face of natural disasters, assets will be damaged, productivity will reduce, and supply chains will be disrupted. The primary and tourism sector will likely be the most impacted from the effects of natural disasters. The estimated impacts of droughts could cause GDP to be 0.5 percent lower in 2061 and storms could reduce GDP by 0.7 percent, compared to their forecast growth baseline. These events were considered in isolation, and were not considered alongside sea level rise and temperature increases. Both of these factors would increase the severity of storms and droughts.
  • Reducing emissions will impact some industries negatively: The economy will favour industries that emit the least, which will mean agriculture and manufacturing will likely reduce output, while low and negative emitters, such as forestry, will increase output. Māori are over-represented in the workforce of high-emitting industries (23 percent, while comprising 17 percent of the population), which means a high number of Māori households are at risk of experiencing negative impacts to their income as high emitting industries reduce output.
  • The flow of emissions revenue and spending is uncertain: If Aotearoa New Zealand does not meet its emissions targets, the government will be required to mitigate the shortfall by financially supporting offshore emissions reduction activities. The estimated cost of offshore support ranged from $3.3 billion to $23.7 billion. The pricing of offshore mitigation programmes relies on the existence of such programmes, and other countries meeting or exceeding their targets. If many countries do not meet their targets and few programmes exist, the cost to support these programmes will likely be much higher. On the other hand, revenue from the Emissions Trading Scheme (ETS) could provide between $2.4 billion and $6.2 billion to Aoteaora New Zealand.

Will we achieve our future emission targets?

Aotearoa New Zealand met its 2020 emissions reduction target. Between 2013 and 2020, gross emissions equalled 636.6 million tonnes of carbon dioxide equivalent (Mt CO2-e). Forestry activities reduced this number by 123.3 million tonnes. A further 28 million tonnes were deducted from the previous period’s surplus. After these deductions, Aotearoa New Zealand met the 2020 target with 21.5 Mt CO2-e to spare.

The 2020 emissions target was much gentler than the upcoming targets in 2030 and 2050. Sharp changes will be needed to reduce emissions from primary industries and energy sources. The 2030 target, or the first Nationally Determined Contribution (NDC1), is set for net emissions to be a 50 percent reduction below the 2005 gross level. The following figure looks at the gap that must be bridged.

Source: Statistics New Zealand

From 2005, net emissions have fluctuated, and the 2030 target (calculated as 50 percent of 2005 gross levels) still feels a solid distance away. Between 2021 and 2030, the net emissions will need to accrue to this level. Arranging the data by emissions type and source highlights that gross emissions of methane and carbon dioxide have remained at around the same level for the last 15 years, the amount of carbon dioxide offset by land use, land-use change, and forestry (LULUCF) sector has been reducing steadily since 2012.

Source: Statistics New Zealand

Aotearoa New Zealand reached its 2020 target because the carbon captured by the LULUCF sector could offset enough gross emissions. Because the 2030 and 2050 targets are much more aggressive, high emitting sectors should not bank on carbon offsetting to save the day. The following graph shows the emissions share of Aotearoa New Zealand’s two highest emitting industries: agriculture and energy. Agriculture is responsible for most of our methane emissions (followed by waste), while the energy industry emits the most carbon dioxide.

Source: Statistics New Zealand

If Aotearoa New Zealand is to meet its emissions targets, gross emissions must decrease significantly. There are multiple plans at work that aim to make this a reality.

Emissions Reduction Plan

The Emissions Reduction Plan (ERP) is the flagship document that outlines Aotearoa New Zealand’s journey to a low-emissions economy. The plan approaches addressing agriculture and energy emissions differently.

The high-level approach to reducing energy involves commitment to:

  • Reduce emissions from energy generation by exploring more environmentally friendly ways of generation, such as solar and wind power
  • Reduce the demand for energy by improving the operational energy efficiency of homes, offices, and commercial buildings
  • Reduce the demand for energy by businesses.

The agricultural approach involves actions that will:

  • Incentivise farmers to reduce emissions by introducing a price on agricultural emissions from 2025
  • Accelerate getting tools, technologies, and practices to farms through the Centre for Climate Action on Agricultural Emissions
  • Fund tikanga-based agriculture programmes to support Māori aspirations
  • Increase the value of the forestry industry.

BERL looked at the emissions attributed to the three leading kinds of livestock farming in Aotearoa New Zealand: dairy, beef, and sheep farming. The data clearly showed that the strongest methane emitters are dairy cows. The ERP is careful to avoid explicitly stating that the production of milk from cows will have to decrease, and that dairy farmers will be the most likely to pay for emissions penalties if they are not able to adapt to the changing face of the country’s food and fibre industry. For such a transition to be just, these changes must not be delivered at the last minute. A miracle technology that allows cows to produce milk with minimal methane is unlikely to appear at a mass scale to save the industry.

Either way, it is clear that the impacts of climate change will be costly for households throughout the country, particularly as storms and droughts become more common and severe. If high-emitting industries do not reduce their emissions, further penalties will be felt, even more so if offshore mitigation does not materialise as the CEFA expects.