Climate Change and our Regional Economies
With Nick Davis / 9 January 2020
In this sixth instalment of our insight series on climate change, MartinJenkins Director Nick Davis draws on his presentation at last year’s Economic Development New Zealand conference to write about both the challenges and the opportunities that climate change presents for local government and regional economic development agencies in Aotearoa. This article was also published in the December 2019 issue of Mahi Tahi, the EDNZ journal.
The recent passage of the Zero Carbon Bill is an historic moment for climate change action in Aotearoa, paving the way for a period of significant policy reform to achieve a low-carbon future. An effective climate change response will involve not just addressing the immense risks of climate change, but also seizing the major economic opportunities that this global threat presents for New Zealand businesses and communities. It’s also clear that those risks and opportunities will be different from region to region.
A Bow Wave of new Climate Policies
We are already seeing what I believe is the bow wave of the coming climate-related policy reforms. Key changes so far include reforms to the Emissions Trading Scheme; the planned introduction of farm-level emissions pricing in the agriculture sector by 2025; the proposed Clean Car Standard and Feebate scheme; the $230 million Sustainable Land Use Budget package for transition support to the agricultural sector; the ban on future oil and gas exploration; and new funding of $26 million for a satellite to measure methane emissions from space.
We can expect to see more policies and government initiatives aimed at energy system transitions, including a significant shift to more renewable and low-emissions electricity generation; switching of process-heat fuels; electrification of private passenger vehicles and public transport; and use of potential new energy sources.
There’s also likely to be significantly more investment in science and research geared towards reducing the costs of and barriers to emissions reduction and towards a better understanding of the risks and implications of climate change.
We can also expect to see changes in government procurement practices, as well as financial sector reforms to mitigate the risks that climate change presents to the banking system, to encourage companies to report transparently on the risks they face, and to fund investments in climate adaptation in vulnerable areas.
This is not a Business as Usual policy environment. If we are to put ourselves on a credible path towards our long-term targets, then many of these policies must be in place within the next five years.
An uncertain transition pathway — but big payoffs from early action
There is significant uncertainty around the shape and timing of policy change and around how households and businesses will respond to new policies. There is also significant technological uncertainty, with many of the solutions not yet commercialised. But we do know that delay could be very costly.
Research for Westpac in 2018 contrasted two transition scenarios. Under the optimistic scenario New Zealand and the world take early climate action, with more investment in technology, significant decarbonisation through reduced industrial emissions, and major afforestation to offset gross carbon emissions.
The pessimistic scenario involves delays and uncertainty in the policy environment and therefore an uncertain investment environment, with slower uptake of low-carbon technologies and electrification domestically, and slow progress on agriculture. As a result, we need a more abrupt adjustment from 2030, with more rapid decarbonisation, in order to meet global temperature goals.
The economic outcomes under these two scenarios are very different. Our economy continues to grow under both, but early, deliberate action on climate change saves New Zealand $30 billion in GDP growth by 2050 compared with the pessimistic scenario, and results in a 32% lower carbon price. Clearly, acting early means more to gain and less pain.
The physical impacts of climate change: the Local effects
Climate change discussions are often framed around future risks — but the physical impacts of climate change are already starting to be felt. These translate into significant economic costs, including lower crop productivity, damage to infrastructure and other assets, disruption to transport networks, and adverse health effects.
There is uncertainty in the local effects of climate change in New Zealand, but some of the expected effects include rising average temperatures, particularly in the North Island; rainfall increasing in the west and decreasing in many eastern regions, with droughts more likely and more intense in the east; and rising seas, which are expected to increase coastal erosion and cause more frequent breaches of coastal protection structures and low-lying areas.
Some economic sectors will be affected more than others. For example land-based primary industries are expected to face significantly more droughts and extreme high temperatures. The transport sector’s most significant climate vulnerabilities are from higher temperatures, extreme short-duration precipitation events, flooding, and sea level rise.
Electricity generation and transmission could be significantly affected by rising temperatures and sea levels. Demand for electricity is expected to grow significantly, and large-scale investment in wind and solar will be needed within the sector. Our forestry sector could be significantly affected by an increase in bushfires, and a significant increase in supply may push prices downward.
The cost of the transition itself: Uneven outcomes across different sectors will create winners and losers
As well as the physical impacts, the process of transitioning to a low-emissions economy will entail significant economic costs, including a rising price of carbon on emissions-intensive activities.
The implications of the transition will not be evenly distributed across New Zealand’s economic sectors. In certain sectors some particularly big shifts are needed. For example, our electricity generation and distribution sector will need significant investment in wind, solar and geothermal energy sources, and some high-emissions plants will need to close. The transport sector will need investment in electrification of public transport and to encourage uptake of electric vehicles, and will also need to shift to lower-emissions methods for moving freight.
Our manufacturing sector will need to replace inefficient industrial heat processes with lower-carbon alternatives. Process-heat changes are also likely to be needed in schools, hospitals and homes. Potentially significant changes in land use are needed, away from high-carbon farming systems towards lower-intensity systems and forestry. Our tourism sector will need to respond to risks such as a significant change in global consumer attitudes to long-haul air travel.
Trade-exposed sectors that are emissions-intensive are most exposed to transition risks, with potential for declines in output and loss of jobs. Some of our most exposed industries include some of our largest firms, such as Fonterra and Methanex, which are significant employers in their local communities and significant contributors to regional GDP.
Those sectoral impacts translate into uneven impacts across regional economies, creating regional winners and losers.
The regional impact of the economic transition and physical impacts
When considering the regional impacts of climate change, it’s important to look at the combined effects of the physical impacts and transition impacts.
For some sectors, particularly agriculture, the physical impacts of climate change are expected to add to competitive pressures from the transition process, causing a double-whammy effect.
Regions with high-emissions profiles will be the most significantly affected, including those with significant concentrations in non-renewable electricity generation and large-scale high-emissions industrial processes. About two-thirds of employment in emissions-intensive, trade-exposed industries are outside of Auckland, Wellington and Christchurch, and some of these businesses are significant contributors to regional GDP.
Rural and provincial regions that depend significantly on land-based industries are also very exposed to both physical and transition impacts. They may also benefit from increased investment in forestry. In urban areas, the biggest exposures relate to transport and infrastructure, particularly in low-lying and coastal areas. The implications for tourism are harder to call, but it’s likely that tourism-dependent regions will also need to adapt and create climate-resilient forms of tourism.
But significant economic opportunities exist
Although our low-emissions transition will strand assets and reduce competitiveness in some sectors, it also offers significant opportunities for investment, including through the search for lower-carbon alternatives. Over the medium term, a rising carbon price can be expected to stimulate higher rates of innovation, leading to higher productivity.
A changing climate may also alter what can be grown where. The agricultural sector has opportunities to increase productivity and diversify in the face of climate change.
There are likely to be opportunities in many sectors — for example, renewable energy (solar, wind, geothermal and biomass), distribution technologies (metering and software), waste (waste efficiency, landfill natural gas production and distribution), livestock (manure management, and lower methane emissions improving feedstock efficiency), forestry consulting (expertise in degraded land, waste disposal, and conservation estates), transport (electric vehicles and battery technologies) and building (heating, cooling and insulation products).
A ‘triple dividend’ from building more resilient communities
Much of our built environment and productive sectors are in vulnerable locations, including coastal areas and flood plains. Not all communities have the same capacity to adapt, and socially and economically disadvantaged communities are among the most vulnerable.
As with mitigation, international evidence shows there are significant payoffs from early action to build resilience. A recent report by the Global Commission on Adaptation demonstrates that adaptation can provide a triple dividend in the form of avoided losses, economic gains, and social and environmental benefits.
The potential savings from investments that increase resilience are large when you consider that over the 10 years to 2017 climate change cost the New Zealand economy at least $120 million for privately insured damages from floods and a further $720 million for economic losses from droughts. These costs are only going to increase under a 1.5 degree global warming scenario.
We need to factor climate change into our economic development strategies and plans
So, what are the implications for central and local government, development agencies and economic development practitioners? There are six key takeaways:
#1 Build climate-change risk and opportunity assessment into regional development plans — Climate change risks and opportunities should be a key consideration when development strategies and plans are produced. It’s important to bring scientific and economic understanding together to develop a bottom-up picture of the potential impacts on large employers and key sectors, and of how businesses are responding to climate-related challenges.
#2 Take early action to build resilience in the face of risks to the built environment and infrastructure — Many communities on the coast and in low-lying areas will face significant challenges and hard choices, including managed retreat. Infrastructure will also come under significant pressure in certain areas from rising sea levels and extreme weather. It’s important to anticipate these challenges and put processes in place for building resilience and addressing these risks.
#3 Catalyse change in our cities — In urban areas, local government can play a role in catalysing a transformation to low-emissions transport, for example by ensuring there is adequate EV charging infrastructure and by accelerating the electrification of public transport.
#4 Enable low-cost renewable electricity and clean energy projects — In some parts of the country, councils and EDAs will have opportunities to support and enable investment in low-cost renewable energy, and to work with large industrial manufacturers to explore alternatives to fossil-fuel sources for process heat.
#5 Enable land use change to support more sustainable land use and reduction of agricultural emissions — The agricultural sector faces big challenges but there is much they can do to improve their emissions profiles — through good farm management practices, through smart decisions about alternative land use, and through offsetting. This will require significant behavioural change in the sector, and that needs to be supported.
#6 Provide targeted support to communities to ensure a just transition — And finally, there will be some communities that may potentially be hard-hit and need support to transition, including workers who may need retraining and businesses who need support to adapt.
A key economic driver for the next 30 years
Climate change is a planetary-scale issue and despite New Zealand’s relatively small contribution to it, the physical impacts of climate change and the policy response will have significant implications for our country over the next 30 years at least.
Along with demographic changes, and technological changes shaping the future of work, we can also expect climate change to be one of the major drivers of New Zealand’s economic strategy for decades to come, with significant consequences for jobs, incomes and livelihoods. This is a challenge and an opportunity that our regions need to respond to with early and energetic action.
About the author
Nick Davis is an experienced economist and public policy expert who has advised governments on a wide range of economic, regulatory and machinery-of-government issues. His key skill is breaking down problems to their essence, drawing on evidence and analysis to identify the best solutions, and packaging advice to decision-makers in ways that enable them to make confident decisions.
Nick has specialist skills in public policy analysis and evaluation, public sector financial management, and economic and financial analysis. Before joining MartinJenkins in 2004 he held senior policy roles at the New Zealand Treasury and Ministry of Economic Development, and worked as a regulatory analyst at Merrill Lynch International in London.
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