Soaring petrol prices are the first battleground in the Reserve Bank’s new climate challenge.
The Government’s decision to cut petrol excise and road user charges have made a small dent in inflation, but the bank’s monetary policy committee acknowledges that is at odds with the need to reduce the use of fossil fuels.
On Wednesday, the bank is publishing a consultation paper that looks at how it should address climate change as part of its remit. At present, its remit requires it to manage inflation and unemployment, with an eye to the Government’s policy on housing prices. But that could change.
Paul Conway, the bank’s new chief economist, says we need to use less oil – and the supply crisis caused by the pandemic and the war in Ukraine help with that. “The longer run game is to wean ourselves off fossil fuels, absolutely,” he tells Newsroom. “And globally, subsidies to fossil fuel industries are still huge, particularly in the developing world.”
“But then I think about the long-suffering consumer. How can we make that transition in a way that doesn’t overly penalise people or hurt people on the way through?”
The consultation paper asks what role monetary policy should play in addressing climate change.
“It’s a really good question. The impacts of inflation and interest rate settings on the transition to a low carbon economy is something we’re very aware of at the bank … I think climate change and housing are things that we have to be very cognisant of, as we’re setting monetary policy.
“We take it very seriously. We’re thinking hard about it.”
According to last week's Monetary Policy Statement, global oil prices and their pass-through to domestic petrol prices have played "a particularly large role" in the recent increase in tradables inflation.
"Oil prices are expected to remain relatively high, even as global demand softens," the statement says. "Prices have dipped slightly from recent peaks because of increased production and the recent release of global oil reserves. Dubai oil prices are expected to gradually return from about US$105 towards $80 per barrel, in line with risk-adjusted futures market pricing. Margins for refined oil products have risen significantly and are expected to keep fuel price inflation higher in the near term."
The rising cost of living, increasingly driven by the bank hiking the base interest rate, is also expected to affect demand for whiteware, furniture and perhaps vehicles.
“These transitions take a long time. So we're not going to get there this year, or next year. But slowly and surely, we need to swap out our car fleet of internal combustion engines for EVs.”
– Paul Conway, Reserve Bank
That could slow the transition to EVs, which had increased to 21 percent of passenger vehicles imports by the end of 2021. "The secondhand car industry is a bit flat at the moment," he says.
"These transitions take a long time. So we're not going to get there this year, or next year. But slowly and surely, we need to swap out our car fleet of internal combustion engines for EVs."
Conway warns that the cuts to petrol excise and road user charges won't stop the contribution of fuel prices to inflation; they will just temporarily suppress it before bouncing back up when the Government ends the excise cuts.
He says the overall contribution of the excise tax to the consumers price index is relatively low, though.
In the November 2021 Monetary Policy Statement, the bank published a chapter looking at how climate change would affect inflation and employment, in setting monetary policy.
It said isolating, quantifying and tracking the specific impacts of climate change on consumer prices was extremely challenging. Conway echoed that: he said it wasn't yet immediately clear if hiking interest rates would help or hinder the move to a lower carbon economy.
The November statement said there would be the obvious physical impacts, such as variations in growing conditions for crops, and more frequent and severe weather events.
But there would also be the transition impacts: "These are the outcomes of actions to limit climate change and its effects," it said. "They may be the result of government policy changes, consumer preferences for ‘green’ products, or pressure from investors and the public more generally. Government intervention is accelerating globally, with New Zealand recently making a commitment to reduce net greenhouse gas emissions by 50 percent by 2030."
In the near term, most of the price changes are upwards – and global production and distribution are already impacted. "For example, severe droughts in Brazil over the past two years have been boosting grain prices," the statement says. "The shift to renewable energy has created some challenges, such as energy shortages when demand is high. China temporarily introduced electricity rationing due to high coal prices and difficulties meeting emissions goals, as manufacturing-related electricity demand increased and extreme weather boosted demand for heating and cooling."
The impact on consumer prices would most starkly affect housing and household utilities, food and transport – but wouldn't be all bad news. So, for instance, while the cost of fossil-fuelled transport would rise inexorably, low-emissions production should become cheaper, with investment in new technology that could further reduce costs in low-emissions industries.
Now, the Reserve Bank has begun using consumer-generated data from the app Gaspy to get a real-time measure of petrol prices, rather than waiting for out-of-date Stats NZ figures.
According to Gaspy today, the petrol price rises in the past month have wiped out the 25c a litre savings from the Government's cuts to fuel excise.
The average price nationwide is $2.949 a litre for regular 91, up 24.5c in the past 28 days. The average diesel price is $2.651, up 22.6c over the same period. Diesel was selling as low as $1.557 a litre at Christmas.
The most expensive prices for all grades of fuel are consistently at the three service stations on Waiheke Island ($3.559 a litre for regular 91 this week) because of the added cost of shipping it over the Hauraki Gulf.
For the rest of New Zealand, the most expensive regular petrol today is $3.199 a litre at BP 2go on Jervois Rd, in Auckland's Herne Bay. The priciest diesel is $2.979 at Caltex on Abbotts Way, 10km away in Remuera. And the highest price for premium 95 petrol is at the Caltex service station in Highland Park, in east Auckland.
Conway says the use of Gaspy stats is part of a "data revolution". He expects the bank will start using other real-time data as well, such as supermarket scan data to measure the price of food.