New Zealand’s low-carbon transition will place a cost on the economy, but the physical impacts of climate change and climate inaction are also expected to cost billions, according to a new Treasury report.
The Climate Economic and Fiscal Assessment represents the first attempt by the Government’s economic advisors to sum up the expected impacts of climate change in dollar terms.
It finds climate change-fuelled storms, floods and droughts are likely to reduce New Zealand’s GDP. That builds on findings from 2021, which said GDP will be 0.6 percent lower in 50 years because of droughts attributed to climate change and another 0.7 percent lower because of storms. Government debt as a percentage of GDP could rise by about 4 percent over the same time period, as the burden of responding to extreme weather increases.
More than half of New Zealand’s exports come from sectors with a relatively high exposure to climate damages, the Treasury finds.
As sea levels rise, more and more coastal property will also be vulnerable to flooding. Currently, $12.5 billion in assets are in the coastal flood zone, but this could double with 60cm of sea-level rise – likely to happen this century under current global climate policies.
Māori are disproportionately exposed to climate risk.
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The transition to a low-emissions economy may also come with some costs, however. GDP in 2050 was likely to be about 1.2 percent below what it would be otherwise, according to modelling from the Climate Change Commission and Westpac. Those numbers were backed up by international findings, the report said.
Higher carbon prices would have a regressive impact on low-income households and on Māori, Treasury officials added.
However, there are also benefits which have yet to be quantified. Air pollution from vehicles currently has a social cost of $10.5b a year, which would largely be averted with mass electrification of transport. Warmer, drier houses would also improve health and reduce health system costs.
Both physical climate impacts and the move to a net zero economy will have an impact on the Government’s books.
The Crown’s fiscal liability from natural hazards will grow faster than its revenue over the period to 2050 – which is partly why it will have to take on more debt to respond to disasters.
The Government may also have to bankroll some of the low-carbon transition, which could cost between $3.8b and $11.5b, officials said.
There are also costs to inaction, however.
The Treasury report is the first real attempt to quantify the costs of meeting New Zealand’s climate target under the Paris Agreement. Even so, given the large uncertainties involved, officials warned the estimates “should therefore be treated as highly illustrative and not as forecasts or projections”.
Updated in late 2021, the Paris target covers the years 2021 to 2030 and is significantly more ambitious than our domestic emissions budgets. The gap between the Paris target and the domestic budgets is expected to be filled through paying for emissions reductions overseas – by purchasing foreign carbon credits or funding climate projects in other countries.
If New Zealand reduces emissions at home by more than needed to meet the budgets (and therefore reduces the foreign burden to some extent) and faces a low price for overseas purchases, meeting the target could cost about $3.3b. If it instead follows the current policy projection and faces a high carbon price, the cost rises to $23.7b. A middle ground scenario sees the Government fork out $8.6b to meet the target over the next eight years.