Treasury asks for economic plan to pay for climate crisis

The destruction of state highway 25A, in the Coromandel, was a disaster for the Coromandel community that depended on it. They endured extra travel time and costs, limited access to healthcare and education, impacts to freight, businesses, tourism and disruption to day-to-day life.

Its speedy rebuild was a triumph. The new $43 million, 124-metre-long Taparahi Bridge swoops over the ravaged native forests below. From storm-smashed woe to go took just 11 months, according to an Infrastructure NZ report to the Transport Minister today.

But it didn’t come cheap. And, say the authors, “we shouldn’t have to rely on emergency situations to drive high performance and faster pace in the building of our critical infrastructure”.

Their small case study of one storm remediation project highlights a much bigger question: how does New Zealand find the money, plant and skilled workforce to rebuild and strengthen its homes, businesses and infrastructure as climate change bears down like another cyclone?

The Government says it’s committed to New Zealand’s path to net zero by 2050; now the Treasury is challenging the new ministers on how they’re going to pay for such a dramatic economic transformation.

Increased storms and droughts could add another 4 percent of GDP to New Zealand’s net core Crown debt by 2061, Treasury modelling shows. The Lloyd’s insurance marketplace assesses New Zealand as having the second-highest risk of annual losses in the world, behind Bangladesh.

The $3.5b in insurance claims for last year’s Auckland Anniversary Floods and Cyclone Gabrielle are double all of New Zealand’s large weather events in the previous 10 years combined.

Unreported in Treasury’s briefing to new Minister of Finance Nicola Willis, her key officials say paying for climate mitigation and adaptation will need an economic plan with full buy-in from ministers and the private sector.

They’ve been warning for years of how hard the climate would hit the government books; now that time has come. “Some of the challenges that could impact on public finances … are here now. The impacts are potentially large.

“Demographic change and climate change are increasing demand on government expenditures and this will grow over time.”

“These severe weather events are only going to get more frequent and worse. We’re experiencing the best weather we’re going to see in our lifetimes, now.”

Dr Caralee McLiesh, Treasury

Treasury says market mechanisms such as emissions pricing should be at the core of a portfolio approach to climate change.

The officials directly challenge the Government to state its position on the contentious question of forestry offsets in the emissions trading scheme. “The emissions price required will depend on several factors, including the degree to which governments wish to leverage relatively low-cost forestry offsets to achieve targets,” they say. “It will be important that the direction of travel is clearly communicated to support market confidence to invest.”

Dr Caralee McLiesh, the Secretary of Treasury, has expanded on her officials’ arguments in a speech to the New Zealand Economic Forum at Waikato University. The Government will need to tighten its belt, borrow no more than what it can repay in a future of modest growth,

“We’ve recently experienced how climate change is likely to impose large fiscal and economic costs, as well as devastating human, environmental and social costs, both now and into the future,” she says. “We estimate the economic costs of Cyclone Gabrielle and the floods is somewhere between $9 billion and $14 billion.”

Increasing impact of severe weather on NZ general insurance

As well as the $3.5b in insurance claims, the Government has contributed $4.7b to the response – thus far.

“And as we know, these severe weather events are only going to get more frequent and worse. We’re experiencing the best weather we’re going to see in our lifetimes, now.”

She says New Zealand faces a structural, generational challenge to fiscal policy.

“These challenges – the ageing of the population, climate change and geopolitical fragmentation – really illustrate that achieving sustainability in our public finances is going to require either tight control of expenditure growth, or stronger revenue growth, or both.”

And McLiesh has found backing from one of the public sector’s most senior voices.

A bridge to the future

Sir Brian Roche chairs the Cyclone Gabrielle Recovery Taskforce, intended to be the bridge between local authorities, the government and the private sector in the project to rebuild. He and the other taskforce members are nearing the end of their 12 month terms.

Roche also grew up in Hawkes Bay. He went to St John’s College in Hastings, which opened its doors to the community in the days after the cyclone, to provide food and showers.

“It is encouraging to see that The Treasury has identified climate change funding as a key issue in their briefing to the incoming minister,” he tells Newsroom.

He agrees that the Government needs a new sustainable funding model for climate mitigation and adaptation. “That’s the very question that the policy work needs to address.

“We’re facing numerous funding and policy hurdles and in reality our current model doesn’t seem to be fit for purpose any more. The frequency and severity of extreme weather events requires us to find a model that is sustainable. 

“While both local and central governments have admirably handled the challenges of the events from last year, it’s clear that relying on a ‘pay as you go’ approach and dipping into the yearly budget isn’t sustainable.”

He singles out the Earthquake Commission as an example, with its annual set-aside funds – is that a template we should adopt for climate adaptation?

Central and local government are involved in a scalding game of “risk hot potato”, as Professor David Frame puts it, with residents and insurers.

But Roche argues insurance will continue to have a role to play alongside central and local government, business, community, iwi and individuals. 

“The key is what that actually looks like in practice,” he says. “The events of last year have highlighted a number of issues around mitigation such as land use and having a common understanding of what a natural hazard or risk is. This is a very complex technical and human issue that will be challenging.”

Will insurance companies ‘retreat’ from homes, businesses and infrastructure in some flood- or storm-prone areas?

“The size of the land areas that might be affected are unclear but clearly, and as evidenced by the categorisation by local councils in Hawkes Bay, there are some areas where they believe people should not reside,” Roche says.

“They have determined that there is risk to life which suggests that while the land can still be used for orchards etc, people shouldn’t reside there. 

“As can be seen from recent events these are really difficult conversations, and they’re very emotionally charged because we’re talking about where people have built their lives. But they are issues that we just can’t wish away.”

Strategic retreat from risk

Roche says decisions about where we build and where we inhabit are pretty fundamental. We have huge design standards for earthquakes – where, he asks, are those design standards for floods?

New Zealand needs far more transparent data for people deciding whether to buy or build in areas that come with risk. With the right data, people are rational. They will modify their behaviour.

Roche draws on his experience chairing the cyclone taskforce, negotiating over who (government, councils, insurers or owners) would pick up what tab for homes and businesses that couldn’t be recovered.

Roche says New Zealand needs better climate risk data, and a better understanding of what a hazard is. That should be a common data set that is made available, to inform decisions.

That is echoed from the other side of the table, by Amanda Whiting, chief executive of New Zealand’s biggest insurer. IAG has the AMI, State, NZI, NAC, Lumley and Lantern brands, as well as providing the general insurance products sold by ASB, BNZ, Westpac and The Co-operative Bank.

It’s just reported its half-year results – six months in which it collected more than $2b in premiums. That’s contributed to a bigger half-year profit – but IAG and its customers aren’t out of the woods.

The company says it’s received more than 52,000 claims from both the North Island floods and Cyclone Gabrielle, most of which have now been settled. Its insurance payouts have topped $1 billion, a number second only to the Canterbury earthquakes.

Whiting insists the company will try to ensure New Zealanders have contined access to appropriate insurance cover, and will work closely with local and central government on flood resilience.

“To keep New Zealanders safe, and insurance available and affordable, we must reduce flooding and natural hazard risk through good planning decisions, investment in protection and resilience measures, and where necessary, through relocating people away from at-risk properties.”

The Treasury officials say the same. Effective adaptation action will involve getting better information on climate related risks, they say in their briefing to the Finance Minsiter.

It will require a planning system that supports risk mitigation; a clear articulation of how costs will be shared across central and local governments, communities, businesses and asset owners; and statutory frameworks that enable a range of options for how communities adapt.

“Establishing clear roles and responsibilities for an enduring approach to severe extreme weather events can also ensure the economy is more resilient and prepared for shocks.”

For the people

Soon after Dr McLiesh’s speech, Sir Brian Roche took part in a panel discussion at the Economic Forum. “This all feels overwhelming,” he said. “And it’s not.”

New Zealand needs to draw a line. There are the solutions for the floods and storms that have already hit, and there are the proactive solutions for those storms still to come.

We need to stop repeating the same mistakes, he says. “I think the role of government, actually, is to not blink in the eye of complexity. And my last bid to them is, please deal with the emotional dimensions. You know, we have to do it for people, not to them.”