Another view of climate change

The sharp contrastof bush fires and flooding in Australia has been blamed by some on climatechange.   While attributing any particular event to changes in the climate isdifficult, an increasing frequency of such extreme events is expected underclimate change.   This applies to New Zealand as well.

Meanwhile ourEmissions Trading Scheme is under review by a select committee to ascertain ifmodifications could lower the cost to New Zealand of meeting our Kyoto obligations.  

These two newsevents capture almost all of the debate on climate change.   That is, what will be the economic effect ofclimate change (acting on agriculture and energy supply for example) and whatwill be the economic effect of different policies to reduce New Zealand’s emissions of greenhouse gases.   There is, however, a third dimension to theeffects of climate change on the New Zealand economy – what we might call the indirectinternational effect.   This has a number of manifestations:

  • The direct effects of climate change on other countries.   The foremost consideration here is probably how different growing conditions in other countries affect agricultural commodity prices in world markets.     A rise in world prices would clearly benefit New Zealand.  
  • Immigration – will New Zealand face pressure to allow more immigrants from island states that are increasingly exposed to storms and rising sea levels?
  • Possible adverse foreign interpretationsof New Zealand’s actions to reduce greenhouse gas emissions and the associatedpossibility of trade barriers.   In other words, if we do nothing to reduce ouremissions, or if we are seen by others as not doing enough, we might face theprospect of retaliatory trade policies that could cost our economy more thanreducing our emissions.
  • The food miles controversy.   Underan appropriate carbon price this debate is devoid of economic merit.   The realproblem though is consumer perception accompanied by protectionist politicians andlobby groups.   The issue has the potential to spread to other areas such as thepropensity of foreign tourists to travel long distances.
  • The number of emission units thatNew Zealand might be obliged to purchase on world markets beyond the Kyoto first commitment period which expires in 2012, or the price of those units.
  • The effect of subsidies forbiofuel production on agricultural commodity prices or, more generally, the effectsof more land being used to grow biofuels rather than food.  

Research in these areas is sparse.  With regard to international food prices for example, there is little consensusabout whether prices will rise or fall as a result of climate change.   Muchdepends on how quickly climate change occurs, on the extent to which countriesadapt agricultural practices to different climates, and on international tradepolicy.   Another factor is the strength of the fertilisation effect of more CO2in the atmosphere.   Without CO2 fertilisation agricultural priceswill probably increase.   Assuming an increase of 10%, which is consistent with internationalresearch, generates a permanent lift household spending in New Zealand of about $120 per person per year.   If the CO2 fertilisation effect isstrong, such that other countries can increase their agricultural output andbecome more self-sufficient, world commodity prices will fall and householdspending in New Zealand would eventually be lower by about $170/person/year,but transitional effects could worsen this.

Overseassentiment about food miles is not well understood.   A possible insight is somerecent research with respect to the issue of genetic modification, whichestimated a permanent drop in household spending of about $200/person/year if geneticallymodified crops deter foreign consumers from New Zealand products.   As withgenetic modification, the food miles issue requires robust data and soundargument to allay consumer fears and misunderstanding.

With regard to the effect ofinternational agreements, our modelling shows that tightening New Zealand’sallowance by 10 Mt of CO2 (about 13% of current emissions) reduceshousehold spending by a permanent $320/person/year, after adjustment costs – astrong reason to for us to tread carefully in post-Kyoto negotiations.

We can compare these resultswith the direct effects of climate change on the economy.   Using past droughtsas a guide, which may not be reliable as the consequences of relatively raredroughts may not be the same as those of a consistently drier climate, suggestsan effect on household spending of $150-$200/person/year.   The key issue here iswhether shifts in land use under climate change will be easier or moredifficult than has been the case in the past.   Other industries such as tourismand horticulture may also be affected by climate change, but even the directionof the effects, let alone their magnitude is difficult to gauge.

Precise numbers though, arenot the issue.   The lesson to be drawn from the above is that we risk becomingpre-occupied with the debate about the finer points of our Emissions TradingScheme or with how farming will fare under a drier climate, when how the restof the world is affected by climate change and what it does in response isprobably going to be just as important.   Indeed, given the potential forinternational conflict as countries argue about water shortages, energysecurity and burden sharing with respect to emission reductions, the indirectinternational effects of climate change will likely dominate most othereconomic issues that will confront New Zealand over the next few decades.

Enjoyed this article?

You might like to subscribe to our newsletter and receive the latest news from Infometrics in your inbox. It’s free and we won’t ever spam you.