The sharp contrast of bush fires and flooding in Australia has been blamed by some on climate change. While attributing any particular event to changes in the climate is difficult, an increasing frequency of such extreme events is expected under climate change. This applies to New Zealand as well.
Meanwhile our Emissions Trading Scheme is under review by a select committee to ascertain if modifications could lower the cost to New Zealand of meeting our Kyoto obligations.
These two news events capture almost all of the debate on climate change. That is, what will be the economic effect of climate change (acting on agriculture and energy supply for example) and what will be the economic effect of different policies to reduce New Zealand’s emissions of greenhouse gases. There is, however, a third dimension to the effects of climate change on the New Zealand economy – what we might call the indirect international 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 interpretations of New Zealand’s actions to reduce greenhouse gas emissions and the associated possibility of trade barriers. In other words, if we do nothing to reduce our emissions, or if we are seen by others as not doing enough, we might face the prospect of retaliatory trade policies that could cost our economy more than reducing our emissions.
- The food miles controversy. Under an appropriate carbon price this debate is devoid of economic merit. The real problem though is consumer perception accompanied by protectionist politicians and lobby groups. The issue has the potential to spread to other areas such as the propensity of foreign tourists to travel long distances.
- The number of emission units that New 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 for biofuel production on agricultural commodity prices or, more generally, the effects of 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 consensus about whether prices will rise or fall as a result of climate change. Much depends on how quickly climate change occurs, on the extent to which countries adapt agricultural practices to different climates, and on international trade policy. Another factor is the strength of the fertilisation effect of more CO2in the atmosphere. Without CO2 fertilisation agricultural prices will probably increase. Assuming an increase of 10%, which is consistent with international research, generates a permanent lift household spending in New Zealand of about $120 per person per year. If the CO2 fertilisation effect is strong, such that other countries can increase their agricultural output and become more self-sufficient, world commodity prices will fall and household spending in New Zealand would eventually be lower by about $170/person/year, but transitional effects could worsen this.
Overseas sentiment about food miles is not well understood. A possible insight is some recent research with respect to the issue of genetic modification, which estimated a permanent drop in household spending of about $200/person/year if genetically modified crops deter foreign consumers from New Zealand products. As with genetic modification, the food miles issue requires robust data and sound argument to allay consumer fears and misunderstanding.
With regard to the effect of international agreements, our modelling shows that tightening New Zealand's allowance by 10 Mt of CO2 (about 13% of current emissions) reduces household spending by a permanent $320/person/year, after adjustment costs – a strong reason to for us to tread carefully in post-Kyoto negotiations.
We can compare these results with the direct effects of climate change on the economy. Using past droughts as a guide, which may not be reliable as the consequences of relatively rare droughts may not be the same as those of a consistently drier climate, suggests an effect on household spending of $150-$200/person/year. The key issue here is whether shifts in land use under climate change will be easier or more difficult than has been the case in the past. Other industries such as tourism and horticulture may also be affected by climate change, but even the direction of the effects, let alone their magnitude is difficult to gauge.
Precise numbers though, are not the issue. The lesson to be drawn from the above is that we risk becoming pre-occupied with the debate about the finer points of our Emissions Trading Scheme or with how farming will fare under a drier climate, when how the rest of the world is affected by climate change and what it does in response is probably going to be just as important. Indeed, given the potential for international conflict as countries argue about water shortages, energy security and burden sharing with respect to emission reductions, the indirect international effects of climate change will likely dominate most other economic issues that will confront New Zealand over the next few decades.