The mystery at the heart of the Climate Commission's strategy

13 March, 2021

The Climate Change Commission’s draft plan for how New Zealand will reduce emissions is nothing if not ambitious.

The commission recommends re-shaping cities to walk and cycle more, less coal and more renewables. It wants subsidies for native trees and electric vehicles, and considers Zero Emissions Zones in city centres that can only be accessed by electric vehicles. That is only a sample of what they are proposing.

This is Think Big, only bigger.

The commission’s most radical recommendation is to ban imports of petrol and diesel light vehicles by 2032. If implemented, the policy would have consequences for every household and business in the country.

Of the 260,000 new and used light passenger cars imported into the country in 2019, just 2 per cent were electric.

But mystery surrounds how the Commission could have reached its far-reaching conclusion to ban non-electric imports.

The commission’s recommendations are based on findings from its economic modelling. The models work out the least-cost ways to reduce emissions in future years.

Research including analysis by the commission suggests EVs are currently a relatively expensive way to reduce emissions relative to alternatives.

The mystery is how the commission’s models which solve for least cost could have arrived at an EVs-first strategy.

The commission’s EVs findings are likely the result of assumptions fed into its models, specifically the assumed values for the cost-effectiveness of EVs which are called “marginal abatement costs”. These costs may be driving the Commission’s EV strategy.

Despite releasing a mountain of other data from its models, the Climate Commission refuses to release its assessment of these marginal abatement costs. It has not provided a plausible reason.

Here is what may be going on.

In 2018, the Ministry of Transport published a study which looked at using a feebate to encourage EVs. Feebates place a levy on petrol and diesel cars to subsidise EVs.

In the study, the ministry estimated a marginal abatement cost, that is the per-tonne cost of reducing emissions using feebates.

The ministry reached the extraordinary finding of a negative abatement cost, negative $266 per tonne to be exact. Effectively, it said feebates could both reduce emissions and save their owners money. The elusive free lunch.

The finding implies most car buyers – 250,000 of them each year – walk past $20 bills on the pavement by not choosing to buy EVs. “A ‘rational’ individual would automatically choose the best option,” says the ministry.

Economists are usually sceptical about claims of sustained irrational self-harm across whole populations.

The more plausible explanation for negative costs is that the ministry counted all the benefits of owning an EV but only some of the costs.

Overseas research reaches a different conclusion on EV abatement costs. According to the Economist, the cost per tonne performance of EVs may be nearer +$1500 in New Zealand dollars.

Transparency now has a premium. The suspicion is that the commission’s draconian recommendation to ban petrol and diesel imports may be the result of questionable assumptions. Another possibility is that the commission’s recommendations might be the result of a catastrophic error.

Either way, New Zealand is staring down the barrel of unprecedented economic reforms without assurance that the supporting analysis is sound. That concern is easily resolved with transparency, which the Climate Change Commission is resisting.

The objection is not to electric vehicles per se, which work well for some people, and on current trends will become competitive in the 2030s, according to analysis by the Climate Commission.

Unfortunately, concerns with the commission’s approach go well beyond EVs and lack of transparency.

It appears that many of the commission’s recommendations do not have so much as a back-of-the-envelope calculation to support them. That is no way to do any kind of public policy, let alone the most significant reforms of a generation, and especially for climate change.

Governments around the world have real trouble with emissions. All too often, studies find emissions policies either raise emissions or provide only trivial benefits.

Good analysis matters more for climate than almost any other area of policy, a point which was well illustrated by the Interim Climate Change Committee, the predecessor to the Climate Commission.

In 2019, that committee looked at various policies and technologies, ranking them according to their cost per tonne performance. Results ranged from $250 per tonne abated (pumped hydro) to $89,000 per tonne (battery storage).

What makes these findings useful are the consequences for prosperity. At $250 per tonne, reducing emission to net zero costs about 5 per cent of GDP. At $89,000, it’s a whopping 1500 per cent of GDP. Only careful analysis can reveal these enormous gaps in performance.

So why is the Climate Change Commission sending some, perhaps most, of its recommendations to the government without an analysis of the costs and benefits for each recommendation?

Inexcusably, the commission appears to be proposing the most significant reforms in the country’s history while flying blind.

Late last year, the commission chair Dr Rod Carr justified limited analysis saying the commission’s advice offers no more than a “direction of travel.” Analysis can come later with the “actual development of the black letter regulation”.

Given the breadth and specificity of the commission’s draft recommendations, this is a deeply irresponsible view from a senior and influential public servant.

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