Taking faster action on climate change could save New Zealand $30 billion by 2050, according to new research commissioned by Westpac.
The research, carried out by EY and Vivid Economics, shows New Zealand’s economy could be tens of billions of dollars better off if early action is taken to meet our Paris commitment to help keep global warming to less than two degrees Celsius.
Westpac NZ Chief Executive David McLean said the research showed the benefit of early and consistent action to tackle climate change and New Zealand needed to accelerate its response.
“This research demonstrates the importance of taking immediate steps to cut our greenhouse gas emissions. The alternative is waiting and taking action later, but that is likely to require more drastic changes in behaviour and over the long-term hit people harder in the pocket,” he said.
The report models two scenarios – one that involves an earlier and smoother transition to a lower carbon economy, and another in which substantive action to reduce emissions is delayed for more than a decade.
The modelling indicates the economy would benefit by $30 billion by 2050 if government, businesses and households took early action, Mr McLean said.
“If we wait to take action on climate change it may mean a very slightly healthier economy in the near term, but this gain would be lost in future as emissions-intensive sectors were forced to play catch up.”
Mr McLean said the finance sector had a major role to play in helping New Zealanders transition to a low carbon economy and Westpac was stepping up its efforts to help curb climate change.
“Our lending to green businesses that are helping to provide solutions to climate change stands at $1.5 billion. We’ve set a new target to lift that to $2 billion by 2020. We’re also committing to reducing our own carbon emissions by another 25%.”
Westpac has decreased its own carbon emissions by 38% since 2012 and offsets the remainder of its emissions through the purchase of New Zealand carbon credits to be carbon neutral. Over the same period it has reduced lending to companies involved in fossil fuel extraction and production by 55%.
Mr McLean said Westpac had commissioned the EY report to get a better insight into the risks facing the bank from climate change, and is making the contents freely available so that other companies are informed.
“The research clearly shows that climate risks are also financial risks.
“Westpac wants to provide useful financial information to our customers so they can plan ahead. It’s part of our commitment to help grow a better New Zealand,” said Mr McLean.
Westpac NZ General Manager of Corporate, Commercial and Institutional Banking, Karen Silk, said lots of businesses wanted to take action on climate change but had questions about when and how this should be achieved.
“Hopefully this research provides some guidance around the long-term risks and opportunities in different parts of our economy that will help businesses with their long-term planning.
“We believe businesses need to be thinking about and planning for climate change now, not only from a risk perspective, but also for the growth opportunities it presents to many parts of the economy. Smart companies should start focusing on those opportunities as part of their business strategy.”
As well as analysing the industry risks in transitioning to a two-degree economy, the report authors also looked at the physical threats posed by climate change to five key sectors.
They found agriculture and tourism would be disrupted by climate events, while forestry would be at risk of wildfires. Electricity and transport would also be affected, but would become a focus for decarbonisation and could experience growth in demand.
- Two scenarios were mapped out: the central scenario modelled an early and smooth transition by NZ businesses to meet climate obligations. The shock scenario anticipated more than a decade of inaction on emissions reduction, followed by more aggressive action from 2030.
- The modelling shows that NZ can decarbonise towards a two-degree target while achieving economic growth.
- A key difference between the scenarios was the timing of the inclusion of agriculture within the NZ Emissions Trading Scheme (ETS). Other factors included improvements in technology, the purchasing of carbon credits, and the rate of afforestation.
- The modelling indicated the central scenario would create $30 billion more GDP through to 2050 than the shock scenario.
- Agriculture faces challenges in a two-degree aligned economy, but the industry is projected to be better off from an early, phased, introduction to the NZ ETS, rather than a more rapid entry later on.
- Growth is not projected to be evenly distributed. Renewable electricity sources such as wind, hydro and solar will be among those industries to prosper, alongside fishing and non-ferrous metals, while fossil fuel industries will contract.
- A sector’s capacity to decarbonise is positively correlated with projected growth.
- The report also looked at the physical threat posed by climate change to key NZ industry sectors.
- Electricity generation and transport will likely experience physical disruption from climate change but will become a focus for decarbonisation and may see increases in demand.
- Forestry will likely face significant fire risk but be an important sector in the transition to a two-degree economy.
- Drought, wildfires and glacial retreat will likely increase in frequency and cause economic loss and operational disruption for agriculture and tourism, as evidenced by past climate events.
What does this report tell us?
- EY modelled two scenarios and found there would be economic benefits over time if New Zealand industries took earlier action, allowing a more gradual adjustment, rather than waiting for many years and facing a higher cost and more disruption.
What were the differences between the two scenarios?
- One of the main differences between the scenarios was the timing of the introduction of agriculture into the New Zealand Emissions Trading Scheme. But the researchers also looked at other factors, such as improvements in technology, the purchasing of carbon credits, and the rate of forestry growth.
How much does New Zealand stand to benefit if the Government and industries act proactively?
- The average Gross Domestic Product growth is forecast to be 2.015% per year until 2050 if industries take early action on addressing climate change. If substantive action is delayed and companies have to play catch-up later, this falls to an average of 2.005%. The cumulative difference is NZD$30 billion.
What does the report mean for households?
- Steps to reduce emissions will change relative prices for households. Carbon intensive products such as meat and air travel will become relatively more expensive, while less carbon-intensive goods and services, such as bread and internet connections, will become relatively less expensive. The idea is that households will adjust what they are consuming in a way that is consistent with a lower-carbon economy.
Why has Westpac commissioned this research?
- We think climate change is the biggest environmental issue we face. It is a major threat to New Zealand’s economy and our wellbeing. Westpac Group was the first bank in Australasia to recognise the importance of limiting global warming to two degrees. We specialise in minimising financial risks and maximising opportunities and we want to help our customers manage the transition. We also want to ensure capital investment flows to the parts of the economy where it is needed. We need to tackle this with urgency – the longer we wait the higher the cost and disruption we could face.
What is Westpac doing about climate change?
- We currently provide $1.5 billion in lending to companies providing climate change solutions (e.g. green buildings, forestry, green waste, low carbon transport) and our lending exposure to fossil fuels has decreased by 55% over the past five years to $318 million. Westpac is the only New Zealand bank to regularly publish its lending exposures to both businesses providing climate change solutions and those involved in fossil fuel extraction and production. See http://westpacsustainability.co.nz/ for more information.
What would be the impact if New Zealand did nothing?
- The research did not look at this scenario. The study assumes New Zealand meets its commitments to keep warming at less than two degrees Celsius, and modelled the impact to the economy of taking action at different times. The modelling shows that growth under both scenarios would be slightly lower than if NZ took no action on climate change, however the modelling does not take into account the cost of physical impacts of climate change from things like drought, damaging storms and fires – as this is too complex to model. However, these costs are expected to be substantial and the report states the associated cost will be higher the less action we take to tackle climate change.
Which industries benefit and which face greater challenges as a result of economy-wide efforts to tackle climate change?
- Industries that can decarbonise more easily fare the best. These include renewable energy, transport and manufacturing. Fossil fuel industries contract in both scenarios. Of the two scenarios, agriculture performs better economically under the proactive actions associated with the central scenario.
What sort of action does the report envisage?
- The report analyses probable changes to industrial practices. Under the central scenario, significant investment in research and development would bring new technologies that reduce emissions. The electrification of passenger and freight vehicles would enable industries to reduce the intensity of emissions. Agriculture would be phased in to the NZ Emissions Trading Scheme from 2020. Additionally, this change in policy would precipitate a change in land-use from agriculture to forestry.