The Parliamentary Commissioner for the Environment has recently provided some long-awaited policy analysis on the 2018 Government decision to not grant any new offshore petroleum prospecting, exploration or mining permits. The Commissioner’s Note “Restricting the production of fossil fuels in Aotearoa New Zealand” aimed to extend the existing analysis on the environmental effectiveness and likely economic impacts of the ban. As noted by the Commissioner, when the ban was announced, limited analysis was offered, and the stakeholder consultation process was truncated. The Commissioner noted that the absence of a strong evidence-based case for the ban (together with suggestions it may even increase global emissions) has done the ban “few favours”.
Given the contribution of over $2.5 billion to GDP by the oil and gas producers, the many thousands of jobs employed directly and indirectly by the industry and the payment of $650M per year in royalties, the (belated) analysis of the ban is welcome. In that respect, the Commissioner opines that while the ban has been framed by the Government as a climate policy, its most immediate impact is economic.
Economic Costs
The Ministry of Business, Innovation and Employment (MBIE) assessed the fiscal costs and lost revenue to the Crown as part of its Regulatory Impact Assessment. To do so, MBIE modelled three scenarios of the impact. The Commissioner found that an inappropriate discount rate was used by MBIE, contrary to Treasury advice, and that one or possibly two of scenarios were not “particularly realistic”. For example, one of the scenarios reflected a world where countries take no further action at all on climate change, and that even the middle scenario failed to reflect NZ’s own stated level of climate policy under the Paris Agreement. This the Commissioner considered to be somewhat surprising, as was the fact that the Climate Change Response (Zero Carbon) Amendment Bill was not broadly taken into account, even though it had not passed at that stage.
The Commissioner agreed with MBIE analysis of the impact of the ban on GDP and noted “the available modelling analysis leaves little room for argument that the economic impacts of the ban are likely to be measured in billions of dollars”.
Although not a direct economic effect, the Commissioner noted that since the introduction of the ban, the perception of NZ as possessing a stable policy environment has changed.
Energy Affordability
The Commissioner concluded that the ban is likely to have an (adverse) impact on natural gas prices and, in turn, electricity prices.
Environmental effectiveness of the ban
The ban was found to likely have little impact on domestic emissions from electricity generation if the NZ ETS price is significantly higher than presently. In the short term, thermal peaking plants will continue to provide the peaking capacity, albeit at a higher cost.
No meaningful contribution to the global reduction in emissions were found by the Commissioner to arise from the ban (other than it could catalyse some “international momentum” for reducing the flow of investment into fossil fuel supply).
Legitimate claims and acknowledgements
The Commissioner adopted a rather unusual approach by dividing his concluding findings, outlining what those who support or oppose the ban can legitimately claim and what each grouping must acknowledge.
Those that support the ban can legitimately claim that:
It will likely reduce domestic emissions through a reduction in fugitive emissions and if Methanex closes one or more methanol production facilities then there may be a reduction in domestic emissions;
It unravels the contradiction of reducing domestic emissions while continuing to seek to profit from extracting fossil fuels;
The credibility of NZ’s negotiating position in international climate change negotiations is strengthened;
It reduces the risk of capital and jobs being stranded should there be a sharp future contraction in oil and gas industries.
Those that support the ban must acknowledge that:
(Like the NZ ETS), it will have a small and uncertain impact on global emissions and the impact will depend on climate action by other countries and the extent to which foregone production is substituted by overseas production;
A price-based supply side policy could be a more cost-effective policy.
Those that oppose the ban can legitimately claim that:
The ban will likely impose costs on the economy in the billions of dollars;
Taranaki will be the most significantly impacted region;
It is unlikely to significantly reduce domestic emissions other than reduced fugitive emissions and reduced domestic emissions from methanol production if Methanex exits prematurely;
The NZ ETS has the potential to achieve greater domestic emission reductions than the ban and at a lower cost.
Those that oppose the ban must acknowledge that:
Continued investment in oil and gas could expose the economy to the stranding of investment and jobs;
There is no firm basis for claiming the ban will increase global emissions;
Interest in offshore drilling appeared to be declining before the ban was announced;'
The NZ ETS does not account for emissions overseas from NZ export and the ban addresses sources of emissions that the NZ ETS cannot.
Comment
It is surprising that it fell on the Commissioner to provide such (belated) analysis on what was a very significant policy change. While there are some identified benefits of the ban, these appear less certain and reliant on third parties to actually deliver (for example other countries, and the closure of an important regional manufacturer). The Commissioner’s Note makes it clear that other climate change responses would have been more effective and cost less to the economy to implement. Given the Commissioner’s Note, the ban’s future must be uncertain with any change in government however with that New Zealand’s stable policy environment will suffer as a consequence.