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Ex-Cabinet Minister turned OECD official Simon Upton highlights range of risks facing NZ economy over 40yrs including global warming, pollution, pandemics, war, financial crises, deficits...

Posted in News
See video

By Alex Tarrant

She's a hard road travelled finding someone more pessimistic than Bernard Hickey, but that journey may just be over.

Delegates at a Treasury-Victoria University conference on the government's long-term fiscal projections this week were treated (subjected?) to a half hour presentation of the risks facing New Zealand's economic outlook from former National Party Cabinet Minister, now Organisation for Economic Cooperation and Development (OECD) official, Simon Upton.

His message? Don't bank on 40 year projections which don't recognise the risk that the economy will be hit by a major shock (or major shocks) during that time. Because it will.

You can read Upton's full speech to the conference here, or watch it in the video above.

Below are a few key comments:

A much larger economy would place increasing pressure on the planet’s capacity to absorb waste and supply vital ecosystem services, Upton said.

"The baseline case (with no policy change) for the OECD Environmental Outlook to 2050 projects the global economy to almost quadruple by 2050 from US$75 trillion to US$300 trillion. The OECD’s share of the global economy will decline from a little over half global GDP (54%) to less than a third (31%)," he said.

"Needless to say NZ becomes an even more vanishingly small element of a much less familiar geo-political world."

No country would be immune from the global environmental pressures of such a world whose impacts would be transmitted directly (as in the case of climate change) or indirectly (through declining environmental quality affecting global supply chains).  

"The Outlook’s baseline case projects that the world is on course for a 3-6 degree increase in global average temperature by the end of the century (2-3 degrees by 2050), a 55% increase in demand for water (with 40% of the world’s population living in areas of severe water stress by 2050), a further 10% decline in biodiversity by 2050 and more than double the number of premature deaths from airborne pollution (particulate matter and ground level ozone)," Upton said.

In some cases (notably airborne pollution) the ageing profile of OECD populations would place them at particular risk.

"As an open economy, New Zealand can expect to feel the consequences of rising resource scarcity and environmental damage through trade linkages and directly experience the local consequences of globally-induced climate change," he said.

"Depending on the severity of environmental pressures, New Zealand could become an increasingly desirable destination for migrants as well as benefit from demand for the biological output of its resource base in a world needing more food.

"The global scale of potential climate change has reinforced the impression that environmental change is the most likely source of catastrophic risk.  This may not be so.  For a carefully measured assessment of the relative orders of magnitude that can reasonably be attached to known risks, Smil (2008) is essential reading."

Viral pandemic, mega war

"On the basis of a rigorous assessment of the known statistical level of exposure to risk of fatality caused by large scale catastrophic events, Smil identifies only one risk emanating from the natural world – a viral pandemic – to which a high probability of mortalities in the region of 10⁵ (10 to the power of five) can be attached within the next fifty years.  He ascribes a similar level of probability to a mega-war (defined as a ‘potentially massive armed confrontation’)," Upton said.

"Conflict is not good for smoothly advancing prosperity. To those inclined to dismiss such risks, Smil counsels pondering on the ubiquity throughout history of irrationality, the drive for power and dominance and how as a species we might respond to unpleasant social and environmental developments:-

Doing that might lead one to conclude that despite many localised problems, the second half of the twentieth century was an exceptionally stable and an unusually benign period in global terms, and that the probabilities of more painful events will greatly increase during the next 50 years."

Natural hazards, biological risks

Then there were natural hazards and biological risks.

"New Zealand’s vulnerability to seismic and volcanic events is well known. I barely need to mention it in this city or after the Christchurch earthquakes," Upton said.

"Natural disasters have the potential to impose economic shocks that knock New Zealand’s growth prospects and thereby undermine the government’s ability to raise tax revenue.  

"Prudentially, New Zealand’s geological endowment requires the Government to run its finances on the basis that it will have to face recurrent fiscal burdens in the same way countries like the Netherlands face water management expenditures or other countries face significant defence expenditures for geo-political reasons," he said.

"A similar reasoning applies to New Zealand’s relatively high exposure to biological risk given the biological base of the economy."

Climate change

While not a ‘natural’ disaster in the same sense, anthropogenic climate change posed unknown but potentially significant economic risks within the 40 year horizon under consideration.  

"Significant climate change is already locked in and global emissions trajectories suggest that the chances of holding average global temperature increases to 2 degrees are fast dwindling,"Upton said.

"The global community faces a choice in the next decade of either acquiescing in significant climatic disruption or costly adjustment because of the failure to take comprehensive measures over the last twenty years," he said.

Acknowledgement of risks not matched by action

Like many countries, New Zealand’s stated acknowledgment of the risks was not matched by actions that could significantly reduce those risks.  

"While the costs of placing economies at a competitive disadvantage from acting unilaterally are prominently advertised, the costs of a collective failure to act are discounted," Upton said.

"This is a long-run challenge that will not go away and the costs that will be encountered either adapting to the consequences or trying to limit their extent are likely to weigh on future growth.  This places a further question mark over future growth scenarios based on benign assumptions about the physical world," he said.

Financial crises

One other class of risk to smoothly advancing prosperity deserved comment – financial crises.

"The financial sector is capable of delivering shocks with every bit as much impact as natural disasters. Such shocks can swiftly impose constraints on a government’s fiscal position for many years," Upton said.

"Economic crises are not rare events. A recent study estimates that since 1970 there have been a total of 147 banking crisis, 218 currency crises and 66 sovereign debt crises.  As the world is now well aware, this is not just an emerging markets phenomenon.  Thirty one of the 34 current OECD members have experienced at least one systemic banking crisis since 1970 and 32 have experienced at least one of a banking, currency or sovereign debt crisis over that period.

"Against this backdrop New Zealand is fortunate not to have been among those having experienced a banking crisis although this may be as much a consequence of prudent Australian regulation governing our largely Australian-owned banking sector.  

"Serial failures by other New Zealand financial intermediaries over the last thirty years have destroyed a significant share of private savings which suggests that New Zealand has lacked important management skills and has failed to regulate appropriately. There is no room for complacency," he said.

External debt

One specific source of economic vulnerability for New Zealand was its external indebtedness position and the risk of a "sudden stop" in capital inflows if foreigners turned-off New Zealand as an investment destination.  

"Encouraged by New Zealand’s economic performance and prospects, sound institutions and policy settings, foreign investors have been willing to fund New Zealand’s sustained current account deficit.  This has seen the net international investment position expand to a net liability of over 70% of GDP," Upton said.

"Good management and a bi-partisan track record of taking unpalatable political decisions when required has shielded New Zealand from greater investor scepticism.  

"However, investor sentiment cannot be assumed to be unshakeable.  A significant and sustained negative reappraisal of NZ’s risk profile could see GDP and employment fall as activity contracts and the fiscal position deteriorate.  Only our institutions (like this process we’re engaged in) and political probity keep those prospects at bay," he said.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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31 Comments

What he just mentioned on AGW

What he just mentioned on AGW is an extinction event for us.  Yet its only a "challenge"
6 Degree's C by the turn of the century is actually the worst number Ive yet seen. Up until now it was 2150 or so.'
"In November the World Meteorological Organization reported that atmospheric greenhouse gases reached yet another record high in 2011, amounting to a 30 percent increase in radiative forcing – warming effect – since just 1990. That’s fast. CO2 has breached 390 parts per million, which is higher than at any time in the last 15 million years, and is heading, according to an MIT projection, to 866 ppm by century’s end."
1) Thing is at 6Deg C and even 4 our society wont be up to much....we'll be "lucky" if there are 1 billion of us on the planet at that rise...
2) That is a point on an upward graph btw.....so even 3 by 2100 the peak is still 6 by 2150.  If its 6 at 2100 that suggest 8 or 9 by 2150.
Humans wont be around...
regards
 

No mention of Peak oil, or

No mention of Peak oil, or peak many things...just how does a Global economy get that big without materials and commodities is a matching quantity and at low cost achieve that? (it cannot)
 
IMF,
Peak Oil Warning From an IMF Expert : Interview with Michael Kumhof
Matthieu Auzanneau, The Oil Man blog, Le Monde blogs
Michael Kumhof is the deputy chief of the modeling division at the research department of the International Monetary Fund (IMF). Together with other researchers from IMF, this 50 years old German economist has published several papers focused of "peak oil", sending warnings regarding the possible imminence of a decline of world oil production and its impacts."
"if you just look at crude oil [which accounts for around 80 % of liquid fuel production], you could say, well maybe we are already at the historic maximum level of production."
 
Not to mention that per year...and the doubling time is ignored it seems...basic maths its the area under the graph....I cannot but assume he failed maths and badly.
By 2050 oil will be effectively gone....even by the end of this decade it will be severly price rationed....
So the only Q is, is he and the OECD that blind (political outlook)? are they wifully blind? or are they knowingly lying....or is there a hint in there "benign"?
Lets assume he isnt stupid, so politics, given the party political broacast at the end,..that leaves the last, unless he's hinting something in the main body, or covering himself.
regards

Thanks Alex - good

Thanks Alex - good article.
 
Upton is not stupid, but Steven has a valid point; the energy needed to feed that 'extra 2 billion' Upton speaks of, isn't there. So it's not 'to NZ's advantage, unless our farming is immune - which it ain't.
 
But he does go close, obliquely:
 
"this....places a further question mark over future growth scenarios based on benign assumptions about the physical world".
 
Read: there are limits to growth.

One loose calculation I have

One loose calculation I have done PDK is on farm energy. For the average farm oil input figure I found, this could be replaced by woodgas. A woodlot to do so would take about 10% of the land area of the farm. How much to transport, process and export? Don't know but I suspect you could double that. Still in global terms we will be a lot better off than some.

The key is 'local'.   So you

The key is 'local'.
 
So you take the people to the farm, given that you can't (apart from backyard gardens) take the farm to the people.
 
You're on the right track, though...   Wanna build a biodigester for my forest?

Abolutely on local, that is

Abolutely on local, that is why the land area of the farm has to be given over rather than relying on outside sources. Digesting is still problematic I believe, as are many of the gas to liquid technologies that have failed in their aspirations. They all also fail on what you say, trying to transport the fuel to the plant doesn't work for EROI. Woodgas, despite its inefficiencies, still remains the most reliable alternative biomass transport fuel. 

Point is though - as soon as

Point is though - as soon as we do reach that critical peak where scarcity becomes a real reality - then all the temperature 'trajectories' that Upton refers to will need a rework.  In other words, the peak energy crisis will be more of a staller of anthropogenic effects on climate than any amount of talk fests - be they OECD talkfests or CACC talkfests or IPCC talkfests or whatever. 
 
Indeed if all these talkfest-cronies and their scientific projectionist hangers-on would stop travelling around the world to talk and calculate, the benefit to humanity (not to mention climate change/GHG emissions) would be substantial.
 
Upton should man a shovel and plant a few trees.  Much more useful if he wants to save the planet.
 
 

He was asked about peak oil

He was asked about peak oil in the Q&A after his speech, and said he didn't buy into it. Will try rustle up the quote if I've got time later.
Cheers
Alex

Thanks Alex. He's a smart

Thanks Alex. He's a smart fellow - top 10% my guess.
 
But not that smart, if he doesn't understand that a finite resource peaks and ends - there are too many examples in history, too much math says it can't be any other way.
 
My Physics Prof touches on 'Cognitive Dissonance' (something I've wondered about listening to Gluckman) - acknowledges he's out of his discipline, but that he can't see any other reason for the inability of otherwise sound intellects to join dots.
 
Go figure (so to speak.....)

pdk - he's a career

pdk - he's a career bureaucrat  - lurching from one taxpayer funded job to the next.
Do you see anything productive (or better yet, sustainable) in this snapshot;
http://en.wikipedia.org/wiki/Simon_Upton
The top 10% of the smart people discover things, invent things, design things, make things.  Lawmakers develop ways to restrain, not enable, such creativity.   

Hi Kate,  I met him a couple

Hi Kate,
 I met him a couple of times through the National party, I never felt comfortable around him, somethink not quite right. Which side doe's he bat for?

The side his bread is

The side his bread is buttered on. A champion for sustainability? Cue Tui. 

That's somewhat surprising,

That's somewhat surprising, I'll be interested to hear his quote on that.
 
Most of the current projections estimate the total barrel production peak to be between 2020-2030. This is of course ignoring net energy available which has been in a steady decline for the last few decades, and which has recently accelerated in decline due to us now being forced to extract an increasingly large fraction of our oil supply from low EROEI unconventional sources.

Interesting, where are you

Interesting, where are you reading these numbers?  Most of what Ive read says  crude was 2006....its possible sometime before 2018 that might be briefly beaten, but unlikely. After 2018 its certianly a never, ever...in terms of a sustained trend...The interesting thing is when we come off this plateau we will probably see some big drops like 10%...nothing gentle...
From 2006 the make up has been in "all liquids"  even that has about 5 years.......
In terms of sourcs the ASPO seems to be a little low on estimating actual output, oil industry and economists grossly over......
The second and more important point is what's NET for sale points to a drop in exported output this decade as domestic demand is rising fast..
regards

It would be good to get that

It would be good to get that on record....Im sure we are going to see some severe impacts in the next few years...so much for credible analysis....
You dont buy into it....it simply is.
regards

Ah - a new spiritual leader

Ah - a new spiritual leader for you.
A pied piper of worrying about things that probably never happen.
However some terrible predictions do come to pass - like Y2K (the year 2000 did happen)
And pig and bird flu swept the world (1 person died in HKng and 1 in belgium etc)
 

You can always spot spin -

You can always spot spin - and a weak argument - by the introduction of emotion.
 
Delvivg further, you can usually find reference to like-sounding but totally unrelated events.
 
And - deliberately, one presumes - not much depth.
 
I suggest you shelve your emotions and your preconceptions, read all side of all debates, and wait until you have done so before coming to conclusion(s). I read all the contra stuff I can lay my hands on too - Richardsons 'Making a Difference sits alongside Moores 'Children of the Poor', alongside (the BRT's) Conservation Strategies for NZ (not), an Introduction to Energy Physics, Hold This Land, Ecological Sanity (not), Heat, Climate Wars, Farmageddon, Adventures in Oil (BP history), Macroeconomics, Unfinished Business, The Coming Plague, Practical Coal Mining, Conservatives without Conscience, Municipal and Rural Sanitation, Tell me no Lies, Keeping pet Chickens, Fundamental Atmospheric modelling, Daylight Robbery, Mao the unknown story, A Texan looks at Lyndon, I've been Thinking (not), Ecomyth (not) - and that's just reading along maybe a fifth of one shelf; of which there are a dozen.
 
Comes back to what I was saying about reading vs absorbing dumbed-down infomercial sound-bytes - you get a more informed populace with reading.
 
Or are you brave enough to state, perhaps, that finite resources can be extracted at a growing rate, forever? Citing references, of course.......
 
 

"worrying about things that

"worrying about things that probably never happen"
Well they are happening SK, I don't know what you call utra deep oil exploration or sending Northern Hemisphere fishing vessels to the Southern Ocean but I call it desperation. We're picking over the most difficult, expensive, isolated and lowest concentration resources now, a bit like scavengers on a rubbish heap. Good luck with the growth forever line.

Well I do hope the 4 horsemen

Well I do hope the 4 horsemen of the apocalypse dont hit the Viaduct before I've had my lunch!
SK

The most serious risk over

The most serious risk over the next 40 years has been up front in stuffing this economy for the last 40 years...shoddy govt...political self interest...votes bought with bribery.
 
 

Yep, I think we will see the

Yep, I think we will see the demise of some of the West over that period from trying to maintain an unsustainable welfare state

Too many Malthusians in the

Too many Malthusians in the world today.
A dose of realism is badly needed... 
Life will prevail... Let it be... Nature is not to be managed, and we should not try to manage it. 
Humans are the worst plague on earth! There is way too many of us utilizing resources, and way too few, conserving them! Almost none of us have any respect for water, the very basis of life in our planet, and certainly none of us live in a natural state.
Without us, life will thrive all over the world!
Global warming... Bring it on!
H.GeeDubya
 

Kind of  'Ces't la vie,

Kind of  'Ces't la vie, not'
May we?

To be fair we are just doing

To be fair we are just doing the same thing any other organism would do: Utilizing energy/resources to increase our biomass.
 
The problem of course is that now our biomass is far greater than the world can sustainably support and we are altering (destroying) the very ecosystems and climate which has enabled us to thrive.
 
Of course this won't end well but looking objectively at it helps. Humans may be a mere 'flash in the pan' of evolution and life on this planet.
 
For humanity do not weep - A great short essay looking at our history and evolution and why we are creating such a predicament.
 

Absolutely correct,

Absolutely correct, Plutocracy. 
It is inevitable for us, just as it is for many other species in our planet.
Now, if we could ditch the 'consumer society' for sustainable practices...
Ahh, what a wonderful world it would be!!
HGW
 

lol.... yeah but Malthus was

lol.... yeah but Malthus was proved wrong. He thought as people had more wealth they would have more kids thereby overpopulating, opposite happens.
Seriously tho, because we are discussing shows a positive bent. 
Cheers

Predcisely my point

Predcisely my point Spliny. 
Although some would argue that it was people heeding his warning that save the world.
It makes for a good forum, nothing more. No need to 'SAVE THE WORLD' exists, and we would not know where to begin if such need ever arose.
The converse is also true. There is no need to destroy nature, but we don't know where to begin conserving it!
HGW

"Depending on the severity of

"Depending on the severity of environmental pressures, New Zealand could become an increasingly desirable destination for migrants as well as benefit from demand for the biological output of its resource base in a world needing more food.
 
How does this statement from Simon Upton relate to the vision of ANZ Mike Smith on NZ agriculture and foreign investment, outline in the 'Greener Pastures...opportunities for NZ commodities..' report? From what I understand he advocates selling what seems to be strategic assets (land) so as to secure market access despite ".... a 55% increase in demand for water (with 40% of the world’s population living in areas of severe water stress by 2050)..." . Notwithstanding relevent comments above regarding resource constraints and growth, it appears to be selling the golden goose.
http://www.interest.co.nz/rural-news/62255/tap-burgeoning-asian-agricultural-export-opportunities-kiwis-need-accept-asian-inve#new
 
Based on the challenges be they what Simon has outlined or the fact there are Mike Smiths in this financial world, should we just sell the farm and to hell with the kids?
 
 

Just out from Tim Groser's

Just out from Tim Groser's office:
NZ to join Climate and Clean Air Coalition
 
Climate Change Minister Tim Groser announced today that New Zealand would join the Climate and Clean Air Coalition (CCAC).
 
The CCAC is a new initiative focussed on climate pollutants such as black carbon, and greenhouse gases including HFCs and methane that have potent but short-lived effects on climate, human health and agriculture productivity.  The Coalition is a voluntary partnership initiated by the United States. 
 
“This new group is not a substitute for action on the real climate change problem, carbon dioxide, which remains in the atmosphere for around a hundred years,” says Mr Groser. “But moving quickly to reduce emissions from short lived climate pollutants is part of a coherent strategy to tackle the challenge of climate change.
 
“The Coalition is focussed on reducing methane emissions from industry which complements work that New Zealand is leading in reducing methane emissions from agriculture.  We have been asked to lead an agriculture initiative in the CCAC that will add to our work in the highly successful Global Research Alliance on Agricultural Greenhouse Gases initiated by New Zealand in 2009.”
 
Mr Groser says that international action on climate change requires effort on multiple fronts. Work that the CCAC is doing, along with work in the Major Economies Forum, the Global Research Alliance, and the reform or fossil fuel subsidies that New Zealand is coordinating will add value to global agreements negotiated under the UNFCCC. 
 
“New Zealand is active internationally on all these fronts.  These efforts demonstrate on-going action on climate mitigation during the transition period to the post-2020 global climate agreement that will be negotiated by 2015. 
 
“We have a long-term and coherent strategy in place and we are on track to deliver what most New Zealanders have voted for – a balanced approach to climate change, playing our part while avoiding imposing excess costs on households and businesses while the Government focuses on jobs and strengthening our recovery,” Mr Groser says.
 
The CCAC will meet next in March 2013. 

MUCH better acronym would

MUCH better acronym would have been: COW-P: Coalition of the Willing - Polluters.
 

Words words words that might

Words words words that might make timothy feel better about himself.....