The New Zealand government may have to spend billions buying carbon credits overseas to meet its climate targets, according to a report by the Treasury and the Ministry for the Environment.
The Climate Economic and Fiscal Assessment 2023 report, published this month, looked at how climate change will affect New Zealand's economy and finances.
It found NZ would “almost certainly” need offshore carbon mitigation to meet its climate commitments, which could cost anywhere between $3.3 billion to $23.7 billion.
These costs were a “significant fiscal risk” which could absorb between 3.9% to 28% of all new operating expenditure in the next seven government budgets.
In the Paris Climate Agreement, NZ promised to reduce its net emissions to 50% below 2005 gross levels by 2030 and will have to use both domestic and offshore mitigation to achieve that goal.
“For all scenarios considered, our analysis estimates this cost to be multiple billions over the period 2024 to 2030,” the Treasury and the Environment Ministry said in the report.
This was estimated to cost somewhere between $7.7 billion and $9.9 billion, even in a scenario where the cost of carbon credits aligned with the current price in well-established markets.
The average carbon price in these markets was about $95 per tonne, compared to NZ units which have recently been trading at about $60.
However, the bill could be much larger or smaller in different scenarios included in the report.
The International Energy Association (IEA) has estimated a carbon price for emerging economies at about $41 per tonne, which would mean a cost to NZ of between $3.3 billion and $4.2 billion.
On the other end of the sale, the IEA also estimated a price of $227 per tonne for advanced economies in a scenario of “advanced global climate action”.
This would translate into a cost of between $18.3 billion and $23.7 billion.
Not a sure thing
The report said these estimates should be treated as “illustrative”, and not as forecasts or projections, as they rely on assumptions about a highly uncertain future.
“The intent of the analysis is to demonstrate the broad size of the potential fiscal cost of the purchase of given volumes of offshore mitigation to achieve New Zealand’s NDC1”.
NDC1 refers to the first Nationally Determined Contribution, or how much NZ promised to reduce emissions between 2021 and 2030 in the Paris Climate Accord.
“Domestic policy decisions will materially influence the amount of domestic mitigation New Zealand is able to achieve and at what cost. This will have important implications for what volume of offshore mitigation New Zealand may look to procure to achieve its NDC1”.
The estimates are spread across a $20 billion range with different future carbon prices being the key variable.
These costs range from anywhere between 3.9% to 28% of the new operating expenditure that will be made available through government budgets from 2024 to 2030.
“However, the source of funding for these costs is subject to future policy decisions; comparison to the operating allowances is used here to provide a sense of scale,” the report said.
The size of the cost of offshore mitigation will depend on whether NZ achieves or exceeds its domestic emissions budgets, and also on the price paid for international offsets.
“The future price of international reductions is unknown, reflecting that many markets are at early stages or yet to be developed”.
The report said it was clear the “size and breadth of the economic and fiscal costs of climate change” on the country would be large and have significant implications for its fiscal position.
“The physical impact of climate change and the choices the country makes to transition to a low-emissions future will affect every aspect of the economy and society for generations”.