Let’s not blow the chance to lead change

More feedback on the NZ Insitute’s “fast follower” proposal, this time from business commentator Rod Oram in yesterday’s Sunday Star Times. Rod’s take is very similar to mine, though from a different perspective, and so I’m very pleased to welcome Rod as our third guest blogger – and reproduce that SST column in full. It’s a very good read…

The New Zealand Institute is making the same fundamental mistake about climate change as much of the country’s business community.

When it comes to action, the institute is exaggerating the cost and ignoring the opportunities. In its latest paper on the issues “We’re right behind you: A proposed New Zealand approach to emissions reduction” it argues that the cost of action would be “very high” (a quantum it hasn’t measured) because ours is the second most polluting economy in the OECD. This is worse than the fourth ranking the institute used in its previous paper, which was the figure cited in last week’s column.

For every dollar of economic activity, we are second only to Australia in the amount of greenhouse gases we generate. The only way we could tackle that is to undertake “a substantial restructuring of the New Zealand economy”. But that would take too much pain for too little gain, the institute argues.

But that’s plain wrong, because the institute has failed to consider our unique emissions profile and the economy-enhancing opportunities we have to reduce them. The two critical areas are agriculture and electricity generation.

First, agriculture. Almost half our total emissions are from farming. Of that, roughly one-third is from nitrous oxide from fertilisers and animal urine and two-thirds from methane, a by-product from ruminant animals failing to fully digest their feed.

We can substantially reduce nitrous oxide emissions, judging by the success farmers are having, by applying nitrogen inhibitors to their pastures, as a recent column analysed. Even better, this is not a cost to farmers but a benefit. The small cost of applying inhibitors is vastly offset by the value of the better pasture growth the inhibitors promote.

The science of methane reduction is less advanced. But within, say, 10 years it is realistic to expect we will have animals that digest their feed better, thus producing more milk and meat with less methane. We will achieve this through a combination of animal and plant breeding and changes to the chemistry of animal digestion. The economic gain from more productive animals will far outweigh the cost of making those improvements.

Second, electricity generation. Our abundant, economic sources of renewable energy mean we can largely insulate ourselves from the rising international price of fossil fuels and carbon, as last week’s column said. This ability to generate almost all our electricity needs from renewables, at cost-competitive prices, is also unique in the world, a fact the institute ignores.

Against these two big sectoral gains, we have some negatives. It will take decades to replace our low-efficiency, high-emission vehicles, so we will have to accept higher transport costs in the medium term. Similarly, some companies that rely on using large quantities of cheap power to produce low value goods will fail if they can’t adapt to somewhat higher energy prices.

But overall, we will significantly reduce our agricultural and electricity emissions and reap economic benefits too. As a result, we will cut our overall greenhouse emissions as deeply as leading countries, but at less cost. This is a far cry from the institute’s deeply negative and ill-informed view that we could only achieve reductions through costly restructuring.

The institute’s failure to consider our unique emissions profile has led it to make another serious error in its analysis. It says we have no role to play in the world’s battle with climate change because our emissions are so tiny.

But our agricultural strength gives us a huge role. If we pioneer the science of methane reduction, we could bring two benefits to other countries. Our technology would help improve their farming and reduce their emissions; and we could champion the cause of bringing the agricultural sector fully into Kyoto and its successor global frameworks.

Success on those two fronts would help encourage developing countries to sign up to the global response to climate change. It is vital they do, because unless virtually every country is engaged, it is too easy for backsliders to argue they should do little or nothing.

The institute appears ignorant of these issues. So its cavalier suggestion we should renege on our Kyoto commitments is akin to suggesting we should quit the World Trade Organisation and abandon our leadership role in the fight for freer agricultural trade.

The institute’s inability to read other big trends, particularly in business, is a weakness throughout its paper. For example, it identifies the climate change response of leading US corporations such as Wal-Mart and General Electric and British food retailers such as Marks & Spencer, but considers their actions not yet material.

This ignores, though, the fact that these companies are going far beyond simply responding to consumers’ desire for greener products.

They are using the likes of energy and sustainability issues as drivers of deep innovation in technology and business models. Yes, these companies care about the environment, but they care a lot more about achieving big changes in their businesses that leave their competitors in the dust. This is a seismic shift in global corporate thinking and practice, the biggest in many decades.

You need to read no further than the Forethought section in the current issue of the Harvard Business Review (free at www.hbr.com) to understand this. The institute misses this shift and thus overlooks the imminent, deeply adverse impact on any New Zealand company that buries its head in the sand.

But it’s no surprise that business lobby groups fighting the government’s climate change and energy strategies have seized on the paper to justify their opposition. They particularly liked the institute’s proposal we should renege on the Kyoto treaty. Instead, the institute argues, we should become a “fast follower”, bobbing along in the wake of climate change progress made by other countries.

But if business thinks being a fast follower will give New Zealand an easy ride on climate change, it should consider this crucial sentence on page 44 of the institute’s paper: “It is important that a clear signal is sent to New Zealand firms that a change in course and speed is required in terms of the emissions intensity of the New Zealand economy.”

A target of a 30% reduction in NZ’s emissions by 2050 relative to 1990 levels is the signal the institute proposes. But it is suggesting only a flexible pathway to that goal, easing or tightening the demands on business depending on the opportunities available to them to reduce emissions.

This target is problematic for three reasons. First, it is a lot less demanding than the government’s implicit target of a 40% reduction by 2040, not to mention the 50% cut by 2050 the National Party is advocating. The institute argues that the government’s policies will fail to deliver a 40% cut. In fact, it says its more modest target will require more stringent action than the government’s.

The announcement of the details of that in its second climate change paper next February will come as a shock to business leaders who rushed to embrace the first paper as an easy option.

Second, business has long argued against a flexible pathway. It says it needs long-term certainty of the climate change requirements so it can make robust, long-term investment decisions. Moreover, an “as and when” approach will subject the government to constant lobbying from business to keep deferring action until conditions are more favourable.

Third, the institute’s modest target would leave New Zealand far behind the goals being set by our major trading partners and the UN’s Intergovernmental Panel on Climate Change. Keeping temperature rises to modest levels the world can possibly cope with will require a 50-85% reduction in emissions by 2050, the IPCC says.

Many of our trading partners are responding with similar targets such as California and Scotland’s pledges of 80% cuts by 2050, the UK’s of 60% by 2050, the EU’s of 30% by 2020 if other countries also cut and Germany’s of 40% by 2020.

Consumers in those high value markets will demand supplier nations like us make similar contributions to solving climate change. If we don’t, they won’t buy.

The institute acknowledges the risk but thinks we can respond quickly when the need arises. Any business person knows life is never that simple; any serious follower of climate change knows the challenges are far harder and longer term.

In advocating this fallacious fast follower approach, the institute has damaged its credibility and given business an excuse to continue to duck the real issues.

© Rod Oram. First published in the Sunday Star Times, Sunday 28 October 2007

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