Omission 3: Finance

Appendix 8 – Cost appears to be conflated with value, and key finance considerations are ignored including detailed capex costs, balance sheets and adaptations for councils.

Intro

The other missing thing is a detailed discussion of costs. Once that is unpacked it becomes clear that cost and value are conflated and financial problems and solutions are missing too.

The CCC…

Says “the overall costs of meeting the country’s targets and proposed emissions budgets are likely to be less than 1% of projected GDP”[1]
Says “[the actual] cost [will be] no more than $190 million each year over emissions budget 1, $2.3 billion each year over emissions budget 2, and $4.3 billion each year over emissions budget 3.”[2]
Says “some low-income households … could struggle to access lower emissions technologies.”[3]

Discussion

Warren Buffett says that “Price is what you pay; value is what you get”.[4] This is a good saying for basic investment equations, e.g. how much do you need to pay to achieve future cost savings or value-add?[5]
The CCC assumes that the impact of its proposed emissions budgets will lose $4b of GDP value. [6] To achieve that value loss, the CCC says it will cost Aotearoa $33.76b until 2035 and it does not quantify the cost between 2016 and 2049.
“A growing number of high-income families are struggling to pay the bills” and “a quarter of [families who participated in research from the Commission for Financial Capability] were from families with incomes between $100,000 to $150,000”[7] NZ also has a very high cost of living[8] and very high house prices.[9] NZ’s household debt as a % of GDP is very high at almost 100%,[10] suggesting that most families would struggle to have spare disposable cash or access to more cheap finance in order to pay capex to secure low-emissions tech, e.g. EVs.
The same dynamic may also apply to businesses, but it is councils where there is more public data. Auckland Council, for example, has a net-debt-to-revenue-ratio of 247% and a cap of 265% and it concludes that “Auckland … can’t fund the level of investment required [to fund capex costs related to a growing city, let alone sustainability initiatives]”.[11] Auckland’s rates and related company cost increases are forecast to be high over the coming years in the context of Auckland Council recommending a climate change package of $170m less than the option that would provide the most emissions reductions.[12]

Conclusions

The CCC’s 1% “cost” in the body of the report is actually the impact on value, not the cost. The CCC tries to correct that in the evidence, yet still conflates “cost or GDP impact.”[13] Cost is what you pay. Value is what you get, or lose.
The CCC’s investment case is to spend $33.76b + $TBCb to get a return of -$4b and a net zero carbon outcome. The point is not to disparage the cost or say that the costs are not worth it (costs simply must be paid to sustain human existence) – but that that sort of logic needs a lot more discussion than half a page.
It is not clear what the reason for the large increase in costs is between emissions budgets one and two.
To be able to forecast a change in value to 2050, the CCC must have modelled the costs between 2036 and 2049, or at least have assumptions about that.
It is not clear who bears the costs, over what time period, and how much each of the policy options and directions will cost.
A portion of the cost is to be paid by households but it doesn’t look like many can afford it.
If a portion of the cost is to be paid by businesses, what are the CCC’s solvency assumptions? I.e. businesses are not going to, en masse, pay billions of dollars for a negative return as that would jeopardise director duties regarding insolvency in the Companies Act.
The capacity of households and councils to pay to reduce emissions appears very limited as balance sheets are maxed out in 2021.
It is not clear what the cost of adaptation and mitigation will be in addition to the cost of reducing emissions.
Emission reductions will be so transformational that many medium and high-income households will also struggle to access technology, not just low income households.

Recommendations

Clarify the discussion throughout the report so as not to conflate cost and value.
Sum the disclosed costs in the first three emissions budgets, in the report, and materially flesh out the discussion on the investment case of -$33.76b – $TBCb for a return of -$4b and a net zero carbon outcome.
Explain why there are large cost increases between emissions budgets one and two.
Explain what the cost might be, or what the assumptions for cost are, for the period 2036 to 2049.
Explain who bears the costs, over what time period, and how much each of the policy options and directions will cost.
Explain how households, councils and businesses will incur costs to reduce emissions if they cannot afford to.
Acknowledge high Auckland (and national) house prices and that many medium and high-income households will also struggle to access technology, not just low income households.
Explain how businesses will either stay in New Zealand, or pay lots of money for a negative return on investment.
Advise the cost of adaptation and mitigation in addition to the cost of reducing emissions, under the proposed budget pathway and the status quo, out to 2100.
Recommend that the government consider using its balance sheet to achieve climate change objectives, whereby it would not incur cost (other than interest which it could meet) and households (and businesses, and/or councils) could repay the government over time with an additional % of tax taken off, or a levy.
Recommend centralising the funding of city adaptation and investment in emissions reductions technology. Part of this could include centralising some policies in line with national direction, but leaving some decisions to cities.
Recommend to tax the family unit like a family, not like individuals. E.g. one stay at home carer and one earner should see both adults taxed on half the total income each. That would be more equitable, better recognise wellbeing, and also provide households with more cash to perform their anticipated climate change obligations.
Recommend the formation of a central insurer of properties at risk from rising sea-levels to ensure access to insurance, and to avoid properties not at risk and consumers who have already managed their risk not subsiding those who took on risk or had time to exit that risk.
Reassess the GDP model and discussion in light of further thinking on costs and value.

[1] Page 18 of draft report

[2] Page 6 of https://ccc-production-media.s3.ap-southeast-2.amazonaws.com/public/evidence/advice-report-DRAFT-1ST-FEB/Evidence-CH-12-How-we-earn-our-way-in-the-world-20-Jan-2021.pdf

[3] Page 81 of draft report

[4] www.forbes.com/sites/forbesfinancecouncil/2018/01/04/the-important-differences-between-price-and-value/?sh=454a53294237

[5] www.investopedia.com/terms/n/npv.asp

[6] Page 6 of https://ccc-production-media.s3.ap-southeast-2.amazonaws.com/public/evidence/advice-report-DRAFT-1ST-FEB/Evidence-CH-12-How-we-earn-our-way-in-the-world-20-Jan-2021.pdf

[7] www.rnz.co.nz/national/programmes/ninetonoon/audio/2018657826/earning-150k-and-still-falling-behind

[8] www.hendersoninternational.co.nz/the-cost-of-living-in-new-zealand/

[9] www.stuff.co.nz/business/110049950/auckland-ranked-among-worlds-least-affordable-cities-in-housing-report

[10] www.interest.co.nz/business/106868/alison-brook-asks-if-context-our-already-high-levels-household-debt-we-are

[11] www.interest.co.nz/news/101894/auckland-council-says-its-debt-levels-are-track-despite-445-million-increase-87-billion

[12] https://www.stuff.co.nz/national/politics/local-government/124281624/auckland-10-year-budget-record-rates-rise-plan-needs-public-support