The Climate Change Commission's model is under fire

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ANALYSIS: One of the most controversial things in the Climate Change Commissions carbon-cutting blueprint is a figure: less than 1 per cent of GDP. Thats the total cost of the commissions proposal. That figure shut down one of the last politically acceptable reasons to oppose climate action: because its too expensive. National and ACT MPs say they dont believe a word of it and are taking aim at the commissions economic model. ACT environmental spokesperson Simon Court says, until the model is scrutinised, the country cant be confident that the commissions blueprint is backed by good evidence. READ MORE: * Why the Climate Change Commission's targets are so weak * 'Not transformational': climate commission's blueprint disappoints green activists * 'The Government will not hold back': Jacinda Ardern on how NZ could go zero carbon Their detractors, meanwhile, say this is a smokescreen the last resort of those who oppose climate action, but cant openly say so. Climate scientist Jim Salinger calls it doubt-mongering. Stuff took a look at the furore. What on earth is an economic model? It helps to think of a model as being like the video game The Sims . Its a recreation, based on data, of our country thats sitting in a computer. Models have to simplify things so the commissions only simulate our carbon-producing activities. For example, if you drive into town to get a haircut, it captures the carbon dioxide produced by your car and any coal that was burned to power the hair dryer. But it ignores the chat between you and the hairdresser. To help it do its job, the commission built three models. One simulates what happens to the countrys emissions if we introduce different carbon-cutting behaviours and tech. A second takes these results and calculates what will happen to our economy such GDP and exports under this pathway. The third model takes these results and simulates our employment market, to tell us how many people in particular industries might lose or gain a job. As well as calculating the effect on GDP, these models say the commissions roadmap will put the country on a path to net zero and could cause up to 1100 people to lose jobs in the oil, gas and coal industry between now and 2035 (though they project those roles will be replaced by work in greener industries). Although the commission has staff who can run and interpret the models, it paid private contractors Concept Consulting and Motu to build all three of these models. This isnt unusual, says University of Otago economist Dennis Wesselbaum. OK. Why is anyone interested in the models? Its not only politicians raising questions. Some economists are also surprised by the results. Wesselbaum thinks theyre too good to be true. The commission points out UK and EU climate models are spitting out similar results . But Wesselbaum thinks we need to ask questions about any suspicious findings, before theyre used as the basis for a government plan. ACTs Court is calling for the commission to purchase and publish the proprietary formulas in the models, which are owned by the contractors. Its unlikely theyd consider this, as it could put their modellers out of business. (Update: Court contacted Stuff after this story was published to add that, while he personally wants to see the underlying code, the version of the model the commission is planning to release is sufficient. He remains unsatisfied with the planned release date of July.) NZ Initiative economists Eric Crampton and Matt Burgess have also voiced concerns . Crampton points to other models that showed more substantial economic consequence. Commission chair Rod Carr explains GDP as a measure of how busy our economy is. Decarbonising our country will make us busier in some industries. In others (such as the fossil fuel sector), well become less busy. The controversial figure, less than 1 per cent of GDP, accounts for both changes. When a country prepares to go to war, GDP rises, he says. We are going to undertake work to reduce our emissions in agriculture and industry. That work will be valued and valuable in the economy. Well also be replacing imported fuels (such as oil) with homegrown electricity, which adds to our countrys GDP, Carr says. Peer reviewers both here and abroad have already scrutinised the models. One expert, Adolf Stroombergen, says they are producing consistent results. He notes the estimate of less than 1 per cent of GDP isnt compared to a world where we pollute freely, but the current trajectory were on today which includes everything weve introduced to date to cut carbon. In other words, that 1 per cent is the difference between what were already doing, and whats in the commissions blueprint. Based on what Stroombergen knows, the figure is perhaps a tad on the low side but is in the right ballpark. Everyone (who wants to) will get a chance to play with the models in July, at the latest. But thats more than a month after the commission will finalise and present its budget and advice to the Government. At the moment, they contain commercially-sensitive information such as statistics provided in secret by companies. This is one reason the Reserve Bank doesnt release its model. The climate commissions sister organisation in the EU, the Joint Research Centre, also doesnt publish its version. Politicians are comparing the commissions results to another model by consultancy NZIER that was used when the Zero Carbon Bill was being drafted. But thats never been made public. Stroombergen says its uncommon for a model to be published for people to play with. These things cost an awful lot of money to develop and maintain and youre just giving away your intellectual property. The commission will need to hide the commercial information and proprietary formulas before publication. It also wants to publish models that a pair of fresh eyes could navigate (as opposed to something only suitable for boffins) so itll tidy up and label them before release. Protecting commercially sensitive information is a fair reason, Wesselbaum says. But you would have to show as much as you can show... That might convince me or not. So these guys suspect a model contains a mistake, then? Some criticism of the commission flagged a famous (ahem, in economic circles) example of an error in economic research though theres no proof of a mistake in the commissions model. Economists, including Victoria Universitys Viv Hall, say significant errors in models are rare. The commissions also been criticised for the choice of Excel as the software that one model runs in. The commission says its double-checking its work as it goes. And again, all three models have been peer reviewed. No-one flagged Excel as a concern. The source of this disagreement is more likely to be the assumptions the commission is making about the future. Whats an assumption? Think of it as an educated guess. To run, a calculator needs you to feed in numbers to get an answer. Similarly, a model needs the commission to feed in assumptions in order to produce results. These assumptions include everything from the cost of an EV battery to what the price of milk will be. Burgess agrees there are no right or wrong answers. But we want to see which judgments are important and look at the literature to see how well the alignment is. For example, the commission assumes the upfront sticker price of electric cars will eventually become cheaper than petrol and diesel versions, with the tipping point occurring between 2035 and 2036 . The commission used research, government and business data to determine these estimates. This type of assumption is listed on the website , and the commission asked the public how it might make better estimates. What other assumptions are in there? As well as these numbers, the model needs the commission to tell it what a good low-carbon journey looks like, says one of the commissions modelling experts Chris Holland. These assumptions arent numerical. For example, the commission told the model that it doesnt want anyone to replace any appliances or vehicles before they stop working. This might come across as a principle with the commission concluding that any future where we scrap our perfectly functional fossil-fuelled appliances or cars is a bad outcome. The models themselves are politically agnostic and are designed to minimise costs. But by feeding in this type of assumption, the commission changes the result. So if a household switches from a natural gas cylinder to a lower-carbon electric (or possibly a hydrogen ) version, they can do it at the end of the fossil-fuelled appliances working life, when they were facing a bill anyway. Some of these assumptions are built into the models. One assumes the overall employment rate will stay steady, Stroombergen says. So while employees in the oil and gas industry increasingly wont get replaced, opportunities in fields such as battery technology grow. Its only if the pace of change is really fast that you end up with temporary surges in unemployment, he adds. In the long run, it is not carbon policy that determines our level of employment. OK, are there other concerns about the commissions work? Some have been raised, though theres a bit of confusion mixed in with the criticism. One is to do with how the model decides which policies offer the best bang-for-buck. One way to do this is to calculate how much it costs for each proposal for instance, a coal ban to reduce one tonne of carbon, which is called a marginal abatement cost (what a mouthful). Theres rigorous debate on whether comparing the relative costs of policies today is helpful. Todays costs arent reflective of tomorrows, and everything from a rise in the price of oil to a major Government announcement (such as proposing a ban) can influence them. For example, the cost of batteries, wind turbines and solar panels have fallen dramatically, former Parliamentary Commissioner for the Environment Jan Wright says. When you set a firm goal, you have a lot of companies that are going to innovate to try to reach that goal and cost reduction, because theyre competing with each other, can happen quite quickly. Some are slamming the commission for not releasing these abatement costs. But the commission says it cant, because it didnt use any. Instead, when the model compares goods such as petrol cars and EVs, it calculates and compares the total cost of ownership. It uses a whole host of assumptions, from sticker price to battery capacity, to do that. The attractiveness of an EV is a moving target for instance, electric cars get cheaper and batteries better every year. Road user charges and regional petrol taxes are an added complexity. On EVs, the commission has been conservative, thinking drivers will only be won over when their lifetime costs are up to 25 per cent cheaper than petrol and diesel options. Questions have also been raised about how wages might be affected if economic growth is delayed by 6 months, its likely wage growth will be too. Those estimates would need to be done by Treasury or Statistics NZ, Carr says. Stroombergen is confident in the commissions modelling work. He did advise it to test how robust and sensitive the results were to certain assumptions, before releasing its final report. Theyve done a good job. Are people looking for a problem in the models? Now a climate activist in his retirement, Salinger worries the debate about models could derail public confidence in the process, right when cutting carbon is critical. We need to leave the [commission] to focus on the most important changes to be made from the submissions between its draft and final reports, rather than being side-tracked down rabbit holes of issues of minor significance, he says. Carr says this debate is less likely to be about the three models at all, and more about the type of advice the commission is recommending. Whats in the advice, then? The commission recommends we use both our emissions trading scheme and regulations to get to net zero carbon. It wants to nudge up how much it costs to release greenhouse gas to the air, by influencing the carbon price in the trading scheme. On the regulation side, it backs a ban on petrol and diesel cars (following Canada, Japan and the UK) amongst others. Its also asked the government to consider a ban on new gas connections , no later than 2025. No model spits out policy, Stroombergen says. The recommendations are coming from the seven commissioners . The model tells them the trajectory our emissions would take and they use their judgement to suggest the types of policies well need which theyve been asked to do under the law. Notably, only the Government has the power to introduce regulations. Its the job of government agencies to do the detailed analysis and public consultation on the policies suggested by the commission, Carr says. The proposed approach a mix of carbon pricing and regulation is a provocation to free-market proponents. They want as little regulation as possible, since its an expensive and to them, unfair way to promote change. If the experts get it wrong, regulation is a lot stickier to unravel, NZ Initiatives Crampton says. Hes calling for the emissions trading scheme to do the vast majority of the heavy lifting, with minimal regulation, saying that should be more cost-effective. Banning fuels or technologies doesnt do that much for overall emissions, [and] does a whole lot to increase the experienced cost of getting to net zero, he says. But that plan relies on the current and the next nine Governments holding their nerve to keep a sinking lid on the amount of pollution allowed. It would cause the price of carbon and petrol, natural gas and diesel bills to spike. Politicians of the day could face increasingly loud consumer and company complaints. History suggests this could be risky. Previous Governments kept the scheme toothless for nearly a decade. As then-Parliamentary Commissioner, Wright highlighted the schemes weaknesses in 2012 . We havent covered ourselves in glory with the way weve dealt with the emissions trading scheme, she says. Its necessary but not sufficient. The commissions philosophy is that the emissions trading scheme will work for some sources of emissions, but not others. Its not alone in this thinking many researchers agree. The free market versus regulatory debate is a wider argument about how to run a country, Carr says. Naturally, in a mixed economy, youve got a wide variety of views. There are benefits to regulation. Its a good way to send people a signal years in advance, Carr says. We need to be rational about where we choose to let markets run and where we make sure markets are appropriately regulated. The commissions approach also places weight on avoiding social costs, such as a scenario where landlords could choose a gas appliance, leaving tenants to foot the rising bills. I thought we gave the Climate Change Commission the job of deciding our zero-carbon path because they were a group of independent experts. Are critics now saying theyre incompetent? The commission was designed to be independent, with all political parties consulted on the seven commissioners chosen . The budgets and advice were released in draft form so everyone could provide feedback on the modelling work and policies suggested. It also asked the country to evaluate the seven principles it used to guide its thinking. More than 10,000 responses have been received and will be considered before the commission releases its final work in May. This will contain the latest modelling. Its inevitable that the country wont pick the perfect, fairest, most robust and most cost-effective way to transition to zero carbon. We cant predict the future and were going to have to build the plane as we fly it a lot like we did with the pandemic. The commission admits that, and says it will adjust its roadmap as new evidence and new tech emerges. Wright thinks people are confused about exactly what the law asks the commission to do. This is not surprising, because its a brand-new institution. It needs to provide advice on the direction of policy, rather than road test policies. I would hate to think this is going to damage the status of the commission, she adds. Its so important that the independence [of the commission] is maintained. Stay on top of the latest climate news. The Forever Project's Olivia Wannan will keep you in the know each week. Sign up here .