Inside Treasury’s fight to keep $23b climate cost off the books

There’s no getting around it, this is a story about accounting.

But sometimes what is being accounted for is so interesting and the numbers involved so large that it breaks out of accounting’s soporific cage.
This is a story about the accounting treatment of the cost of New Zealand meeting its international climate goals, which, by one estimate, could cost the Crown just over $23 billion by the end of the decade.

That’s a fairly staggering sum. The entire cost of NZ Superannuation this year is about $21.6b. However if you look for a similar cost of climate mitigation somewhere on Treasury’s books, you won’t find it.

Glance at Treasury’s Fiscal Strategy Model, (FSM) a 535-row spreadsheet whose 11,770 individual cells tell the story of the Government’s finances from here out to 2037, and you won’t find any indication that the Government is potentially sitting on a fiscal bombshell. Nor would you glean this from most Budget documents or the Crown accounts.

On the FSM, you can find the cost of superannuation each year for the next 15 years, and a reckoning of all the core Crown’s liabilities (about $230b now, rising to $300b over the four-year forecast period), but very little about this quite crucial, and very real, climate liability.

That would seem to be a problem, and it is one former Climate Minister James Shaw tried, and failed, to solve. He wanted to see that number, whatever it was, sitting on the books published by Treasury, an indication of what it would cost to meet New Zealand’s climate goals. As it happens, the cost is only mentioned in the “risks to the fiscal forecasts” section of Treasury’s “Economic and Fiscal Updates”, where Treasury warns climate commitments will “involve significant costs to the Government”, beginning in the next four years.

At stake is the cost of meeting New Zealand’s Nationally Determined Contribution or NDC under the Paris Climate Agreement, which is to achieve a 50 per cent reduction of net emissions below gross 2005 level by 2030, or a 41 per cent reduction on 2005 emissions levels using what is known as an “emissions budget” approach.

New Zealand has two ways to hit the goal. Firstly, by reducing the net emissions New Zealand produces. This is the job of the Government working to the process of the Zero Carbon Act to slowly bring down the net emissions produced by the country.

However, this alone will not be enough to hit the Paris target. To make up the shortfall, New Zealand will have to buy carbon credits from overseas, effectively paying other countries to reduce their emissions, and crediting those emissions reductions towards our own climate target.

The forecast cost of this varies wildly. A 2023 paper by Treasury, Ngā Kōrero Āhuarangi Me Te Ōhanga – Climate Economic and Fiscal Assessment, found, frustratingly, that the forecast cost of this mitigation had an “uncertain” cost.

“In a scenario where the price of New Zealand’s offshore mitigation purchases aligns with the carbon price assumed by the IEA [International Energy Association] for emerging and developing economies (about $41 per tonne of CO2e on average), the cost of purchases could range from $3.3 billion to $4.2 billion,” Treasury said.

Those costs are non-trivial, but in the context of a Government budget of more than $160b a year by the end of the decade, $3.3b-$4.2b spread over multiple years is quite affordable.

But there are other scenarios, including where the price of New Zealand’s offshore mitigation purchases aligns with the carbon price assumed by the IEA for advanced economies under a scenario of enhanced global climate action (about $227 per tonne of CO2e on average). If that were to happen, the cost of mitigations would be between $18.3b and $23.7b.

New Zealand could still afford such a sum, but it would be costly – and if it eventuated, it would come at a very real cost to the Crown, which would have to be met by raising taxes, cutting services, or borrowing.

Briefings released under the Official Information Act and recently published by Treasury show that in August 2021, Shaw and then-Finance Minister Grant Robertson got advice from Treasury on the potential of including the cost of that NDC liability on the Government’s books, like the many other costs the Government is required to pay

Treasury was not keen on the idea and appears to have killed it. The paper said Treasury’s decision not to include this cost was “consistent with engagements with the Financial Statements of Government Audit Committee which included the Office of the Auditor-General”.

The paper justified this because these climate liabilities failed to meet three “key tests” under the Generally Accepted Accounting Practice (GAAP) methodology that New Zealand and many other countries use.

These tests include the liability being a present obligation from the Crown to someone else; a “probable” outflow of resources, likely money, required to settle that obligation, and having a reliable estimate of the obligation. These tests exclude many other things we might think of as liabilities. For example, Treasury noted that when a child is born, it does not calculate as a “liability” the cost of sending them to school, due to complex rules around the Government being able to change that cost by adjusting policy settings.

Shaw was frustrated at some of the criticism from Treasury. Treasury noted that the Paris Agreement included no legal requirement “to enforce the achievement of the parties’ targets” and the absence of a party to whom the liability would be owed.

But there is an implicit enforcement of Paris which is the pariah status that will likely be given to countries that flout it, and an explicit enforcement in the trade agreements with the likes of the European Union that require New Zealand to honour its Paris agreements.

Shaw told the Herald that he even got advice from MFAT (Ministry of Foreign Affairs and Trade) on the nature of the Paris Agreement obligations to strengthen his case with Treasury.

The country will have to pay the NDC offset costs in one way or another. Shaw told the Herald the point of having them sit on the Government’s balance sheet was to help the country calculate the most advantageous way to reduce emissions.

“You’d have to do something about it,” Shaw said.

“If you acknowledge the reality that it is a liability, then you look for ways to avoid the liability. I think the primary benefit is that it might induce some more creative thinking than we’ve seen,” he said.

Shaw cited the example of the Recloaking Papatūānuku proposal, which aims to eventually restore almost one-fifth of NZ to healthy forest.

“Let’s say, for the sake of argument, it’s 50 bucks a tonne today [the current cost of offsetting those emissions]. The real carbon benefit is when those trees mature in, say, 2045 when the price is much higher $300 a tonne. The good folk of 2045 will be delighted to be only paying a debt at 50 bucks a tonne, plus the cost of capital,” he said.

By contrast, if nothing were done, then in 2045 the country will need to find a way of mitigating those emissions at $300 a tonne – a far greater expense.

Measuring the cost of offsets could also encourage a more sophisticated conversation about the merits of domestic action versus buying offsets offshore. The former Government sank hundreds of millions of dollars into decarbonising heavy industry, which was labelled “corporate welfare” by the then-opposition. Measuring these investments against the cost of buying these offsets from offshore could help the Government decide whether the investments were worth it.

“You might, for example, do an arrangement internationally at, say, US$30 and there might be something domestically that’s US$35 a tonne, but it changes our balance of payments or it helps to grow an industry that we don’t have,” Shaw said.

In some cases, it may make sense to still buy offshore mitigation, but in many others it may still look favourable when you factor in benefits like reducing New Zealand’s current account deficit by reducing energy imports.

Shaw also said that in some cases it could be beneficial for the Government to play matchmaker, encouraging New Zealand investment funds to invest and profit from offshore climate mitigation, which would then be credited towards New Zealand’s NDC goal.

This would not cost the Government much, if anything, because the capital would come from the private sector, which would reap the financial rewards of the investment.

Thomas Coughlan is deputy political editor and covers politics from Parliament. He has worked for the Herald since 2021 and has worked in the press gallery since 2018.