NZ's Green Investment Bank is underperforming🍋
Its ongoing operation is difficult to support on a value for money and decarbonisation basis
New Zealand Green Investment Finance (NZGIF) was one of the previous government’s central policy tools to decarbonize New Zealand’s economy and meet its 2050 Net Zero commitment. NZGIF, a “green bank”, was launched in 2018 as a “commercially focused investment company which will work to invest with business to reduce emissions while making a profit”.
Last year I looked into the performance of NZGIF in a piece for the National Business Review, which examined the carbon abatement data NZGIF’s 2021/22 Emissions Benefit Report (EBR). I concluded that
“regardless of the methodology applied, the NZGIF is an expensive way to reduce one tonne of carbon from the environment”.
As NZGIF has recently released its 2022/23 EBR, I thought I’d revisit its data to see if its performance has improved. Spoiler alert: It hasn’t.
Three colours green
Green banks have a difficult task. They need to make a profit, so can’t take commercial risks without appropriate (commercial) recompense. But their whole reason for being is to fund additional carbon abatement, i.e., projects that would not have happened without the bank’s support. Such projects, by definition, are among the more commercially risky, threatening the bank’s long-run profitability. Given these tensions and risks, it is prudent to closely monitor green bank performance.
For my analysis, I’ll draw on three sources:
The many prices of carbon, an Asymmetric Information post by economist
;a paper by the Energy Efficiency & Conservation Authority (EECA) on the Government Investment in Decarbonising Industry (GIDI) fund, which provides a methodology for assessing funding eligibility; and
a comparison with NZGIF’s Australian green-bank peer: the Clean Energy Finance Corporation (CEFC).
The carbon abatement schedule
The many prices of carbon helpfully described the relevant carbon prices, namely the social cost, shadow price, and market price. To summarise:
The social cost of carbon (SCoC) is an estimate of the cost of global damage from one additional tonne of carbon in the atmosphere. Equivalently, it is an estimate of the climate-related benefit of any action taken to reduce a tonne of carbon emissions. The SCoC should be regarded as an upper limit, that is, the most society should be willing to pay to avoid a tonne of carbon emissions.
The shadow price of carbon (SPC) is an estimate of the long-run average cost per tonne of meeting emissions commitments. The NZ Treasury has produced a table of SPC values. It recommends using the SPC for carbon co-benefits in cost-benefit analyses (CBAs).
The market price for carbon (ETS price) reflects the short-run marginal cost of abating a tonne of carbon emissions, given national targets and other settings of the NZ Emissions Trading Scheme (ETS).
Dave used NZ$350, NZ$181 and NZ$72 as indicative prices for the SCoC, SPC, and ETS price respectively.1 He added these prices to a stylised graph, the carbon abatement schedule, which ranks opportunities to abate emissions by the unit cost of abatement.
The schedule divides abatement opportunities into five zones:
Black: These opportunities offer private benefits without government intervention, even absent an ETS.
Yellow: The ETS makes these opportunities privately profitable to pursue without (further) government intervention.
Green: These opportunities are privately unprofitable at the current ETS price but offer a long-run public benefit (conditional on reliable estimates of the SPC). We should not expect these opportunities to be privately pursued without a higher ETS price or additional government support.
Orange: These opportunities offer a social benefit but are more costly than necessary to achieve the emissions commitment implicit in the SPC (as the green zone can be pursued instead). They should only be pursued if all green-zone options are exhausted and further reductions still need to be made.
Red: There is no case for pursuing opportunities above the SCoC even if all others are exhausted, as these activities squander social resources.2
NZGIF’s average cost of abatement is NZ$356 per tonne. This puts it just above the SCoC and into the red zone. We are collectively better off not meeting emission reduction targets than pursuing red-zone activities.
NZGIF funds projects that probably are not eligible for funding by other parts of Government
The previous government established the GIDI fund to “leverage private capital and know-how … with the potential to achieve emissions reduction at a comparatively low price”. If that sounds familiar, it should. It’s the same principle behind a green bank such as NZGIF.
The EECA helpfully outlined a CBA framework for GIDI co-funding, which aims to:
“(a) Identify projects with abatement costs that are so high that compelling reasons would need to be provided to show that co-funding them is in the national interest.
“(b) Identify projects with abatement costs that are so low that compelling reasons would need to be provided to show why they would not be likely to happen anyway, or would not happen within the timeframes needed to meet New Zealand’s Emissions Budgets
“(c) Provide appropriate levels of co-funding to enable applicants to implement the proposed energy efficiency and emissions reduction projects, prioritising projects that deliver maximum value to the Crown, and ensuring that outcomes are consistent with GIDI’s budget and decarbonisation targets.”
This framework parallels the carbon abatement schedule. Point (a) corresponds to the orange and red zones, and point (b) to the black and yellow zones. Only projects in the green zone would be eligible for funding under point (c).
These concepts are encapsulated in this figure, which shows how four projects would be assessed relative to a “decision threshold” — a ceiling determined by the shadow price of carbon.
Project A’s abatement costs are above the threshold line and so should not receive funding from the GIDI — this would represent an economic loss for “NZ Inc.” Projects B and C, being below the threshold line, would be beneficial to NZ Inc. and thus eligible for GIDI funding. Project D would be beneficial regardless of any emission considerations, and thus should not receive funding.
The EECA paper contains a worked numerical example.3 The bar titled “Project” could be Project B or C from the figure above.
As the abatement cost of the “Project” is lower than the SPC, it represents a gain for NZ Inc. As private sector investment covers the “residual”, the government can achieve this benefit for a lower financial outlay (labelled “EECA”).
If we consider NZGIF’s investment portfolio as a “Project”, then its average unit abatement cost ($/tCO2e) is NZ$933, with a cost to government of NZ$356 (see table below). Both figures are well above the SPC of NZ$181.
Mapping those numbers against Dave’s carbon abatement schedule puts NZGIF in the red zone – i.e. NZGIF is a net social cost to NZ Inc. Alternatively, using the EECA investment framework, NZGIF’s investments reflect an abatement cost so high that NZGIF wouldn’t receive funding from the GIDI.
Peer group comparison
It’s instructive to see how NZGIF stacks up against peers. The table below, taken from the 2023 annual report of CEFC, the Australian green bank, shows the impact outcomes of the CEFC and the New York Green Bank. How does NZGIF stack up against these two? Those banks reported a unit cost of CO2e abated of A$53 and US$46, respectively.4 These costs are below most estimates for the shadow and social cost of carbon, and much lower than NZGIF’s NZ$356 cost.
It might be argued that it’s early days for NZGIF, having only been established in 2019. This argument does not hold up looking at the equivalent data for CEFC. In 2016, four years after it became operational, its unit abatement cost was just A$33.50.
It’s telling that the CEFC’s abatement cost has risen over time, to A$53 in 2023. This is perhaps indicative that some of the low-hanging decarbonization fruits have already been picked. That trend is also evident in the NZGIF’s data.
What is also revealing is that lifetime emission abatement quantities have been revised downward in NZGIF’s recent EBR. This might indicate that some of NZGIF’s investments have fallen short of delivering their anticipated benefits.
Weighed, measured, and found wanting
Ahead of the May 2023 budget, the Government announced that the NZGIF was to receive an additional NZ$300m of funding, which was to come from the Climate Emergency Response Fund (CERF). The CERF is the recipient of monies received from the ETS.
Prior to the budget, EY conducted an independent performance review of the NZGIF. The terms of reference for the review included:
"Does NZGIF’s capitalisation allow it to meet its objectives in the longer term?"
It's quite the loaded question.
Given that, in the words of EY, they only conducted “high-level research” of other green banks, EY’s response is perplexingly emphatic:
“An increase in capitalisation is needed to support its ability to achieve its objectives, and to reach the scale that is needed for it to have a material role in decarbonising New Zealand. Increased capitalisation could help NZGIF scale to support additional co-investment opportunities and signal to the market its ability to continue its investments”.
Two of NZGIF’s four long term objectives two are: “to reduce emissions” and to “crowd in private capital”. So it might be reasonable to expect that EY, having researched other green banks, would opine on NZGIF’s relative performance on these metrics before concluding that more money was the answer.
As I’ve shown above, the NZGIF’s economic emissions benefit performance is significantly below that of two other green banks. Similarly, its ability to attract private sector capital at 1.5x, compares poorly with 2.82x for the CEFC and 1.89x for the New York Green Bank. EY’s principal comparative observation seems to be that the NZGIF had a smaller capitalisation than the green banks of Australia and the UK. Correlation maybe, but EY presented insufficient evidence to attribute causation.
Decorative, but not functional
I concluded my 2023 assessment by saying that NZGIF risked being regarded as an
“expensive piece of policy Objet d’Art – decorative, but not a functional and impactful solution in decarbonising New Zealand’s economy”.
One year on, my opinion hasn’t changed. In fact, it’s been strengthened. NZGIF represents a net social cost to NZ Inc., and its ongoing operation is difficult to countenance on a value for money and decarbonisation basis. It should be shut down, and its funds redirected to better-performing environmental initiatives.
The NZ ETS price is NZ$52.75 as at the time of writing (10 June 2024).
The comments section of The many prices of carbon discusses an corner case in which a country R might be justified in pursuing some red-zone opportunities. The corner case relies on those opportunities also contributing to the settlement of a pre-existing debt to another country P that cannot be feasibly settled at a lower cost to R. Under these conditions, the cut-off between the orange and red zones for country R is (SCoC + Δ), where Δ is an identifiable per-tonne benefit to R from settling its debt to P. In the corner case, the pre-existing debt arises from an ethical obligation (which may be difficult to price). This observation generalises to other types of separately identifiable yet tied benefits that are not included in the social cost of carbon calculation. Diplomatic benefits are one possible example.
See Appendix C.
For any quantity and type of greenhouse gas, CO2e signifies the amount of carbon dioxide (CO2) which would have the equivalent global warming impact.
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It's great having these forensic analyses that take apart attempts to assist decarbonisation. What I don't learn is why there is failure here - managerial incompetence, political interference, particular nature of the NZ market (most electricity already renewable) - and what if anything practical can be done to speed up NZ decarbonisation. We now have an administration that, as far as one can tell, is happy to leave NZ flounder in its attempts to reduce its emissions. But if the govt and its advisers are unable or unwilling to help us, can our forensic analysts do better, or does economics remain the dismal science that can tell us what not to do, but offers few practical suggestions as to what we can do?