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?
In a slightly more fulsome address to Peter’s questions where I reference my initial NBR article, and for those who (wisely) don’t use LinkedIn, I’ve transferred that article onto Substack, (https://johnlsyoung.substack.com/p/nzs-green-bank-risks-being-regarded), I’d like to highlight two points:
a) ‘Market failure’ - there isn’t an obvious case of this as NZGIF’s investments are concentrated in asset finance ( EVs/Solar), where there already numerous market participants. Additionally, while the bulk of NZGIF’s lending is longer than five years, it doesn’t indicate that their provision of longer term lending addresses market failure as the majority of the NZGIF debt is on a floating, not a fixed rate basis.
b) ‘Alternatives’ - feed-in tariffs for solar and offshore wind farms ( i.e NZSF/CIP referenced )as an alternatives rather than a green bank. These might help reduce the need to burn coal in electricity generation, which emits 1.8 million tonnes of CO2, annually.
This is a bit off topic (as I was initially interested in the efficacy of the reporting methodology, and then the robustness of the Green Bank as a vehicle to deliver meaningful and cost effective Carbon abatement), but here are some earlier thoughts on the NZ ETS:
In moments of flippancy, but with an element of seriousness attached to it, when people have asked where else can that NZ$700mio of NZGIF money go, I’ve suggested ‘giving it away’. When one considers that green transition ( and associated carbon abatement) can’t occur without emerging economies. For context, since 2001 the Democratic Republic of Congo alone has lost 18.4 Mha of tree cover( equivalent to 75% of the land mass of New Zealand) which is about 11.4 Gt worth of CO₂e emissions, then the NZGIF’s few hundred thousand tonnes of life-time abatement is meaningless and NZ would be better pledging the money to the IMF/World bank to help make a concept that was aired by the FT’s Martin Wolf a reality: https://www.ft.com/content/770aadbb-1583-40ae-b072-9ef44c27cc15
Hi Peter. Great questions. Here are my quick thoughts:
Your question "why there is failure here" is important. At the top level, I think we need to ask is the task assigned to NZGIF realistic? If it is, then we need to look at governance and people issues. If it is not realistic, then why not? I have some preliminary theories, which I think worth considering:
1. The green bank model is predicated on a market failure, i.e. there are commercially worthwhile projects unable to access external finance because they are perceived to be riskier by lenders/investors than their fundamentals would suggest. This might have been true 10-15 years ago ... but is it still true today? Have commercial lenders gained sufficient experience that "green" projects are normal fare for commercial lenders/investors, who have more experience and scale than NZGIF?
2. John's comparator green banks (Australia and NY) are in places without comprehensive carbon pricing schemes (such as the NZ ETS). An ETS, by design, "picks" the low-hanging fruit. The absence of project with low-cost carbon abatement in NZGIF's portfolio will necessarily affect it average performance.
These points begs the question of whether a green bank is useful in the NZ context, at least for funding projects with emissions already covered by the ETS.
Regarding "what if anything practical can be done to speed up NZ decarbonisation"? The standard economist's answer might include the following (1) expand the scope of the ETS to include methane etc.; (2) be more permissive towards technologies that help farmers etc. reduce methane emissions; (3) reduce current and future allocations of units under the ETS, which would push unit prices higher.
I note that (1) has struck road blocks under both Labour and National governments. I suspect that resolving (2) is an important step towards clearing those roadblocks.
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?
Hello Peter, thank you for your comment.
Some of your observations I very briefly touched on in my initial NBR article last year, which can be found in the link below.
https://www.linkedin.com/posts/john-young-1192a425_carbon-emission-benefits-and-green-banks-activity-7082156145649348608-HRTg?utm_source=share&utm_medium=member_desktop
apologies for the document formatting, as that was determined by NBR.
In a slightly more fulsome address to Peter’s questions where I reference my initial NBR article, and for those who (wisely) don’t use LinkedIn, I’ve transferred that article onto Substack, (https://johnlsyoung.substack.com/p/nzs-green-bank-risks-being-regarded), I’d like to highlight two points:
a) ‘Market failure’ - there isn’t an obvious case of this as NZGIF’s investments are concentrated in asset finance ( EVs/Solar), where there already numerous market participants. Additionally, while the bulk of NZGIF’s lending is longer than five years, it doesn’t indicate that their provision of longer term lending addresses market failure as the majority of the NZGIF debt is on a floating, not a fixed rate basis.
b) ‘Alternatives’ - feed-in tariffs for solar and offshore wind farms ( i.e NZSF/CIP referenced )as an alternatives rather than a green bank. These might help reduce the need to burn coal in electricity generation, which emits 1.8 million tonnes of CO2, annually.
This is a bit off topic (as I was initially interested in the efficacy of the reporting methodology, and then the robustness of the Green Bank as a vehicle to deliver meaningful and cost effective Carbon abatement), but here are some earlier thoughts on the NZ ETS:
https://www.linkedin.com/posts/john-young-1192a425_nzs-emissions-trading-scheme-feb-2023-a-activity-7102067558198956033-ENNq?utm_source=share&utm_medium=member_desktop
In moments of flippancy, but with an element of seriousness attached to it, when people have asked where else can that NZ$700mio of NZGIF money go, I’ve suggested ‘giving it away’. When one considers that green transition ( and associated carbon abatement) can’t occur without emerging economies. For context, since 2001 the Democratic Republic of Congo alone has lost 18.4 Mha of tree cover( equivalent to 75% of the land mass of New Zealand) which is about 11.4 Gt worth of CO₂e emissions, then the NZGIF’s few hundred thousand tonnes of life-time abatement is meaningless and NZ would be better pledging the money to the IMF/World bank to help make a concept that was aired by the FT’s Martin Wolf a reality: https://www.ft.com/content/770aadbb-1583-40ae-b072-9ef44c27cc15
and here
https://www.climatepolicyinitiative.org/wp-content/uploads/2023/06/An-FX-Guarantee-Mechanism-for-the-Green-Transformation-in-Developing-Countries.pdf
Totally accept that this is unlikely to happen for political reasons
Hi Peter. Great questions. Here are my quick thoughts:
Your question "why there is failure here" is important. At the top level, I think we need to ask is the task assigned to NZGIF realistic? If it is, then we need to look at governance and people issues. If it is not realistic, then why not? I have some preliminary theories, which I think worth considering:
1. The green bank model is predicated on a market failure, i.e. there are commercially worthwhile projects unable to access external finance because they are perceived to be riskier by lenders/investors than their fundamentals would suggest. This might have been true 10-15 years ago ... but is it still true today? Have commercial lenders gained sufficient experience that "green" projects are normal fare for commercial lenders/investors, who have more experience and scale than NZGIF?
2. John's comparator green banks (Australia and NY) are in places without comprehensive carbon pricing schemes (such as the NZ ETS). An ETS, by design, "picks" the low-hanging fruit. The absence of project with low-cost carbon abatement in NZGIF's portfolio will necessarily affect it average performance.
These points begs the question of whether a green bank is useful in the NZ context, at least for funding projects with emissions already covered by the ETS.
Regarding "what if anything practical can be done to speed up NZ decarbonisation"? The standard economist's answer might include the following (1) expand the scope of the ETS to include methane etc.; (2) be more permissive towards technologies that help farmers etc. reduce methane emissions; (3) reduce current and future allocations of units under the ETS, which would push unit prices higher.
I note that (1) has struck road blocks under both Labour and National governments. I suspect that resolving (2) is an important step towards clearing those roadblocks.