Decarbonisation can be a national investment

Much of the resistance to rapid decarbonisation makes the claim that countries cannot afford these new technologies.

This may have been true once, but the falling costs and growing advantages of cleaner technologies have flipped this around. Many nations are now seeing this transition as cost-neutral, or even beneficial, with a recent OECD-UNDP report laying out the evidence that “accelerating climate action is not only feasible, it also makes economic sense.  What do the costs look like for New Zealand?

HOW UK HOUSEHOLDS CAN SAVE $3,100 PER YEAR

The feasibility of the UK’s net-zero by 2050 target has recently been challenged by some of Britain’s opposition politicians. It certainly requires large technology changes, most of which are happening already as the UK electrifies. The investment required for these changes is substantial. The UK’s Climate Change Commission advice on the UK’s Seventh Carbon Budget forecasts the costs to be around “£700 billion over the 25 years to 2050”. That estimated investment is rapidly falling, down from £1,300 billion estimated only five years ago.

The net effect of this investment is that UK household costs go down. Their homes become cheaper to heat as the UK decouples the price of electricity from the price of natural gas and the switch to heat pumps mean that energy is used much more efficiently. Their vehicles become cheaper to run overall as they electrify. The overall saving per household could be $3,100 per year by 2050. (Not to mention the geopolitical advantages that accrue to a nation with more control over their own energy sources or the increased competitiveness of UK industry from cheaper power.)

Is this forecast credible? We think this underplays the advantages. Solar and wind generation continue their astounding downward price trajectory with little end in sight. Their Climate Change Commission presumes that solar will drop in price at 2.7% per year to 2050, whereas over the past ten years solar has achieved 4.9% declines. The same numbers for onshore wind are 0.6% forecast and 6.7% achieved. True, technology prices can fall more slowly as a technology matures, but set against that, further scale brings further learnings that keep driving down costs. So, we consider that the UK’s Climate Change Commission is being very conservative. We expect the return on the UK’s investment in decarbonisation will be higher than they expect.

CAN NEW ZEALAND DO THE SAME?

For any nation, the cost of decarbonisation depends upon what has to change, what changes have been made already, and the relative importance of differing sectors. For the UK that’s renewable generation, electric vehicles, and heat pumps as they move off coal, gas, and oil. For Aotearoa, we’ve already completed some of the actions that are paying off for the UK. Our electricity system depends much less on gas and that use will continue to decline as our gas fields run down. However, we’re yet to phase out our last coal use for generation whereas the UK ended coalfired generation in 2024.

In the UK, electricity prices are closely tied to gas prices. Decarbonisation reduces gas use, leading to a reduction in energy prices. Our link between electricity prices and decarbonisation is less direct, with retail prices increasing due to rising wholesale and lines costs, and complex retailing arrangements. In turn, wholesale prices are rising due to decades of underinvestment in generation and distribution, as well as the market arrangements that cause such underinvestment. Thus, the link between decarbonisation and lower retail prices is not as strong here as it is in the UK.

For vehicles, Aotearoa’s vehicle fleet is not electrifying as fast, thanks to lower fuel taxes, weaker policies, and slower fleet turnover. Our Road User Charges on EVs increase their per kilometre costs and reduce their cost advantage over fossil fuel vehicles. These factors act against rapid uptake of EVs here.

New Zealand’s drivers for decarbonisation are not as strong as the UK, so our progress on these easy actions is slower.

The harder actions will take bold steps, especially for agricultural emissions. It’s been twenty years since a politician drove a tractor up Parliament steps to protest the idea that the agricultural sector should pay for emissions. The sector still resists accepting this responsibility with pricing on emissions pushed back again. Without pricing, there are only weak incentives to reduce emissions.

HOW MUCH COULD NEW ZEALAND SAVE?

The overall opportunity for New Zealand is harder to take up than for the UK, as more of our emissions come from harder to abate sectors like agriculture (and international aviation, should we ever choose to include this in our national emissions accounting).

Our Climate Change Commission provided a technical analysis of the domestic actions that we could take to meet our emissions targets and what the costs of those would be. Their 2024 Report on the potential domestic contribution to Aotearoa New Zealand’s second nationally determined contribution considered three scenarios with different ambitions, risks, and rates of change. For example, our 2021 renewable generation of 35 TWh increases to 52-59 TWh and electrification of light passenger vehicles rises from 38 to 55% by 2035, depending upon the scenarios. These scenarios see our emissions fall by 40 to 70%, depending upon how ambitious we want to be.

As in the UK, these changes should create significant medium and long term savings in cost for power and transport set against initially higher investment costs. When compared to business as usual reference scenarios, the more ambitious scenarios might cost us 0.7% of GDP by 2035.

This change is within the error of the model — we simply don’t believe that an economic forecast for a decade into the future can have an accuracy of better than 1%. In effect, the supposed cost of a more ambitious transition is so low that we cannot credibly predict it.

So, New Zealand is not forecast to make a savings in the manner that the UK has done. Our best estimate is that the cost of more ambition is close to cost neutral. However, we think this modelling approach is conservative — that cleaner technologies are improving faster than presumed, that the indirect benefits are greater than these models presume, and that the costs of not acting will rise faster than estimated.

WHAT ARE OTHER NATIONS DOING?

Every comparable nation is facing the same question as the UK and New Zealand — cleaner technologies are more efficient with lower operating costs but these are set against higher initial costs. McKinsey’s report “An affordable, reliable, competitive path to net zero” explores how nations are justifying significant upfront investment for long-term economic benefits. They present the decarbonisation transition as having four goals — reducing emissions, affordability, reliability, and industrial competitiveness. We agree and we would add the value that can come if the transition targets the co-benefits possible from more equitable approaches.

WHAT ARE WE DOING?

Within this global shift, CVCF is demonstrating that decarbonisation is a way to build excellent businesses that deliver both profits and emissions reductions. We look for the kinds of niche companies that a small venture capital fund can accelerate and that can deliver very high returns.