Budgeting analysis

Published in Insights, The New Zealand Initiative’s newsletter, 29 January 2021

This week, Stuff’s Thomas Coughlan uncovered an extraordinary story of last-minute heroics by officials who demanded good practice on an important decision.

As Cabinet prepared to make its final decision on the proposed Auckland light rail project in February 2020, Treasury intervened. Their objection was this: after two years of planning, for a $10 billion project, nobody had done a cost-benefit analysis.

Treasury suggested postponing the decision until the ‘value-for-money’ case had been made.

Covid-19 further delayed the decision before New Zealand First finally killed the project.

The story reveals an astonishing disregard for costs and benefits, especially given the large sums involved.

Cost-benefit analysis, often loathed by Ministers, serves the public interest. It puts an onus on officials to show a project can plausibly deliver tangible and intangible benefits which are large enough to justify costs.

It is not uncommon for analysis to reveal projects which would cost many times more than their benefits.

Nowhere is the risk of lopsided costs and benefits greater than emissions policies.

On Sunday, we will learn whether the Climate Change Commission sees value in cost-benefit analysis when it presents its long-awaited carbon budgets. The budgets will chart this country’s course to lower emissions over the next 15 years.

The Commission’s recommendations will have even greater ambition and reach than Auckland’s light rail, affecting every person and every business in New Zealand.

What chance the Climate Commission’s proposals stack up against conventional cost-benefit analysis?

An area likely to command the Commission’s attention is transport, which produces 20% of New Zealand’s emissions.

The Commission is likely to recommend the country’s vehicle fleet transitions off fossil fuels to alternatives, mainly electricity.

That transition, if it is recommended, will not come cheap. At a conference late last year, the Commission’s chairman Dr Rod Carr anticipated a potential cost “well over $100 billion in the next 25 years”.

The Commission may also recommend emissions standards, restrictions on imports of certain vehicle types or vehicle usage restrictions.

Whatever the Commission proposes, its recommendations will have substantial direct and indirect costs which can be justified only by lower emissions.

Anyone who cares for effective climate change action should care for cost-benefit analysis. Such analysis can reveal how to get the biggest emissions reduction bang for our buck. Of course, this must also include whether the proposed measures are compatible with New Zealand’s Emissions Trading Scheme. Or, indeed, whether buying and retiring ETS credits would be more effective than some of the measures considered.

Yet such analysis likely will not feature in the Commission’s proposals. In their public statements, the Commission’s chair and staff have repeatedly said their advice would be a “direction of travel.” Cost-benefit analysis will come later when departments write the black-letter laws.

The problem is twofold. First, departments no longer routinely do cost-benefit analysis, as the Auckland light rail case shows. If the Commission does not do the analysis, it is possible nobody else will. Second, the Climate Change Minister has said he will accept whatever the Commission gives him. Given this, the Commission should have at least a rough idea about the efficiency of those policies.

Even if its proposals are only in principle, the Commission cannot wash its hands of the responsibility to check its conclusions when it knows nobody else will do an analysis before the government commitment becomes final.

The Commission’s predecessor, the Interim Climate Change Committee, set a useful precedent by backing its advice on the electricity sector with high-quality analysis.

Will the Commission use analysis to support its proposals, demonstrating the emissions benefits of their ideas? Or will the Commission merely repeat the Auckland light rail non-analysis? We must wait for the Commissions release on Sunday to find out.

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