Friday, April 19, 2024

A reserve bank for the environment

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The economic levers a government has provide a useful model for the environmental checks and balances it will need, writes David Eade.
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Will they raise, or will they hold? When exploring levers, it’s hard to go past the power of the Reserve Bank of New Zealand to set the Official Cash Rate – a lever that moves the New Zealand economy. 

A mega-lever, the OCR controls a mega-outcome, inflation. Simple. But like all things simple, this overnight success took 90 years to achieve. 

The RBNZ has been in operation since 1934, with an initial mandate to provide exchange rate stability. Fast-forward to 1989, and the RBNZ blazed a new trail that many other central banks would follow – announcing that it would focus only on keeping inflation within a desired range. 

Inflation is considered a proxy for economic health as it balances consumption of goods and supply of money. A spike in inflation, like that we have recently felt, is caused by too much money chasing too few goods. 

The goal of the Reserve Bank is to pull the OCR lever just as an economy fuelled by cheap money starts to chase too few goods. Put another way, its job is to take the punch bowl away just as the party gets going.

When the lever is pulled, and rates rise, we collectively know that we are in for a stint of pain. Additional spending stops as we switch from Wattie’s baked beans to Pams. 

No one can complain in isolation, because the lever being used is so big that it affects the whole economy. It may not affect everyone equally, but the resulting effects are deemed to be fair. This breeds an element of collectivism where weathering rising interest rates is almost a badge of honour that unites people. 

Your level of debt load, or financial leverage, determines the effect a rising OCR has on you. Those with a high degree of debt, which includes most food producers, begin to feel pain as the OCR raises. Those with savings in the bank enjoy a rise in the OCR as it offers a higher return on safe assets like term deposits. 

There is a parallel between the journey of the RBNZ and the Climate Change Commission (CCC). The CCC has only just begun its journey, and much like the early days of the RBNZ, its mandate is broad. Its very broad purpose is to ensure NZ makes progress towards emissions reduction goals. 

It does have a lever – setting the price of a New Zealand emissions unit or NZU, the price for one tonne of carbon. But unlike the Reserve Bank, it does not have direct control over this lever. At this stage, it can only influence ministers to use the lever as it suggests.  

In time, it’s likely that the CCC’s ability to influence the market more directly will increase. But the real question is by how much? 

What would it look like if the CCC was officially the Reserve Bank of the Environment? Its lever might be something equivalent to pricing emissions and its mandate may be controlling environmental inflation – too much production coming from too few natural resources. 

In this scenario, those with environmental leverage (a high level of natural resource consumption) would have to tighten their belts and those with limited environmental leverage would be rewarded. Those who are efficient convertors of energy would grow, produce more goods, and employ more people. Those who are not would be slowly restricted.

Repurposed financial products and incentives, like green loans and clean car discounts, would not be required, as all lending initiatives would be focused on improving productivity from fewer natural resources. 

Much like a raise in the OCR, there would be no room for complaining as the results of pulling the lever would affect the whole economy. 

Would jobs be lost if the Reserve Bank of the Environment pulled hard on the pricing emissions lever, say in the aftermath of NZ missing a critical climate goal that jeopardises a trade relationship with a low-emitting partner like the European Union? Probably. 

But is that any different from the recession-edging treatment the Reserve Bank is putting us through now? We probably wouldn’t accept that treatment now, but after a few more Cyclone Gabrielles and Auckland flooding events? Maybe.  

This might sound very dystopian to some, but the world’s trajectory is slowing inching in this direction. There is a growing emphasis on meeting environmental goals – evidenced by the passing of the Biodiversity Bill in the EU and the Nature Repair Bill in Australia. 

To reach our net-zero goals, we are all required to become more efficient energy convertors, which will likely require a mixture of utilising new and existing technologies. We’ll also need new frameworks – like a reserve bank for the environment – that seem pretty ridiculous now, but may be called on in a future of climate breakdown. 

The NZ primary sector would probably do well under such a framework. Like the savers who smile when the OCR rises, our ability to provide habitat, store carbon and efficiently produce valuable products by harvesting energy flows of light, water and soil puts us on the right side of the ledger. 

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