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There’s a New Driver in the Global Economy Seat

As the world tries to steer away from fossil fuels the opportunities for New Zealand could be huge, writes Amy Hamilton Chadwick.

13 May 2024

It’s more expensive to buy a battery electric vehicle (EV). It costs more than the equivalent petrol car, you’ll probably want to install a charger, and you’re going to need to learn about the charging network and change the way you plan trips. So, it’s fairly costly.

But once the money has been invested, and you’ve adjusted to a different way of powering your car, your ongoing costs are much lower. Recharging is much cheaper than buying petrol; maintenance and repairs are lower; and your emissions are close to zero.

On a much larger scale, this is analogous to what’s happening in the global economy. As the world tries to move away from fossil fuels, the upfront costs are astonishingly large. Mind-boggling sums of money are required to create the kind of energy generation, infrastructure and technology we need.

But once the facilities, systems and innovations are in place, the total cost of powering our world should be much lower. Ideally, energy generation will be cheaper, emissions will reach net zero, and the green economy will create billions of jobs.

So, what does this mean for New Zealand and the average Kiwi investor?

New green economy inevitable

In 2023, the world generated 50 per cent more renewable energy than it did in 2022, and this year global electricity emissions are set to fall for the first time, according to independent energy “think tank” Ember. Clean electricity is at a tipping point, which will have a major impact on emissions as we continue to electrify activities that were previously powered by fossil fuels, like heating our homes, driving and some manufacturing.

Global clean energy investment rose 17 per cent in 2023 to reach US$1.8 trillion, driven not only by renewable energy generation and EVs, but also by hydrogen technology and carbon capture, according to Bloomberg. Here in Aotearoa, investment giant BlackRock has set up a $2 billion green energy investment fund, and renewable energy consumption and supply reached record highs in 2023.

As the United Nations’ Secretary-General, Antonio Guterres, put it in January: “Let me be very clear again: the phase-out of fossil fuels is essential and inevitable. No amount of spin or scare tactics will change that. Let’s hope it doesn’t come too late.”

Challenges ahead for Aotearoa

In a shift of this magnitude there will always be massive problems to tackle and enormous opportunities to capitalise on.

For New Zealand, our isolation presents some issues when it comes to climate change. We rely heavily on the shipping and aviation industries to move ourselves and our goods around, to trade internationally and bring tourists to our shores. Unfortunately, this leaves us heavily reliant on oil, and long-distance travel and transport are among the hardest sectors to decarbonise. In the short term, this means we are vulnerable to rising oil prices or higher carbon prices, or both.

“Disruptions to shipping have quite profound effects on New Zealand, and they highlight our critical dependency on travel of various kinds – goods and people,” says Dr Kevin Trenberth, climate scientist and honorary academic in physics at the University of Auckland. “When you look at the international marketplace for selling goods, I’m not sure the cost of transportation is adequately factored in. It’s already significant, but it is likely to become more so.”

The cost of transportation is also likely to rise for travellers, he says.

“The cost of flying is almost sure in the longer term to go up. It’s very difficult to decarbonise the fuel for planes. I don’t see, in the near term, that there will be major advances on air travel and for shipping. Although there are prospects for various other fuels, and the marketplace may improve, I think we should expect them to become more expensive than they have been – tourism is an industry that is somewhat at risk, and it’s unclear how it’s going to evolve.”

Michael Worth, sustainability and impact lead at Grant Thornton, agrees, adding that tourists also contribute a high carbon footprint travelling to New Zealand, and place a load on our infrastructure and environment. Tourism might become even more of a luxury item in future.

We face additional, more mundane, challenges too; improving our electricity infrastructure for instance, so the grid can cope with our more electrified homes and businesses. Trenberth would like to see a national scheme to allow households to feed solar power back into the grid from home systems and to help optimise electricity use overall.

Opportunities to capitalise

There are also opportunities for a country with abundant natural sources of renewable energy. We have renewable electricity generation sites popping up across the country, taking advantage of our wind, hydro, geothermal and solar resources.

This is an excellent chance to improve our energy security. Reducing our reliance on oil by generating more energy at home means we aren’t at the mercy of price spikes or shortages in oil or coal.

The investment required to make this happen is substantial, but it could create jobs and make a sizeable contribution to the economy. Trenberth says he would like to see government incentives to help the push towards more self-sufficiency when it comes to energy and manufacturing, reducing our reliance on imports. And if we produce more than enough renewable energy for our own needs, we could potentially become a net exporter of green energy, which would be profitable and drive productivity.

Worth believes there’s also an opportunity for our timber industry to create positive environmental impact and employment in high-skill work, while helping solve our housing crisis.

“In 1948, Finland got the best designers together to make lovely homes using local wood, then worked out how to flat-pack them. They could then easily move them around a long skinny country. After that, they started exporting them. That’s a wonderful idea for us and for our timber industry. We can use that resource, add value, create energy-efficient, warm, dry homes and fix our housing problem. Then we can export. Depending on how you do it, you are sequestering carbon in the timber for long enough that it makes a real difference. We could fix our own problems, and export both the products and the knowledge.”

Cost of fossil fuels

At an individual level, it tends to be slightly more expensive to choose the greener option in 2024 – so it’s easier and cheaper to keep living like you’ve always done instead of investing in new ways to move around and use ethical products.

But that is changing. Burning fossil fuels will become the more expensive choice, driving up your cost of living. Not only will travel and imports become more expensive, but the price of petrol, diesel and natural gas are forecast to rise.

Even getting around our major cities by car may soon become prohibitively expensive as congestion charges are on the cards for Aucklanders, road toll prices rise, and parking spaces become rarer in most centres.

“Congestion charging is an obvious thing for all our major metros,” says Worth. “Parking in town? It’s nuts. If you want to exercise that privilege, you pay for using that asset and space.”

Councils now approve apartment buildings with no carparks, and often prioritise pedestrians and cyclists over drivers when they redesign public spaces. Despite many objections, the overall shift at national and local level is towards more efficient transport solutions, not simply electrifying our traffic jams.

At home, our appliances are going electric, and we may soon have new ways to mitigate high power bills. Aotearoa has lagged in its uptake of solar energy, but prices for solar photovoltaic modules have fallen 42 per cent since 2020, according to Bloomberg, so expect to see more solar farms and solar panels on homes and businesses. That will allow households to sell power back to the grid, or store it for their own use, which should help keep your electricity bill down.

“There is a tremendous amount of opportunity for New Zealand in solar energy,” says Trenberth.

Long-term ESG thinking

In the meantime, as all these green projects are gaining momentum, fossil fuel producers are aiming to squeeze every bit of juice out of the lemon, says Jason Choy, senior investment portfolio manager at InvestNow.

“The writing is on the wall for high emission businesses, so they are doubling down and doing as much digging and drilling as they can to maximise profits before the music stops. This has led to high returns recently for traditional vanilla funds, so they’ve been good performers in the short term. For ESG [responsible] funds, things have moved more slowly, but with potentially better long-term returns.”

He believes the long-term outlook for ESG investing is strong. Increasing ESG regulations and reporting – particularly in the European Union and United States – are slowly forcing businesses to operate in more ethical ways: “Ultimately, regulators will step in, and companies will have to play the game or they’ll be out of business. It will get to the point where there’s no other choice.”

But Kiwi investors need to start putting their money where their mouth is, instead of adopting a set-and-forget approach to their KiwiSaver and other investments.

“The RIAA surveyed Kiwis and 59 per cent said they would move their investments towards their values,” says Choy. “But FMA research shows that 75 per cent fail to actually walk the talk. People say, ‘Of course I want to change the world’ but then you ask them whether they paid for the carbon offset the last time they booked a flight on Air New Zealand – and very few have.”

Fees for ESG investment funds can be higher, but Choy says that gap is closing. If you do want to take the long-term view on your investments, start by finding out what funds you currently invest in and how they perform from an ethical perspective. It’s possible that switching to an ESG fund will mean sacrificing some short-term gains for better long-term outcomes, but that tends to be part and parcel of making good decisions for a long-time horizon.

“Climate change is a megatrend that is very long-term by its nature,” Choy adds. “We may not even see the benefits of decarbonising in our lifetime – maybe it will benefit your children or your grandchildren. It’s hard to think like that, but this is only going to keep growing.”

Informed Investor's content comes from sources that Informed Investor magazine considers accurate, but we do not guarantee its accuracy. Charts in Informed Investor are visually indicative, not exact. The content of Informed Investor is intended as general information only, and you use it at your own risk.

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