Resounding cheers greeted Jacinda Ardern and James Shaw when they went to Victoria University last Thursday to explain that morning's announcement that no more offshore oil and gas exploration permits will be granted.

Gratifying to their ears, no doubt — but entirely undeserved.

This policy is self-righteous nimbyism, environmentally pointless, economically costly and politically counter-productive to the Government's own agenda on climate change.

What matters for the climate is how much fossil carbon is consumed, not where it is produced.

Advertisement

How much is consumed needs to go to zero. Until it does, though, where it is produced does matter for the economy.

The opportunity cost of this ban — the jobs, royalties and export revenues forgone — is unknown and unlikely ever to be known given the chilling effect it will have on exploration of the existing permit areas.

What we do know is that New Zealand struggles to earn its living as a trading nation. Right now we are enjoying the best terms of trade on record, the most favourable mix of export and import prices ever.

But we still run a $3 billion trade deficit, underpinned by a net $4.5b deficit in petroleum and petroleum products. It contributes to an overall external deficit of $7.7b in 2017, which has to be financed by running up debt, or selling off assets, to the rest of the world.

That is another good reason, of course, to decarbonise the transport sector, the source of 13.5 per cent of the country's greenhouse gas emissions.

But with the best will in the world, that will take years.

In the meantime we spend more than $1000 a head on imported oil. As it is a fungible commodity, to the extent New Zealand is a net consumer of oil, some of that money ends up funding the ethically dubious activities of the Iranian, Saudi and Russian governments rather than our own.

It costs many millions of dollars to drill exploration wells and the odds of a strike are 10 to 15 per cent.
It costs many millions of dollars to drill exploration wells and the odds of a strike are 10 to 15 per cent.

Is this a real choice, though, domestic versus imported oil?

We will never know. The Government makes much of the fact that a large area — 100,0000 square kilometres, the size of the North Island — is already covered by exploration permits and those rights are grandfathered.

The ban on issuing any more permits is a long-term signal, it says. In the meantime, "just transition" is the watchword. You will hardly feel a thing.

This elicits snorts of derision from the industry.

The chief executive of the Petroleum Exploration and Production Association (Pepanz), Cameron Madgwick, points out that it costs many millions of dollars to drill exploration wells and the odds of a strike are 10 to 15 per cent, so the holders of permits seek deep-pocketed joint venture partners to share the risk.

Competition for that capital is global and a Government declaration that "fossil fuels are not our future" is bound to discourage it.

Jacinda Ardern and James Shaw have announced that no more offshore oil and gas exploration permits will be granted. Picture / Mark Mitchell
Jacinda Ardern and James Shaw have announced that no more offshore oil and gas exploration permits will be granted. Picture / Mark Mitchell

The executive director of the Business NZ Energy Council, John Carnegie, said: "This is a strong signal to investors, that they will respond to immediately not some time in the future. All plans, current and future, will now be reconsidered in light of this decision, especially when combined with the prospect of a higher future carbon price.

"The likely result will be no further investment or job growth in that part of the industry."

It is also something of a vote of no confidence by the Government in its main climate policy instrument, the emissions trading scheme (ETS).

The entire purpose of the ETS is to send a reliably rising price signal to inform and influence commercial decisions about where to invest. Does it make more sense to spend money drilling into the earth's crust or building a torrefied wood pellet plant, say, or investigating the feasibility of turning the black liquor from pulp mills into bio-diesel?

The big game has to be the Zero Carbon Act: setting a net zero emissions target and setting up a mechanism for carbon budgets en route to that goal. Picture / 123RF
The big game has to be the Zero Carbon Act: setting a net zero emissions target and setting up a mechanism for carbon budgets en route to that goal. Picture / 123RF

Those are risk/reward calculations for private enterprises to make. The more the Government pre-empts those decisions by fiat, the more it reduces the utility of the ETS.

Shaw's response to that argument is that demand-side measures like a carbon price need to be complemented by supply-side polices.

In other words, knowing that existing natural gas reserves will cover only 10 or 11 years' consumption at current rates should encourage the development of alternative sources of industrial heat and the replacement by renewables of the 15 per cent of electricity production now derived from fossil fuel.

Recommendations on planning for the transition to 100 per cent renewable electricity in a normal hydrological year (an important caveat) by 2035 is one of the two main tasks of the distinguished interim climate committee established this week.

Within hours, National leader Simon Bridges had promised to reverse the policy if his party is returned to power in 2020. Picture / NZME
Within hours, National leader Simon Bridges had promised to reverse the policy if his party is returned to power in 2020. Picture / NZME

Their other job is to consider how and under what conditions including agriculture in the ETS could be made to work.

Although that is a daunting agenda, it would have made sense to put the question of exploration permits to the committee as well. For one thing, it would have meant more industry consultation than seems to have happened.

It is not as if there is any obvious time pressure. The oil industry is not beating down New Zealand's door. In each of the past two years, only one permit has been granted for offshore exploration.

But the worst aspect of the policy is that it politicises climate policy at a time when precisely the opposite is needed. Within hours, National leader Simon Bridges had promised to reverse the policy if his party is returned to power in 2020.

The big game has to be the Zero Carbon Act: setting a net zero emissions target and setting up a mechanism for carbon budgets en route to that goal, guided by an independent and expert Climate Commission, for which the interim committee is a precursor.

For that policy to prove durable and effective, it will require cross-party support, which will be difficult enough to achieve given the vexed issues around the agricultural gases.

Tossing a trophy to the Green Party base, perhaps in the hope of reducing the risk that the Green vote gets wasted in 2020, smacks of ad hoc partisan politics as usual.

It is utterly at odds with the careful, consultative, consensus-seeking approach being pursued over the larger climate agenda.