The multi-billion climate adaptation fund idea explained

Sunday, 21 July 2024

Levies on rates, petrol or property insurance could be used to pre-fund costs of managed retreat.

EXPLAINER: Levies on house insurance flow into the Natural Hazard Fund. Levies on employers keep the ACC Fund topped up. Hard-earned tax dollars go into the NZ Superannuation Fund.

New Zealand has a history of setting up giant funds to help pay for giant future costs.

Now, there’s a growing call for a national climate adaptation fund to be established, possibly funded by new levies on insurance, or on council rates.

Raewyn Peart from the Environmental Defence Society (EDS) pulled no punches when she addressed the finance and expenditure select committee inquiry into climate adaptation on how much it’s going to cost the country to adapt to climate change.

“It’s going to be really, really expensive. We need to establish a national adaptation fund,” she told MPs.

Hone Winder-Murray tells MPs about the reality of climate change for one hapu near Katikati.

Supporters say putting money into a fund is fair, as it means the current generation is partly pre-funding future climate adaptation costs that would otherwise have to be paid by future generations.

Why might we need a giant climate adaptation fund?

The cost of adapting to climate change is going to be very large, experts say.

It will include doing things like building defensive infrastructure, such as flood defences, moving infrastructure such as roads, and even, one day, moving homes and entire communities out of flood and coastal areas – a process known as managed retreat.

The select committee was told about the threats to some communities, including the small coastal western Bay of Plenty papakainga of Ngāi Tamawhariua which Hone Winder-Murray said “will soon be under water”, though the hapu that live there does not have the money to buy land nearby to relocate.

Some have told MPs that costs of climate adaptation should fall where they lie. People who own a house in a flood zone took the risk of buying it, and so should wear the loss, if it has to be abandoned.

But flood after flood, natural disaster after disaster, New Zealanders have by and large rejected that view.

In Christchurch, in Auckland, in Gisborne and in Hawke’s Bay taxpayer and ratepayer money was used to buy out owners of homes that should not be rebuilt.

Homes, council infrastructure and businesses may have to be moved from flood and erosion-prone areas.

Those arguing for a fund, say if we know costs are coming, we should be setting money aside now to pay for it.

Are there other potential benefits?

Knowing there is funding to help them could encourage councils and communities to get cracking on adaptation planning.

It could enable managed retreat form risky areas before a life-threatening disaster hits them, MPs have been told.

It could also help preserve and protect national and local taonga like coastal marae and papakainga.

And the downsides?

It would mean new taxes.

The select committee inquiry has also heard from people who fear the country has lapsed into climate alarmism, and is heading down a costly route on disputed scientific modelling, which ultimately undermines personal liberties, and private property rights.

Who might run such a fund?

The Christchurch red zone is the largest example of retreat yet undertaken.

One suggestion is the Natural Hazards Commission (previously the Earthquake Commission). It’s used to running a big fund.

In 2023 the expert working group on managed retreat said a new crown entity might be set up to manage it.

How big would it need to be?

The thinking is not yet advanced enough to say, but it would have to be billions.

In 2022, when it first suggested a giant fund be established, the EDS said: “It is challenging to estimate the likely annual costs of managed retreat in future decades, let alone the possible cumulative costs by specific dates.

“One estimate concluded that annual costs should be under 1% of the country’s GDP (which was about $350 billion in 2022) over the next few decades.”

How might we build the fund up?

Many options are suggested.

It could be done general taxation like the NZ Super Fund.

Putting another levy on petrol would put up the price of petrol, and the costs of doing business.

It could be done through a levy on property rates, or, like the Natural Hazard Fund, through an additional levy on property insurance premiums.

Polluters could be asked to chip in through an additional levy on fossil fuels, it has been suggested.

Nobody to date appears to have suggested a dairy levy.

What would fund money be used for?

That would have to be nutted out, but it must not be a free-for-all poney pot for politicians to raid.

Helping pay for managed retreat from high-risk areas would be one potential use, though there is a growing lobby that says not everyone should be bailed out.

MPs have been told that using taxpayer dollars to buy out the owners of second homes, holiday homes, and bachs in coastal erosion zones and floodplains is not an acceptable use of public money.

Insurer IAG, the owner of State, NZI and AMI, has asked MPs to move quickly to stop development in areas that will be overtaken by climate change. It did not think the owners of properties in new developments in risky areas should be bailed out at a later date by taxpayers.

It could also be a mechanism used to help cash-strapped local councils fund climate adaptation plans, and pay post-disaster costs.

Do other countries have adaptation funds?

The EDS couldn’t find any examples.

Given New Zealand is, according to global reinsurers, the second most disaster-prone country after Bangladesh, it’s possible this could be something New Zealand takes a lead on the world in.