Chapter 10 Economy and financial system

Taking action now can reduce long-term costs and bring opportunities.

Climate change is already affecting our economy. It is increasing existing risks, such as floods and droughts, and has resulted in sea-level rise. Between 2007 and 2017, the contribution of climate change to floods and droughts alone cost New Zealanders an estimated $840 million in insured damages and economic losses.*

The public sector, businesses, property owners and civil society need to take action to reduce the scale of the long-term economic costs, and seize the opportunities of a changing climate.

Central government will take action, for example, through legislation, regulation, information or funding to incentivise others to reduce their risk.

Local government will make decisions, for example, on land use or local infrastructure.

Businesses (including iwi interests) and private citizens exposed to climate risks will consider future climate impacts when making long-term decisions, such as where to locate, how to earn an income and what type of insurance to buy.

We have a way to go. For example, less than 10 per cent of firms have assessed risks to their business from a changing climate, and less than 20 per cent intend to take action to reduce their risks over the next five years.**

The actions in this chapter will support the public and private sector and private citizens to better understand and take steps to reduce their risks to climate change.

* See Estimating Financial Costs of Climate Change in New Zealand: An Estimate of Climate Change-Related Weather Event Costs [PDF, 1.3 MB]

** See the Business operations survey: 2021 [Stats NZ website]

This plan addresses the seven economic risks identified in the National Climate Change Risk Assessment 2020. These will create flow-on effects on the economy – see figure 9 and the discussion on the following pages.

Figure 9: The seven economic risks and their cascading impact across the economy

Flow-on effects

The risks to the economy set out in figure 9 will create the flow-on effects set out below.

Key export industries failing to adapt

Land-based primary industries, fisheries and aquaculture and tourism are Aotearoa New Zealand’s most exposed industries as they depend on climate-sensitive natural resources.* These three sectors and their manufactured products form a significant part of the economy and comprise over 60 per cent of exports.**

Failure of firms in these industries to adapt adequately would reduce their productivity and potentially their viability. Impacts would flow on to their suppliers and customers and to our export earnings.*** Climate-related impacts in other countries could also disrupt trade and influence demand for our goods and services.

* See the National Climate Change Risk Assessment Technical Report.

** The three sectors contributed about 62 per cent of export earnings for the year ended March 2020 (Stats NZ data on goods and services trade by country, and the tourism satellite account [PDF, 1.5 MB], both for the year ended March 2020).

*** See Adapting to Climate Change: Stocktake Report from the Climate Change Adaptation Technical Working Group.

Exposed local economies failing to adapt

Economic impacts will not be evenly distributed across Aotearoa. Many regional economies rely heavily on the three exposed industries. Economic activities in hazardous areas, such as low-lying land, will be further exposed. Failure to adapt could lead to business closures and job losses. This would have significant implications for workers and households, and, if widespread, could result in people having to leave some communities.

Disproportionate impacts on Māori

Māori are heavily invested in land-based primary industries, tourism and fisheries, which all have a significant Māori workforce.

Māori collectively own about 40 per cent of the fisheries quota, and have diversified interests across the sector, including catching, processing, marketing and food services. Māori also own 40 per cent of commercial forests. In 2018, gross domestic product (GDP) from Māori tourism was estimated at just over $975 million.*

Economic inequity means that some Māori businesses and workers have less capacity to adapt. Climate-related costs and disruptions could entrench those inequities. At the same time, Māori knowledge of sustainable practices and holistic economic models offer unique ways to adapt. If properly resourced, Māori can take a leadership role in adaptation.

* See Te Ōhanga Māori 2018: The Māori Economy 2018 [PDF, 17 MB]

Less insurable infrastructure, business and housing assets

Some assets could become uninsurable. This will create further issues if they are used as collateral for lending. The value of buildings exposed to coastal flooding could increase from $12.4 billion now to $26 billion for a sea-level rise of 0.6 metres, and $44 billion at 1.2 metres.*

Insurance retreat would likely reduce private and public asset values, making households and firms or public entities less able to invest in adaptation.

There are likely to be more insurance claims, greater damage repairs and higher premiums. Claims for extreme weather events hit a record $321.6 million in 2021, breaking the previous record set in 2020 at $274 million.**

* See Coastal Flooding Exposure Under Future Sea-level Rise for New Zealand [PDF, 3.7 MB]

** See Record Insurance Support for Communities – 2021 Extreme Weather Claims Exceed $300 M [Insurance Council of New Zealand website]

Disrupted supply chains

Local and global supply chains are critical to the functioning of the economy. Supply chains are disrupted by extreme weather (eg, flooding and power outages) and longer-term climate changes that reduce the supply of certain goods (eg, reduced global grain supply from prolonged droughts). Disruptions can range from the very local (eg, a washed-out road to a major tourist site), to major freight hubs, through to global distribution networks. The Intergovernmental Panel on Climate Change (2014)* suggests global climate impacts and their flow-on effects to our supply chains may be more significant to our economy than the direct impacts within Aotearoa.

* See Climate Change 2014: Impacts, Adaptation, and Vulnerability. Part B: Regional Aspects. Contribution of Working Group II to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [PDF, 5.1 MB]

Reduced financial stability

Financial stability means having resilient banks, insurers and other financial institutions. It means we have a system that can withstand severe but plausible shocks and continue to provide the services we all rely on.*

There are two main ways that climate change challenges financial stability. First, the realisation of physical risks could lead to abrupt change in asset values (eg, extreme weather damaging residential housing or farmland or changing production outputs). Second, a disorderly transition to a low-carbon economy could also have an abrupt effect on value (eg, regulatory changes and legal challenges driving down value in emissions-intensive industries).

* See Financial stability report [Reserve Bank of New Zealand website]

Fiscal impacts of extreme weather and sea-level rise

In its 2021 statement on the long-term fiscal position, the Treasury modelled the impact of more frequent and severe storms and droughts.* The median impacts by 2061 appeared modest (net debt 3.77 per cent of GDP higher than baseline).

This analysis suggested the Government’s fiscal position was relatively resilient. However, these national impacts did not reflect the severe shocks felt by affected communities or local government entities. The fiscal impacts could be greater, given the analysis did not consider sea-level rise, non-linear or ‘tipping-point’ changes, or effects beyond 40 years.

* See Te Tirohanga Mokopuna 2021: The Treasury’s Combined Statement on the Long-term Fiscal Position and Long-term Insights Briefing [The Treasury website]

Reduced Crown revenue

The Government may face lower revenue if tax revenue falls or if productivity or GDP reduce, and the costs to replace or repair its own assets increase.

Climate resilience is core to economic security.

The objectives and actions in this chapter focus on adapting and building climate resilience into our transition to a high-wage, low-emissions economy in a way that is fair, inclusive and upholds Te Tiriti o Waitangi.

This means an economy where:

• businesses, large and small, can innovate, thrive and pay higher wages
• our emissions are rapidly trending to net zero
• economic security is provided for all, in good times and bad.

The Government has identified two objectives for the economy and financial system.

Table 12: Government objectives for the economy and financial system

Actions to support a resilient economy and financial system are set out in the sections below. Chapter 3: Enabling better risk-informed decisions and chapter 5: Adaptation options including managed retreat also contain actions that are critical to supporting a resilient economy and financial system. These are:

• action 3.5: Support high-quality implementation of climate-related disclosures and explore expansion
• action 5.4: Develop options for home flood insurance.

Addressing inequity

A climate-resilient economy will support vulnerable New Zealanders.

The economic and financial impacts of a changing climate will not be evenly distributed. Fisheries, tourism and land-based primary industries are particularly exposed to climate risks.

To create equitable climate-resilient economies, we must address how regional economies, rural communities, Māori and workers and households with strong reliance on these sectors will also be disproportionately affected. Workers that are left with more insecure employment and displaced workplaces due to climate impacts need to be supported.

The actions in this chapter focus on adapting and building climate resilience in a way that is fair and inclusive by:

• supporting sectors that are most vulnerable to near-term or significant change
• providing regions with what they need to make informed assessments of their risk and take action
• promoting financial stability to minimise the impact of financial shocks, such as rising prices, on those least able to adapt. Stable prices also help to encourage investment and grow job opportunities
• exploring options to improve the affordability and availability of flood insurance to support the wellbeing of vulnerable at-risk communities.

Critical actions

Action 10.1: Deliver the New Zealand Freight and Supply Chain strategy

Timeframe: Years 1–6 (2022–28)
Lead agency: MOT
Relevant portfolio: Transport
Primarily supports: Objective EF1
Status: Current

This strategy will present a long-term and system-wide view of the freight system. Climate adaptation is being considered through the resilience outcome, to ensure Aotearoa New Zealand’s freight and supply chain system is resilient, reliable and prepared for disruption. This will inform investment by the Government, councils and private sector players.

The strategy looks across industries, sectors and modes to identify challenges and opportunities in the long term. This will lay the foundation for identifying any actions to reduce the risk of supply chain disruptions on businesses, industries and consumers.

The strategy’s equity and safety outcome commits the Government to ensuring that the transition to resilient supply chains is fair, equitable and inclusive. This means ensuring the Government is considering opportunities to support Māori, regional economies, businesses and workers to adapt to expected changes.

By the middle of 2023, the Government will have launched the New Zealand Freight and Supply Chain strategy.

Action 10.2: Strengthen fisheries rules

Timeframe: Years 1–6 (2022–28)
Lead agency: MPI
Relevant portfolio: Oceans and Fisheries
Primarily supports: Objective EF1
Status: Current

The Government is progressing work on the Fisheries Amendment Bill, which includes several legislative changes to the Fisheries Act 1996. The aim is to strengthen and modernise Aotearoa New Zealand’s fisheries management system. The Bill sets tighter rules about what fish commercial fisheries must bring back to port and what they can legally return. The Bill also allows for more agile and streamlined decisions in response to changes in fish stock abundance, by enabling development of the pre-set decision rules.

These rules will allow adjustment of the catch limits, and other sustainability measures within pre-agreed limits, in response to change in abundance. This will allow for the system to be more responsive to the effects of climate change.

By late 2022, the Fisheries Amendment Bill will be passed.

Action 10.3: Deliver the Aquaculture Strategy

Timeframe: Years 1–4 (2022–26) and ongoing
Lead agency: MPI
Relevant portfolio: Oceans and Fisheries
Primarily supports: Objective EF1
Status: Current

The Government’s Aquaculture Strategy sets objectives and actions to support Aotearoa in becoming a world leader in sustainable and innovative aquaculture. One of the strategy’s objectives is to support the industry to adapt to climate change.

Actions include: forecasting the effects of climate change on the aquatic environment and supporting actions for resilience; helping industry to transition to hatchery spat production; spatial planning approaches informed by climate change considerations to enable industry growth and adaptation; and the development of a comprehensive biosecurity approach.

By 2024, the Government will continue releasing implementation plans for the Aquaculture Strategy and reporting each year on the environmental effects of aquaculture.

Action 10.4: Reserve Bank of New Zealand supports the stability of the financial system

Timeframe: Years 1–2 and ongoing (2022–24)
Lead agency: RBNZ
Relevant portfolio: Finance
Primarily supports: Objective EF2
Status: Current

The Reserve Bank of New Zealand (RBNZ) is taking action to help regulated financial entities identify and manage climate risks better. This includes:

• introducing climate-related stress tests that model the effect of severe but plausible scenarios on the balance sheets of regulated financial institutions
• incorporating climate change in scheduled supervisor engagements with the management and boards of regulated entities
• developing guidance on managing risk for the entities the RBNZ regulates.

By March 2024, the RBNZ will have climate change considerations increasingly integrated into its supervisory, stress-testing and policy work.

Supporting actions

Action 10.5: Deliver the Māori agribusiness extension programme

Timeframe: Years 1–6 (2022–28)
Lead agency: MPI
Relevant portfolio: Agriculture
Primarily supports: Objective EF1
Status: Current

This action will deliver a tailored extension programme for whenua Māori. This will support collectives of Māori landowners and agribusiness to take a te ao Māori approach to meeting their aspirations for their whenua in a productive and sustainable way. As part of the programme, landowners will consider how best to plan intergenerationally for the impacts of climate change on their whenua. It will extend the current pilot programme, which offers resources and support to Māori landowning collectives.

Action 10.6: Continue delivering the Sustainable Land Management and Climate Change and Greenhouse Gas Inventory research programmes

Timeframe: Years 1–6 (2022–28)
Lead agency: MPI
Relevant portfolio: Agriculture
Primarily supports: Objective EF1
Status: Current

This work will fund research and develop tools to support the agriculture sector to adapt to climate change better, measure emissions and mitigate land-use impacts on freshwater. It includes science extension and policy research and the ability to respond to the social impacts of climate change.

Action 10.7: Continue delivering the Sustainable Food and Fibre Futures Fund

Timeframe: Years 1–6 (2022–28)
Lead agency: MPI
Relevant portfolio: Agriculture
Primarily supports: Objective EF1
Status: Current

The Sustainable Food and Fibre (SFF) Futures Fund supports innovative projects that design and test new approaches and solutions to risks such as climate change in the primary sector. The fund supports innovation in Aotearoa New Zealand’s food and fibre sector by co-investing in initiatives that bring economic, environmental and social benefits for all New Zealanders. SFF Futures Fund projects include applied research that delivers tangible solutions for primary industries. Funding assists vulnerable groups, including rural farmers and Māori, with problem solving and innovation.

Action 10.8: Establish innovation grants

Timeframe: Years 1–6 (2022–28)
Lead agency: MBIE
Relevant portfolio: Research, Science and Innovation
Primarily supports: Objective EF1
Status: Current

These grants will boost investment in private sector research and development and support innovation. They will share the risk with Aotearoa companies. This means more climate-focused innovation should happen faster, to better enable adaptation action and the transition to a low-emissions economy.

Action 10.9: Identify the impacts of climate change on regional economies

Timeframe: Years 1–3 (2022–25)
Lead agency: MBIE
Relevant portfolio: Economic and Regional Development
Primarily supports: Objective EF1
Status: Current

This work will involve modelling the economic impacts of a changing climate on regional economies and providing guidance for assessing climate impacts in local economic decisions. This will help to identify likely impacts and determine where our vulnerable communities are by exploring the distribution of economic impacts across different parts of Aotearoa. These findings will help regions make informed risk assessments, actions and investments to reduce their exposure to climate-driven economic disruptions and support vulnerable communities. Regional economic preparedness will be further bolstered by other proposals in the national adaptation plan, such as the Māori-led partnership.

Action 10.10: Monitor residential insurance premiums

Timeframe: Years 1–2 (2022–24)
Lead agencies: Treasury; Toka Tū Ake EQC
Relevant portfolio: Toka Tū Ake EQC
Primarily supports: Objective EF2
Status: Current

Monitoring residential premiums and uptake of insurance gives a better understanding of the scale of shifts in insurance availability and affordability.

Action 10.11: Consider climate risk in economic and fiscal monitoring and forecasting

Timeframe: Years 1–6 (2022–28)
Lead agency: Treasury
Relevant portfolio: Finance
Primarily supports: Objective EF2
Status: Current

Treasury’s six-monthly economic updates are a core way to monitor and forecast the economic and fiscal environment. This includes the impact of shocks (eg, COVID-19 or natural disasters) on the Crown’s financial position and tracking long-run changes. The updates highlight known quantifiable and unquantifiable climate adaptation risks as a tool in fiscal and economic management.

Action 10.12: Implement the Government response to the Prime Minister’s Chief Science Advisor’s report on commercial fishing

Timeframe: Years 1–6 (2022–28) and ongoing
Lead agency: MPI
Relevant portfolio: Oceans and Fisheries
Primarily supports: Objective EF1
Status: Current

This report makes several recommendations for the fisheries management system and for commercial fishers. The Government’s response is underway and includes actions that support innovation across the system, progress an ecosystem approach to fisheries management and protect habitats of significance to fisheries management.

Action 10.13: Support the implementation of Aotearoa Circle Seafood Sector Adaptation Strategy

Timeframe: Years 1–6 (2022–28)
Lead agency: MPI
Relevant portfolio: Oceans and Fisheries
Primarily supports: Objective EF1
Status: Current

Building on scenario planning, the Seafood Sector Adaptation Strategy: Climate Adaptation Strategy 2021–2030 [The Aotearoa Circle website] is a collaboration between the major seafood sector leaders, Government, environmental non-government organisations, iwi representatives and the research community. The strategy sets out a shared 10-year vision and goals, and actions to help achieve these. The aim is to enhance the resilience and adaptive capacity of Aotearoa New Zealand’s seafood system. It includes actions to ensure adaptation information is more integrated and accessible, and to promote ecologically and economically efficient fishing and aquaculture. Te ao Māori is incorporated throughout the strategy – and specific implementation actions reflect this (eg, piloting and monitoring a te ao Māori approach to coastal management. An implementation group drawn from the strategy development agencies, established mid-2022, facilitates the strategy’s implementation and progress reporting.

Action 10.14: Deliver the Tourism Industry Transformation Plan

Timeframe: Years 1–3 (2022–2025)
Lead agency: MBIE
Relevant portfolio: Tourism
Primarily supports: Objective EF1
Status: Current

The goal of this work is regenerative tourism. The first phase focuses on ‘better work’ and the second phase on the environment. The Tourism Adaptation Roadmap developed by the Aotearoa Circle will be an input for the environmental phase of the Tourism Industry Transformation Plan. This allows for a sector-wide assessment of risks and actions. Alongside action 10.15, this work will help to minimise the impacts of a changing climate on tourism workers, business owners and communities whose livelihoods depend on this at-risk sector.

Action 10.15: Review the settings for the International Visitor Conservation and Tourism Levy

Timeframe: Years 1–2 (2022–24)
Lead agency: MBIE
Relevant portfolio: Tourism
Primarily supports: Objective EF1
Status: Current

Currently, international visitors do not directly pay for many products and services they use where these are funded by local communities. The Ministry of Business, Innovation and Employment (MBIE), directed by the Minister of Tourism, is reviewing the International Visitor Conservation and Tourism Levy (IVL). This includes ensuring international visitors contribute to resilient, adaptable infrastructure and the natural environment they use during their visit. Resilient infrastructure, including a healthy environment, will reduce the risks from extreme weather. This action will support a focus on the spending priorities of the IVL, as well as any further work across the life of the national adaptation plan (eg, other tools) to support adaptation and climate resilience in tourism.

Action 10.16: Leverage government procurement for climate outcomes

Timeframe: Year 1 (2022/23)
Lead agency: MBIE
Relevant portfolio: Economic and Regional Development
Primarily supports: Objective EF1
Status: Current

This action will check the current government’s procurement policy framework enables mitigation and adaptation in government investments. The greatest opportunity will likely be in construction contracts, making buildings and infrastructure resilient to a changing climate, and reducing carbon emissions and waste. This links to the Homes, buildings and places action plan (chapter 7).

Future proposed work programmes

Action 10.17: Support Māori small business resilience and transitions

Timeframe: Years 2–5 (2023–27)
Lead agencies: TPK; MBIE
Relevant portfolios: Māori Development; Economic and Regional Development
Primarily supports: Objective EF1
Status: Proposed

The aim of this work is to support Māori small and medium enterprises to develop low-emissions growth strategies, respond to climate-related risks and opportunities, and adopt resilient ways of working. Businesses would commit to reducing their emissions or improving their resilience to physical climate events.

This action will support Māori small businesses, which are disproportionately concentrated in sectors exposed to climate impacts and typically have less capacity to adapt than larger enterprises, to take action and demonstrate leadership in adaptation.

Action 10.18: Research business adaptation preparedness and provide guidance for small businesses to adapt

Timeframe: Years 1–6 (2022–28)
Lead agency: MBIE
Relevant portfolio: Small Business
Primarily supports: Objective EF1
Status: Proposed

This will help small businesses reduce their climate risks through targeted guidance and information. The guidance will be based on research that will increase understanding of what businesses are doing to adapt, and the pain points for business owners. The research will set a baseline for current action, inform future policy and drive the development of guidance and resources for small businesses.

This action will assist many of the businesses least able to adapt with climate adaptation, and least aware of the benefits of adaptation and effective ways to build resilience against climate risk. This will help ensure that the benefits of climate adaptation are distributed broadly throughout Aotearoa New Zealand’s business demographics.

Action 10.19: Enhance industry partnership networks

Timeframe: Years 1–6 (2022–28)
Lead agency: MBIE
Relevant portfolio: Research, Science and Innovation
Primarily supports: Objective EF1
Status: Proposed

This action will pool knowledge and resources to solve sector problems. The partnerships will recognise the complexity and interrelatedness of issues, such as climate adaptation, and the need for sophisticated networks to test, scale up and spread innovation to help address challenges facing Aotearoa. These networks will speed up the connections and relationships needed to implement change at pace.

Other actions across this plan will contribute to a resilient economy and financial system

Aotearoa New Zealand’s economy is connected with all the other outcome areas in this plan. A number of other actions will also contribute to a resilient high-wage, low-emissions economy, notably:

• action 3.13: Provide a forestry planning and advisory service. This service will promote better land use, tree selection, resilience and suitability for the landscape. It will support the forestry industry to identify climate risks and take action.
• action 3.14: Deliver the Integrated Farm Planning Programme. This programme will support producers to become more resilient in the face of a changing climate, including developing adverse events and resilience planning and increasing data-sharing capability within the primary sector. The new Ministry for Primary Industries (MPI) On Farm Support services will also guide integrated farm planning.
• action 3.19: Develop Te Ara Paerangi – Future Pathways programme for the research, science and innovation system. This will position our research, science and innovation system for the future. It includes focusing resources on national goals such as climate change and exploring how research can best honour Te Tiriti obligations and promote mātauranga Māori. A research, science and innovation system that is connected, resilient and adaptable can more effectively respond to the needs of businesses and sectors, and support the development of the right tools, information and innovative capacity to address climate risks.
• action 3.20: Continue prioritising research and investment in climate-related science. This will support innovative adaptation and contribute to a resilient economy and financial system by pushing the boundaries of knowledge and transferring this knowledge.
• action 6.1: Implement the Department of Conservation Climate Change Adaptation Action Plan. This plan includes actions for heritage, recreation and infrastructure of public conservation land and water. It will reduce risks to tourism from weather events and protect sites that are important for tourism.
• action 6.6: Implement the Water Availability and Security programme. This programme will help farmers adapt to varying water availability, avoid disruptions to business activity and land use, and potential flow-on impacts on sectors, regions and the wider economy.
• action 9.10: Implement an income insurance scheme to support adaptive capacity of communities and the economy. The Government is developing a proposal for a New Zealand income insurance scheme, which would support workers with a proportion of income replacement for up to seven months if they lose their job through no fault of their own. This would reduce the economic impacts of a changing climate on workers and communities, and enable workers to transition to new job opportunities afforded by changes in the economy.