Economic risk assessment of Mount Egmont : the potential economic implications of a volcanic eruption in Taranaki : a thesis presented in partial fulfilment of the requirements for the degree of Master of Applied Economics, Massey University, Palmerston North, New Zealand
New Zealand is home to a large number of volcanoes, many of which threaten the North Island, with damaging ground hugging hazards or disruptive ash deposits. As little as 2mm of ash will put grazing animals off their feed, completely disrupting the agricultural environment, transport is affected and equipment is vulnerable. The most likely damaging event from an eruption is ash, the potentially unknown area of which is determined by wind direction and strength. The 1995/1996 Ruapehu eruption was geologically considered minor with no more than 10mm of ash deposited, yet the economic consequences and disruption were significant, estimates put the minimum cost of the eruption at $130million made up almost singularly of tourism revenue losses and damage to the hydro-electric turbines. There has been little work completed in assessing economic impact of a natural disaster in an economy prior to the event. While the expected scale of any disaster is frequently assessed on historical evidence for planning purposes, social or economic studies tend to consider vulnerable sectors during evacuation and recovery as opposed to a monetary figure or the economic impact. The most recognised volcanic event (and standard example) in recent history was the Mt St Helens eruption in 1980; this eruption killed 57 people and caused damage in excess of US$1billion. Mt Egmont is the visible headstone of Taranaki's volcanic history but is only the youngest location in a series of destructive volcanoes in the area. There have been no known eruptions within the region since 1755, with eight recorded eruptions in the 300 years prior. It is generally accepted that any future events from Mt Egmont will follow the same path as historic eruptions, explosive ash emissions with gentle lava extrusions. Three eruption scenarios, all skewed towards a more likely smaller eruption, are considered in the overall analysis of the region; future studies may concentrate on rare catastrophic eruptions or the evacuation of New Plymouth. The first scenario is limited largely to the national park with ash fall only within the region, the third scenario pushes ash over much of the North Island and has damaging hazards throughout Taranaki A final consideration is made to investigate how an economy responds to increased volcanic threat without an eruption. If precursors to volcanic activity extend for a long period of time the threat of economic stagnation, reduced investment, emotional stress and permanent relocation from the region will increase. Early warning systems and increased disaster planning has greatly reduced the number of deaths caused by volcanic eruptions, in many ways it has also increased economic vulnerability as danger zones become populated. Taranaki has a low population density with rich natural resources and an economy largely geared towards dairy farming and the extraction of oil and gas. The five largest sectors in Taranaki create $8,910.18million in total output or 57.83% of regional output; these are oil and gas extraction, dairy manufacturing, dairy farming, meat processing and wholesale trade. Oil and gas exploration adds an additional $331.72million to economic output. There is a lot of high level energy infrastructure in Taranaki from gas pipelines connecting fields, production stations and delivery systems to the multitude of high voltage power lines connecting two power generation stations with the national grid. All oil and gas production and much of the gas transmission system is based within Taranaki, this industry alone is estimated to contribute more than $1billion a year to the national economy. One factor of Taranaki's gas monopoly is the significant downstream impact any regional disruption in supply could have on the national economy and social well being. Oil and gas is vital to many aspects of New Zealand business not just within Taranaki but day to day business operations, manufacturing processes and power generation capacity. Iconic industries are those businesses that may have an impact on the local community above that of direct economic loss, that are socially as well as economically significant. These firms are predominantly the largest employers and contributors to the local and national economy, and are the most likely to consider permanent relocation outside the region in the case of a large ongoing event. Research was completed on significant industries to gain a more detailed impression of the largest contributors to the local and national economies and potential disruption. These enterprises include electricity generators and gas production, Fonterra, Ballance, Yarrows and Westgate Port. The National Park, tourism and the airline industry were also considered separately due to their individual importance and likelihood to be affected by an eruption. The results of the input-output scenario analyses show an immediate value added decline in the regional economy ranging between $519.09million and $2,505.21million due to volcanic eruption. Input-output captures the overall regional impact of an eruption, the immediate reduction in output as a result of evacuation and physical influences. However an eruption of any magnitude will also have a national impact on the economy which should not be forgotten. Iconic industries were considered separately to take into account some of the largest regional contributors to the national economy. Risk assessment of the iconic industries enabled the assessment of more long term, wide reaching and national effects of an eruption which are not captured in input-output assessments. The gas industry will have the most detrimental economic effect, literally closing the entire gas dependent manufacturing sector throughout the North Island for a number of weeks. Although the Whareroa dairy factory contributes considerable value to national exports with 100% of production being exported milk volumes normally processed could, with the exception of approximately two weeks during the peak season, be absorbed by other factories in the North Island limiting national impact. It is impossible to determine the degree of flow on effects from all of the businesses affected; many interdependencies wouldn't openly be recognised until they occurred. New Zealand has been lucky in that recent volcanic activity has been minor and sporadic in nature; consequently the public perception of risk has been skewed towards events which in geologic records would not even register. An eruption would overwhelm local civil defence resources almost immediately, the surrounding communities would be flooded with evacuees and the economic ripples would be widely felt. This is particularly the case with Taranaki and the critical high level infrastructure. Mitigating economic risk can only be done by locationally spreading risk, with adequate protection measures (financial or physical) and by increasing public awareness.