Who will save the ETS

How do we save the Emissions Trading Scheme?

Geoff SimmonsEnvironmentLeave a Comment

As we saw in our last blog, in order to meet our 2030 target we need to start acting immediately. International trade might help a little, but regardless we need to be net zero carbon by 2050, 2100 at the latest.

To achieve this we need to put a decent price on carbon, and fast. However the Government’s current consultation looks like it is still pointing at doing to too little, too late. Despite admitting they have stuffed up the ETS (as we outlined in yesterday’s blog), the Government still sticks to its playbook of emphasising the costs of action – which are completely bogus – and talking up the need to cushion the impact on business.

Make no mistake; this means that you and I – the taxpayer – will be picking up the bill.

The bleeding obvious

Let’s start with the bleeding obvious: we need to get rid of the Government’s 2 for 1 offer on emissions units – immediately. It beggars belief that they are even consulting on removing this policy. The Government changed the system in 2009 to allow 2 tonnes of emissions to be met with 1 unit, and they did that without consultation. When the independent review reported back in 2011 they recommended phasing it out, but the Government ignored that advice.

Now the Government is floating the idea of phasing out the 2 for 1 in order to ease the burden on business. The fact is that it is too late to phase stuff out, that was recommended by the ETS review years ago. To meet our 2030 targets there is only one choice – shock therapy. We need a serious price on carbon and we need it now.

Burning the bank

We saw in yesterday’s blog that there is a big ‘bank’ of NZ emissions units held by companies in the market. Some ‘trade-exposed’ companies get free units from the government to cover most of their emissions, but for the last three years they’ve banked those and used dirt-cheap foreign credits instead. All the forestry credits created over the last three years have just been stockpiled too. The result? A big oversupply of units to burn through, which could keep carbon prices low for years.

Ditching the 2-for-1 will help burn through the bank faster (by doubling the number of units all companies need to use), but not fast enough. If you take a hypothetical company that gets a 90% free allocation, they’ll likely have enough free units banked to last them around 13 years without having to buy a thing. Outrageous free-riding.

Here’s an idea – if the Government put a temporary freeze on free allocations, companies would have to use their backlog rather than getting more free units. Freezing it for just one year would mostly burn through the free units they’ve banked (assuming we ditch the 2-for-1 deal). The companies in question will bitch and moan but the reality is they’ve rorted the system over the last few years and this will simply right those wrongs.

Where’s the plan?

The new Climate Change Minister Paula Bennett has said that:

The ETS is one of our most effective tools to tackle climate change domestically…”

As we saw in the last blog, because the government sterilized it, the ETS has failed to have any impact on domestic emissions and business decisions. Its only success was to pull in cheap, fraudulent foreign credits, which we are corrupt enough to be using to meet our international obligations. The ETS has, up until now, been a gelded joke.

That is not the fault of the ETS. Minister Bennett is right that it is a tool. Any tool can be used well, or poorly. The main problem with the ETS in the past and the current ETS review is that government doesn’t have a plan for what they are trying to achieve. They are starkers – Tim Groser’s whole mission was to do as little as possible. Now that impotency as run its course, and the damage – in terms of the magnitude of the task to even meet our derisory modest targets – is substantial. If only we knew where we are going, the ETS can help us get there, but at the moment we have no idea. That is government negligence in action.

The ETS is a tool, we know how to bugger it, but we don’t know how to use it. 

Depending on what emissions reductions we want to achieve, the ETS could set a price on carbon which would help us achieve that goal in the most efficient way possible. How much of our 2030 target do we want to meet domestically? What would it take for us to get there?

We would suggest that in the first instance we should aim to meet it all domestically, and see how possible that is and what carbon price would be required to deliver it (it will need a lot of other policies too – especially in transport). Only then should we consider international trade. The Government needs to go away and do that piece of work, and then have the consultation.

Won’t it cost us?

True to form, as soon as anyone starts talking about putting a price on emissions, the Government starts talking about cost. We’ve talked in the past about how the Government only talks about costs and ignores benefits. We’ve also seen that most of the cost estimates are totally shonky.

But in this case the costs are totally wrong, a complete red herring. We already face a cost as a country – that is inescapable. That was determined by the goal we put forward in Paris. All the ETS determines is who pays that cost.

The ETS (and removing the two for one offer) is not a cost, it is a way of deciding who pays the cost. If the people burning the fossil fuels don’t pay, the taxpayer will – we are all underwriting them. So ignore any talk about the ETS leading to higher prices, or people getting laid off their jobs. If we don’t transfer the costs through the ETS, we will all have to pay more through our taxes.

That is the problem with the Government leaving agriculture out of the ETS – it leaves the rest of us picking up their bill. We can debate the merit of that if you like, but you should know that you are paying for the farmers’ share of emissions reductions.

How do we put this right?

The two for one offer needs to be trashed as soon as possible.

Before we know how to put the ETS right the Government has to work out what it is trying to achieve. As we suggest in the first instance we should be aiming to meet our 2030 target entirely from domestic action. Planting lots of trees will be a key part of that.

We also have to think about how to put right our past wrongs. As mentioned in yesterday’s blog the Government needs to dump the fraudulent foreign units it acquired through the ETS instead of using them to meet international obligations.

But that doesn’t deal with the bank of units held by companies in the market. They only have this bank because the Government handed them free units while the price of foreign credits was essentially zero. As a result there needs to be a freeze on free allocation of one year to use up this bank of units. That will help get us to having an effective price on carbon as quickly as possible.

How do we save the Emissions Trading Scheme? was last modified: February 17th, 2016 by Geoff Simmons
About the Author
Geoff Simmons

Geoff Simmons

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Geoff Simmons is an economist working for the Morgan Foundation. Geoff has an Honours degree from Auckland University and over ten years experience working for NZ Treasury and as a manager in the UK civil service. Geoff has co-authored three books alongside Gareth.