Friday, February 10, 2006

Kyoto: Directions

What is the future direction of New Zealand's greenhouse policy after the demise of the carbon tax? Some strong hints as to the Minister's preferences are contained in the December cabinet paper which also revealed the government's worries about deforestation:

64. Alternatives to the current model include alternative pricing mechanisms, sectoral policies and regulatory measures. Some of these may have significant fiscal and economic costs. The Review also looked at alternative options for specific sectors, such as transport and energy, for reducing emissions and increasing sinks (forestry plantings). For example, I consider that it would be prudent for the government to explore possible policy options to encourage new electricity generation to be built using renewable, non-carbon fuel sources, or to discourage fossil fuel use.

65. If the government does not proceed with a carbon tax, the government will need to consider further measures , possibly under the Resource Management Act, that could effectively manage greenhouse gas emissions at the national level. To put this in context, the current Resource Management Act appeal to the Environment Court concerning the proposed conversion of the Marsden B power station to coal, at law, cannot consider greenhouse gas emission consequences.

66. Under present policy settings, the way is left open to move in time from the current carbon tax/Negotiated Greenhouse Agreement model to a domestic emissions trading regime. While decisions on the detail of the trading regime were intended to be subsequent to the introduction of the current carbon tax in 2007, it was anticipated that a domestic trading regime would send an additional signal to the market to reduce greenhouse gas emissions by limiting the total volume of emissions allowed.

67. Known as a ‘cap and trade’ system, this model may still have benefits in the absence of a carbon tax, particularly as it is expected to provide market-driven and cost-effective reductions in greenhouse gas emissions. This model could also accommodate, if desired, a total allocation that decreased year-on-year, leading to real reductions in total domestic greenhouse gas emissions. The main difference between “cap and trade” systems and carbon tax based systems is that under cap and trade systems volume is capped and the market left to determine value, whereas under the carbon tax based models volume is uncapped but value is determined.

"Cap and trade" is theoretically (to an economist) equivalent to a carbon tax in sending a signal to the market, ensuring that polluters pay (some of) the cost of their activities, and finding the cheapest ways to cut emissions. The difference is primarily distributional - businesses end up paying each other rather than the government (though they can be made to pay the government also if the initial allocation of permits is by auction rather than being allocated on current pollution levels). It also allows private industry to capture the transaction costs (through a market-style arrangement), though still requires the government to fund oversight and enforcement (which is vitally important for any such system to work). We use exactly this system for fishing rights (in the form of Individual Tradable Quotas or ITQs), and it works reasonably well (subject to endless worries about whether the government has set the cap for a particular species at a sustainable level).

More importantly (for the government), this sort of instrument can be applied only to large emitters, such as electricity companies and factories, but not to ordinary people. Sure, the costs will be passed on - electricity prices will still rise - but there won't be a clear impact at the petrol pump, for example. This should make it much easier to pass (though it will still ultimately depend on the support of United Future or NZ First).

The downside is that it does absolutely nothing to combat transport emissions, which is a big area of growth and an area where we can make major savings in the long-term. But there are other policies for that (which will be the subject of another post later).

Meanwhile, the suggestion to use the RMA looks an awful lot like Jeanette Fitzsimons' Resource Management (Climate Protection) Amendment Bill (currently in the ballot), coupled with a national policy statement saying "burning coal is like rolling in your own excrement and only to be done as a last resort". It would be a solid victory for the greens if this happens. Though again, the question is whether the government will have the numbers to pass it, or what the quid pro quo will be. While there's a theoretical coalition of Greens plus Maori Party to pass this legislation, it might result in Winston pulling the plug. Which is the real worry: the government clearly has policy options to make some difference to our Kyoto targets, but coalition politics may force them to continue fiddling while the planet burns.