Wednesday, October 25, 2006

Climate change: was the Projects Mechanism successful?

One of the government's core climate change policies over the last few years was the Projects to Reduce Emissions program, AKA the Projects Mechanism. This was basically a system of subsidising emissions-reductions, particularly investments in renewable energy, with carbon credits. There were some restrictions - the project had to result in a reduction of at least 10,000 tonnes of CO2-equivalent, be additional to "business as usual", and result in reductions which would not occur unless credits were awarded in order to qualify - but there were plenty of projects which met these criteria. All told, 41 projects were subsidised in this way, including 13 wind farms and 4 geothermal projects. These were expected to cover at least 4 year's demand growth in electricity.

So, was it successful? Last year's climate change policy review (s4.2.5) cited a report by Allen Consulting and argued that emissions reductions through the program had been "achieved at a cost (on average) greater than the Kyoto price". An analysis done earlier this year noted that the Projects Mechanism had resulted in expected emissions reductions of 11.85 MT CO2-e during CP1, at a cost of 10.6 MT CO2-e of emissions units. A 10% payoff seems pretty poor, considering the administrative overhead of multiple tender rounds involved, as well as the uncertain nature of the reductions. Several of the projects (for example, the proposed Wainui Hills Wind Farm, which was awarded 378,000 emission units) seem to have sunk without a trace, while others have been delayed, meaning their reductions may be less than expected. OTOH, this means the government will simply hand out fewer credits, so it has no overall effect on the success of the scheme except insofar as it drives up administrative costs.

While this seems to be a fairly gloomy assessment, there are two good reasons for regarding the Projects Mechanism as a success:

  • It is credited (by Pete Hodgson and others) with "kick-start[ing] wind energy in this country". When the Projects Mechanism was started, we had two wind farms (Hau Nui and Tararua 1). Now we have 3 more, and another 10 planned or under construction, and many more proposed (check out the list on the last page of this report [PDF]). Many of the early wind farms received emissions units through the Projects mechanism - but not all have. For example, Meridian Energy's Project West Wind - a 210 MW monster at Makara - was a purely commercial proposition, and it is likely that future wind farms will be too. The experience gained in construction and operation through those early subsidies has helped wind across the "technology valley of death" and turned it into a serious commercial proposition in New Zealand.
  • Emissions units were only handed out for reductions over CP1, but those reductions will continue well into the future. At the time, it made sense to only look at CP1 - after all, it was uncertain whether Kyoto would even come into effect, let alone survive. Now it is looking like there will be a post-Kyoto emissions control regime, and that it will in one way or another include or create an international price on carbon. So the emissions reduction payoff from any project can be measured over the lifetime of the asset (or at least the expected lifetime of a post Kyoto regime), rather than just CP1. If we assume that there will be a similar 5-year CP2, the payoff for the government effectively doubles. More generally, the projects have helped shift New Zealand towards a lower emissions path than otherwise would have been taken, and the government will be able to reap the benefits of that in future.

But while it has IMHO been successful, the Projects mechanism may not have much of a future. Now that wind doesn't need assistance, there's not much left that does; landfill gas, microhydro and cogen are all worthy, but at the same time mostly kibble around the edges. The cost of supporting such schemes in this manner (both to the government and the companies in question, who remember must find a buyer for the carbon credits) may not be worth it. While I think there's a case to be made for reduction subsidies where there's a decent payoff, it may be easier just to cut out the carbon credit "middleman" in future and pay in cash.


I still cannot believe that we have seen any significant efforts into energy use reduction.

The problem for these sort of projects is that standard accounting mechanisms work against them. Reductions in eletricity usage due to better insulated buildings, for example, would lead to lower profits for the generators and suppliers and potentially a reduction in GDP (all other things remaining equal, for the BRT guys). At least with Kyoto adherence looking like it might *cost* us a bob or two there is some incentive to actually do something to reduce this cost.

Unfortunately so far all we are seeing are half arsed light bulb subsidies and some councils offering grants for a few very low income houses. Hardly a co-ordinated, nationwide strategy.

Posted by Anonymous : 10/25/2006 10:39:00 AM

Noddy: We haven't. What we have seen is a supply-side solution, focused on reducing the carbon-intensity of electricity generation, rather than reducing emissions by reducing demand. It's a solution, but clearly only part of what is necessary. The government's review (s4.1.2) identified significant potential for savings in the energy sector, which in turn would result in a substantial reduction in emissions (more than you would expect, given that the marginal generator is coal). The problem is getting there.

The problem isn't top-down issues like GDP (few people outside the BRT really think of it). The problem is uptake - even if energy efficiency is "cost effective", people and businesses don't do it. The barriers to uptake are well-known: information, capital, uncertainty, and market failure (there's a good section on this in the report The UK Climate Change Programme: potential evolution for business and the public sector). We know how to get around these problems: public awareness, loans and grants, R&D, and regulation - but we have done very little to do so. For example, EECA's EnergyWise Home Grants and Crown Energy Efficiency Loans are good programs which achieve good results, but are massively underfunded, as is energy-efficiency research aimed at ironing out the bugs and quantifying the savings. Thanks to a policy culture firmly rooted in the market dogma of the 90's, we just expect the market to miraculously adopt this stuff without having to do anything about it (and if it doesn't, this is taken as proof that it is "inefficient" to do so, despite all evidence to the contrary).

If we want to tap our potential for energy efficiency, then we need to start by funding EECA properly. I have a few snarky things to say about that as well, but its probably something for another post.

Posted by Idiot/Savant : 10/25/2006 12:03:00 PM

Agreed. Whilst targetting low incomes for EECA loans first is laudable I would suggest the bracket is so tiny that the effect is marginal. I would be interested to know what the take up rate in this small bracket is.

One of the first things people coming from Europe notice (after one winter) is just how poor the housing here is and how badly insulated it is. Someone the other day said to me that it was as if the builders thought we had an Australian climate rather than the temprate one we are blessed with. Average temperatures may be higher than Northern Europe but that takes little account of wind chill and dampness factors.

Posted by Anonymous : 10/25/2006 12:25:00 PM

Noddy: as many as hear about it. EECA is budgeted to retrofit 5000 homes a year, and they spend that budget in full - demand far outstrips supply, and is likely to increase even further given the proven benefits. Which suggests that the government should be increasing funding to meet demand (and given the cost - $5 million is chump change in the budget - why the hell not?)

Our poor housing stock isn't just uncomfortable - it kills people. The health benefits alone ought to justify greater spending.

Posted by Idiot/Savant : 10/25/2006 12:46:00 PM


Posted by Anonymous : 10/25/2006 12:56:00 PM

All of the above is good stuff...but the NEXT big breakthrough in renewables will be wave energy. Current rigid structure methods will give way to some innovative biomimicry techniques that will allow flexible, lower cost structures to extract some of the vast amounts of power that is constantly crashing against our long West Coast.

The energy densities available are phenomonal, averaging 30kw/m, up to 100kW/m near Stewart Is.

Posted by Anonymous : 10/25/2006 08:49:00 PM