Tuesday, March 27, 2007

Climate change: hope is not a policy

Today the Greens released a new framework policy for climate change entitled Kicking the Carbon Habit. Over on Frogblog, Green co-leader Russel Norman is praising it as "an elegant solution". I agree that parts of it are very elegant indeed, but elegance isn't enough. A climate change policy fundamentally has to work, and I'm not sure that this one will.

To understand the Greens' policy, we first need to talk a little about emissions trading systems. At their most basic, every emissions trading system works in the following way: the government allocates or sells a set number of permits to emit, and requires emitters to surrender them (the so-called "point of obligation"). The market handles the rest, creating a marginal price for emissions, and therefore a direct financial incentive for reductions.

The elegance in the Greens' policy is that it skips the first stage. The government would not issue permits; rather it would merely create a point of obligation. In the energy sector, that point of obligation would be where fossil fuels enter the economy - where coal is mined, oil imported, or natural gas flows out of the ground - except (in an inexplicably ugly kludge) in the case of fuel used for electricity generation, where it will lie with generators. For the agricultural sector, it will lie with large processing companies like Fonterra. Firms at the point of obligation (such as Solid Energy, Shell, and Contact Energy) will be required to surrender Kyoto-compliant credits to cover the carbon-equivalent emissions of their fossil-fuels, or (in the case of agriculture) their increased emissions since 1990. As the government will not be issuing permits, they will be required to buy these credits on the international market.

The problem with the Greens' policy is that they skip the first stage. Emitters will be completely dependent on the international market to meet their obligations - but that international market doesn't really exist yet. Oh, there's some trade in Kyoto credit thanks to the European carbon market - but not a lot, and certainly not enough to underpin the sort of trading system envisioned here. It's one of the reasons why the government has been wary of implementing a domestic emissions trading regime - linkages with international markets are considered essential to help set the price, but those markets are not yet functioning.

There are other problems. As mentioned above, the shift in the point of obligation for the electricity sector is an inexplicably ugly kludge, which seems to have the effect of sticking the electricity sector for carbon prices twice over (in that the fossil fuels they buy will already have the carbon price built in, and then they must provide permits as well). The beef and sheep industries will be exempted because their emissions have dropped since 1990 - which will create an incentive for farmers to switch back to those industries. The use of a 1990 baseline for the agricultural sector still amounts to a massive subsidy to farmers - all of which will flow into the pockets of the dairy industry. And the forestry scheme - theoretically sharing out the money from the sale of credits among the whole industry, in practice giving it to operators of ordinary plantation forests for conducting business as usual, while imposing a limited deforestation liability - will make no-one happy while not providing sufficient incentives for the key goal of stopping people from cutting down trees.

So what are the good points? Primarily, coverage - it covers more than 90% of emissions, and excludes only industrial process emissions (which are small - 5.6% of the total) and the waste sector (in which a regulatory solution is already proving effective). It also won't cost the government a cent; they get to keep all their Kyoto Assigned Amount, and in addition are handed credits equal to around 75% of it by the energy and agricultural sectors. Even assuming they give away or sell all forestry credit to fund incentive schemes, they still end up ahead by at least 50% on 1990 - and with a significant surplus over projected gross emissions. But IMHO the dependence on a non-existent international carbon market kills it. One may emerge, or it may not, but it is not a chance we can afford to take - hope is not a policy.


My reading of the document is that the electricity sector is responsible for purchasing it's carbon credits *instead* of their fuel suppliers, not as well as. I'm not sure of the justification for this, but I'm sure there is one.

I think we should try and move to a more sophisticated treatment of wood in the Kyoto process. At present all harvested timber is treated as if it was burnt immediately - which is not the case. There needs to be work to model the lifecyle of harvested timber by use (building timber/furniture timber/paper) and determine rates of carbon release.

Posted by Rich : 3/27/2007 09:48:00 AM

Rich: yes, that's what it says. The problem is that the fossil fuels the electricity sector purchases will already include the price of carbon, whether the end use is responsible for its own permits or not. It's the same mechanism which saw European electricity prices rise after the introduction of the ETS, even though generators were given the permits for free: production had a marginal cost, which went straight on the price.

As for wood, the government is apparently trying to do exactly that in Kyoto II negotiations. But given we burned all our mana getting a sweetheart deal in Kyoto I (and then reneging on it), I think the international community will not be very keen on the idea.

Posted by Idiot/Savant : 3/27/2007 10:50:00 AM