Monday, June 04, 2007

Climate change: asking the right questions

In her positioning speech in which she sought to define the ground for coalition negotiations following the next election, Green co-leader Jeanette Fitzsimons also asked Helen Clark and John Key two symbolic questions on climate change. The first relates to both parties' policy for an emissions trading scheme, and asks them to put some hard numbers on it by asking where the cap will be set and how permits will be allocated. The second is aimed at the longer term and asks basically what the parties are willing to do about the dairy industry.

The first set of questions are absolutely vital to judging whether the parties' proposed schemes will be effective, equitable, and morally acceptable. As Jeanette points out, the level of the cap ultimately determines the price, as well as how much the New Zealand taxpayer will be forced to pick up. Setting it too high means permits will be cheaper; it also means polluters will not have to reduce their emissions as much, leaving us with a bigger deficit beyond our Kyoto assigned amount which will have to be met by the government buying carbon credits on the international market. In other words, the higher the cap, the less effective the scheme will be. Obviously, I favour a low cap - setting it at the 1990 baseline seems entirely appropriate - but more important is the principle that, whatever initial level the cap is set it, it gradually sinks. This will drive further emissions reductions and push us towards whatever long-term emissions goal we set ourselves.

Permit allocation OTOH makes no difference to the effectiveness of the scheme - but makes a large difference to the bottom line of the participants. Grandparenting permits - giving them away for free to existing polluters - not only rewards bad behaviour, but would also be a massive transfer of wealth from the New Zealand public to private industry. Auctioning OTOH is fair and transparent, and has the added advantage of generating revenue which can in turn be used to fund other emissions reduction projects. It ought to be no surprise which option I favour. Like the Greens I believe that partial grandparenting can be used where there is a serious risk of emissions leakage or danger to competitiveness, but the basic presumption should be that polluters pay, rather than benefiting from a billion-dollar-plus windfall.

The second question is the thorniest. Dairy cows were responsible for 10.5 MTCO2-e in 2004 - one seventh of our total (and this doesn't include their contribution to energy and transport emissions, or fertiliser - this is the cows alone). Fonterra, the dairy industry's largest player, has set itself the goal of growing at 4% per year, indefinitely. This doesn't mean a 4% increase in dairy emissions every year - emissions per tonne of milk solids dropped by about 1.3% per year between 1990 and 2002 due to more efficient cows - but it still poses a massive challenge. If this growth is sustained, emissions from dairy cows will more than triple by 2050, to 35.75 MTCO2-e - more than 80% of our 1990 total. Unless we do something about this, we have no hope of reaching the National Party's stated goal of a 50% reduction by 2050, let alone Labour's one of carbon neutrality.

On this front, National's response -that they will not restrict growth in the dairy industry - is neither surprising nor a hopeful sign. It's all very well to hope for some technological solution to come along to reduce dairy emissions - but as I have said before, hope is not a strategy. Both parties need to confront this issue, and give us some serious answers on what they will do while they are waiting for their miracle. Because it is clear to me that just waiting around and letting the herd grow is not an option - it just makes the problem that much bigger when you have to confront it (something we learned the hard way over electricity sector emissions in the 1990's). We can not, as a society, subsidise the polluting habits of the dairy industry any longer. If we are to have any hope of meeting our climate change targets, they have to pay their own way.


I believe that Fonterra is increasingly growing by setting up overseas milk processing operations.

That would seem to be a good thing as it means they can deliver their growth target without increasing NZ milk production.

It's also what NZ should be doing - exporting the knowledge to make butter, not the actual butter.

Posted by Rich : 6/05/2007 10:40:00 AM

You've done a great job over the last few months summarising these issues. If I were your editor, I'd have only one minor gripe (and it is pretty minor)

When you refer to the revenue from auctioning tradeable permits, is there any ethical or efficiency reason why the revenue should be recycled by spending it on further emissions reduction or energy efficiency initiatives (grants for certain types of investment, R+D subsidies, public transport funding etc)?

It might be that some of it should be directed this way, but equally shouldn't some be used for income tax cuts, so that the whole basket of policies is revenue-neutral? (and hopefully, with the right design of tax cuts, the effects on each individual's real income will also be neutral - ie the basket of policies won't be regressive or progressive). This might be implicit in your thinking, and you may just be stressing the point that auctioning permits DOES put a lot of revenue in public hands, which admittedly isn't obvious to some people.

Would you agree that it is important for climate change policies to be seen as equity-neutral, so that they can gather wide political support purely on their efficiency grounds? If there is some implicit redistribution then a particular social agenda is effectively being promoted.

Anyway, good work on the posts, but I hope you'll agree there should be no a priori assumption that auction revenues should be be spent on emissions reduction initiatives.
Otherwise we are all forced to engage in debate with the "petrol taxes should be spent on roads, dammit!" rednecks.


Posted by Anonymous : 6/05/2007 11:17:00 AM

ABC: When you refer to the revenue from auctioning tradeable permits, is there any ethical or efficiency reason why the revenue should be recycled by spending it on further emissions reduction or energy efficiency initiatives

Yes: to ensure that it is - to use your phrase - "equity neutral".

As a rule, the government likes these sorts of things to be revenue neutral - so for example the proposed carbon tax was to be offset by tax changes to depreciation rates to encourage capital upgrades. But revenue neutrality os not equity neutrality. Sticking a price on carbon will have a disproportionate impact on the poor - but recycling through the income tax system (even by e.g. cutting the bottom rate or moving thresholds) primarily benefits the rich. So, there's a good case for targetting some assistance towards people at the bottom to ensure they are not too badly affected. And doing this in a way which increase energy efficiency and improves public health outcomes is a no-brainer.

Secondly, there's also a very good practical reason: these things need to be done, and to the extent that they cost less than buying permits on the international market, doing them saves us money and reduces risk. Funding them from pollution revenues is therefore a nice case of a "double dividend" (not to mention of economic justice, in a "justice as perverse irony" sense). Such moves may also make the policy more politicly sustainable.

But those are just my views. In reality, Treasury staunchly opposes any moves to tie revenue to specific spending, so instead if we see auctions (and I'm not sure we will, though I think the odds are better under Labour than National), it is likely the money will just go into the consolidated fund. They may announce some government emissions-reduction measures at the same time (for example, the budget for afforestation incentives), but I doubt they'll formally link it.

Posted by Idiot/Savant : 6/05/2007 07:41:00 PM

This is a comment that is not really connected to anything Jeanette said - or to any of your views, except that it relates to policies that this country could implement now, and I was extremely disappointed to see have never been taken up except in a minor way.
If any party is to be serious about reducing carbon emissions then why not start by doing the things we know will work now! For instance: Why isn't it mandatory now for all new dwellings in NZ to be fitted with solar collectors for hot water heating? In a budget with a huge surplus why is there still only a measly "no interest" loan of about $1500 as incentive for people to chose a solar collector rather than a gas fired water heater? And then only enough for the first few! Are we really serious about reducing Carbon Emissions? Israel has had the fitting of Solar water collectors as mandatory since 1974. As for your example of the dairy industry, they too, are large uses of hot water. They are an ideal candidate for the Mandatory installation of solar hot water heating. And it would be good for them! By reducing to one milking per day (the water will have had time to heat up) they not only reduce carbon emissions, but gain a more efficient production, as well as reduce animal health costs!


Posted by Anonymous : 6/05/2007 08:48:00 PM

Macro: I like solar water systems as much as the next geek, but they're not a universal solution. Israel can mandate universal use because they're universally useful - they're a small country and its fairly sunny over there. But they're not universally useful in New Zealand. Sure, they're great in the winterless north, but in Invercargill? Quite apart from shittier weather, the sunlight is also weaker the further south you go.

(Local geography can also make them useless. To point out the obvious, there's not much point in installing a solar hot water system if you live in a hole in the ground in the Aro Valley and never see the light of day).

As for the paucity of government assistance, we have capacity constraints. Tried finding a plumber to install a solar system recently? The government is trying to fix this by training more plumbers to install the things, but this is a long-term project. In the meantime, they only need to hand out as much money as is required to keep installations at the maximum we can sustain - sadly only a few thousand a year.

As for the dairy industry, I actually went to a conference last year which talked about energy efficiency in that sector, and the blunt fact is that wasting power costs them only a small amount of money compared to the amount they make, so theyy don't really give a damn. Clearly this is an area which demands a regulatory solution (though one which relies on shifting behaviour rather than technology is probably a non-starter).

More generally, New Zealand policymakers are highly suspicious of regulatory tools, and would rather trust in the market to find a solution. If we want this to change, we need to elect politicians who will insist that they investigate all alternatives, rather than trot out the standard market dogma.

Posted by Idiot/Savant : 6/05/2007 11:19:00 PM

"Sure, they're great in the winterless north, but in Invercargill? Quite apart from shittier weather, the sunlight is also weaker the further south you go."
Actually they are JUST as effective in the deep south! in the "winterless" north the problem is too much sunlight! where they are prone to overheating the water and dumping it!
Ok! there are some houses that would need to have an "innovative" position to collect solar energy - some places in Titirangi spring to mind - but generally speaking if a house receives about 6 hours of daylight a day - that is sufficient to make a difference.
I worked for a time in the solar heating sector and even wrote the manual - it takes about a morning to train a plumber to install a solar hot water system - its no big deal.
I now work part time setting out subdivisions (it keeps me out of trouble) - there is another area where there is a huge unnecessary expenditure in carbon - and it depresses me that not one of the hundreds of new houses that are being built today uses a solar collector! We just have to do better and the policy maker MUST take a lead. They had a chance in the last budget and failed to deliver and NO! I HAVE NO FINANCIAL INTEREST THESE DAYS IN THE SOLAR INDUSTRY!
We developed solar water systems specifically for the dairy industry, so they are available. Those that have installed them and have reduced to one milking per day, note only a small drop in production, a significant drop in the use of animal health products, and a significant saving in electricity.


Posted by Anonymous : 6/06/2007 12:03:00 PM

Where is this winterless North you speak of. I've been up to Cape Reinga and it was pissing it down!

Posted by Rich : 6/06/2007 12:55:00 PM

I think if the Greens are serious about reducing carbon emissions then they need to strongly support some of the large hydro and wind power schemes proposed for the South Island. In a windy, wet country like NZ there really isn't any reason why we should have to burn fossil fuels to produce electricity. I realise that damns and wind farms do effect the local environment.

If the Greens aren't prepared to accept this environmental compromise then maybe they could take a serious look at supporting nuclear energy. More and more countries are embracing this as a clean and efficient way to produce electricity. For example, France has the cleanest and cheapest electricity of any industrialised nation, and they are close to 100% nuclear generation.


Posted by nickgavey : 6/14/2007 11:50:00 AM

It is stupid for the Greens to play at being head in the sand NIMBY morons with Dairy production. AGW is a global problem and needs a global solution.

New Zealands climate allows the production of milksolids without the need to house the cows in barns or rely on carbon inefficient grainfeeds. This meams that the milk powder produced here is about as AGW friendly as it is possible to get. Other exporters of milk powder are mainly European and American, where dairy AGW contribution per kg milksolids is higher. Any reduction in NZ exports of milk powder will be taken up by these more damaging competitors.

Making a reduction in our energy efficient dairy production will result in an increase in AGW, by shifting production to places that are less efficient. This is NIMBYism of the most dangerous kind.

Posted by unaha-closp : 6/14/2007 12:25:00 PM