Monday, September 10, 2007

Climate change: judging emissions trading

Green co-leader Jeanette Fitzsimons has laid out the criteria her party will be using in judging the government's upcoming emissions trading scheme. And they're pretty simple: the scheme must be fair, and it must be effective. In judging the first, they'll be asking "where does the money go?" Internalising the cost of carbon through emissions trading will inevitably raise energy prices, and the Greens want to see the resulting money used by the government to fund further emissions reductions rather than captured by dirty industry as windfall profits. Which in policy terms means that they favour answering the vexed question of allocation with auctions rather than grandparenting, with substantial revenue recycling.

The Greens have a strong point here in that the public (and particularly NZ First) is edgy enough about action on climate change raising electricity and petrol prices, without the added insult that the primary beneficiaries will be corporate fatcats and foreign-owned oil companies. Significant levels of revenue recycling leading to tangible and beneficial projects (large native forest regeneration schemes, increased funding for public transport, more renewable energy) will also help counter the inevitable claims from opponents that emissions trading is simply another government revenue grab. But at the same time, it should be noted that this question doesn't actually matter at all to the scheme's effectiveness. What matters in emissions trading is the creation of a marginal price for emissions, not who pays who. But my inner cynic suggests that the government will use grandparenting as a way of buying off key stakeholders who could otherwise kick up a stink in election year, in effect giving away billions of public money in corporate welfare for their own political benefit. Such a scheme would be perfectly functional, but morally unsupportable. OTOH, given that the government will need Green support in order to pass any of this, maybe (for once) they'll do the right thing.

In judging effectiveness, they seem to be pushing for the cap (the total number of permits issued) to be set at our Kyoto allocation of 1990 emissions. Again, this isn't strictly necessary, though obviously a lower cap is better than a high one, and 1990 has the advantage of matching our Kyoto obligation. OTOH, What's important at the moment is getting a cap in place, and hence getting a price for carbon into the system. Once we've done that, then we can look at lowering it - something we are going to have to do if we are to become carbon neutral or meet the National Party's proposed goal of a 50% cut in emissions by 2050. So I'm not too wedded to initially setting a cap based on 1990 emissions, and the expected phased implementation (where different sectors join the scheme at different times) means that we're not really capping overall emissions anyway.

The Greens also seem to think that permits must be fully tradable on an international market in order for the scheme to be effective. They're wrong. Quite apart from the fact that there isn't a functioning international market yet anyway, "local monopoly money" is a perfectly effective tool in reducing emissions. What linkages with international markets bring is either access to low-cost emission reductions overseas, or strong incentives for domestic reductions in the form of higher prices elsewhere, but neither is actually necessary in order for a domestic scheme to do its work. In practice, though, the government is betting on the former, and will almost certainly allow local emitters to present CDM or Kyoto credits to meet their obligations (assuming they can find any).

One of the big problems with New Zealand climate change policy has been the perfect being the enemy of the good. We've failed to implement workable solutions because we were pursuing the mirage of a perfect policy in the future. I'd hate to see the Greens become part of this problem. instead, they should push for the most robust scheme they can get, but support any improvement on the status quo. What's most important, though, is that any emissions trading scheme sets a clear path for long-term emissions reduction, not just in CP1, but all the way to carbon neutrality. And I'm quite surprised the Greens haven't made that one of their criteria.