Thursday, September 20, 2007

Climate change: preliminary analysis

This morning the government announced the framework for its new emissions trading scheme. Previous policy documents had suggested a staged implementation, with the electricity sector being part of a transitional scheme during the Kyoto first commitment period (2008 - 2012), with a full scheme covering all gases and all sectors progressively introduced after that. But the policy has shifted; now the government is planning a much more aggressive implementation, and the first sector on board (from 1 January next year) will be forestry. The transport fuels sector will follow in 2009, the electricity/energy and industrial sectors from 2010, and agriculture, waste, and solvents in 2013. Agriculture and other threatened industries will be eligible for grandparenting of up to 90% of 2005 emissions, while there will be no grandparenting for the energy sector. As for the total cap, it's not clear, and the staged implementation makes it difficult to work out anyway. But there is a strong hint in the major design issues factsheet [PDF] (online soon, I hope) that it will be set at 1990 levels. In answering the question "how many emission units will be issued?", it states:

The emissions trading scheme will operate within the cap on emissions as established by the Kyoto Protocol during its first commitment period (2008 - 2012). There will be no cap on the emissions that occur within new Zealand. However, domestic emissions that exceed New Zealand's allocation under the Kyoto Protocol must be matched by emission units that have been purchased internationally from within the Kyoto cap on emissions.
A consequence of this will be that the government will have to hold a large number of credits back to cover the agricultural sector.

as for goals, there has been a shift away from high-level goals phrased in terms of New Zealand's net emissions in favour of smaller, sectoral goals. Some of these are highly specific, such as generating 90% of our electricity from renewable sources by 2025, halving our transport emissions by 2040, and increasing net forest area by 250,000 hectares by 2020. Others are quite vague, such as becoming "one of the first" countries to "widely deploy" electric vehicles, and being a "world leader" in agricultural greenhouse gas research and reductions. Carbon neutrality is a goal, but will be implemented progressively by sector - the electricity sector will be expected to be carbon neutral by 2025, the energy and industrial sectors by 2030, and transport by 2040. What this means in practice is reducing the caps for those sectors and requiring them to offset the remaining emissions. What's unclear is how this fits with the overall tradability of emissions within an emissions trading regime.

If the carbon neutrality targets are achieved, then by 2040 the only sector which is not carbon neutral will be agriculture. Their emissions will likely be held to around 2005 levels of around 37.5 MTCO2-e, or ~90% of net 1990 emissions. And this represents a definite upper limit on the sorts of long-term emissions reductions we can credibly commit to without either lowering the agriculture cap or continuing to massively subsidize farmers through the purchase of credits on the international market. In other words, a "carbon-neutral" NZ which excludes agriculture is actually substantially worse than National's proposed goal of 50% by 2050. Whether this is consistent with our attempts to brand ourselves as "clean and green", or credible when the international community is suggesting goals of 60%, 80%, or even 100% reductions in net emissions by 2050 is left as an exercise for the reader.

A few final thoughts:

  • The foresters will be very unhappy. Rather than the $1.25 billion giveaway they wanted, they will instead only be able to get credits generated after 1 January 2008, and only if they accept full liability when they cut the trees down. I guess they'll be running that $1.2 million campaign in an effort to buy themselves a government who will give them a handout, then. Which incidentally shows us why we need the Electoral Finance Bill.
  • The farmers won't be happy either. Grandparenting 90% of 2005 emissions is insanely generous, and significantly affects our future potential emissions reductions, but its not the free ride they are demanding. Expect them to drive another tractor up Parliament steps in defence of their "right" to profit by dumping their costs on the rest of us.
  • Forestry being first, with both credits and a deforestation allowance means the market will initially be all sellers and no buyers. This means the price of permits will initially be very low, creating international interest in the market. Farsighted forest owners will hold their credits in expectation of the price rise after 2009, but OTOH the NZ business community is known for its short-sightedness and refusal to invest. So, we may see significant sales of credits overseas, followed by whining that there aren't enough to go round.
  • The stay of execution for the electricity sector is a significant reversal of policy, presumably caused by the difficulty in distinguishing between electricity generators and industrial emitters (some plants are both e.g. Mighty River's Southdown co-gen plant). But given that the electricity sector is already making the required changes, it shouldn't matter too much. The strong expectation of future costs is already changing behaviour.
  • The shift to sectoral goals gives us some simple and inspiring targets which are easily understood. Most people have no idea what our emissions are, and whether a 10% reduction is good or bad. We do understand what "90% renewable energy' and "carbon neutral" mean. However, the sectoral goals need to be combined with an overall emissions goal as well, to guide government policy.
  • I'm left wondering what's happened to the nitrogen levy / nitrification inhibitor subsidy proposed in Sustainable Land Management and Climate Change. It was a fundamentally good idea, if only as an interim measure, but it seems to have dropped completely out of the picture.
  • All the real work on allocation, including the number of additional permits to be allocated as each sector is brought in, has been left up in the air. There will be further consultation, but I'd rather see it done in the open rather than having policy traded in the back room with financially interested stakeholders (who, as the KFA shows, may attempt to intervene in the electoral process or make significant political donations in an effort to buy themselves a free ride).
  • The government is well behind schedule. Last year, they expected to have legislation passed by now; instead, that's been pushed out till sometime next year.

I'll have more later. I still have a fat pile of documents to read (including the Framework for a New Zealand Emissions Trading Scheme [PDF] discussion document), but hopefully that should satisfy people for now.