Wednesday, October 01, 2008

Climate change: answers on allocation

I've been curious for a while about the government's decisions about allocation in its Emissions Trading Scheme. How big is the overall cap? How does this compare to expected demand? What will happen after 2013? What downward path is planned to reduce emissions in the long term? Fortunately, New Zealand has an ideal tool for obtaining answers to questions like this, in the form of the Official Information Act. And the other day, I got some answers. Some of them are a bit disturbing.

First, how big is the cap? I'd tried to calculate this before, using budget data. It turns out I needn't have bothered - the data has been on the web since last November, in a little note to the Climate Change Leadership Forum on Supply and Demand of New Zealand Units. This shows the government allocating 93 million units over CP1, primarily to the forestry and industrial sectors. So that's the "cap" - 93 million units; emitters in included sectors who want to emit more than that will need to buy in credits from overseas.

Interestingly, Treasury argued that this is "better described as a level of free allocation" rather than a cap. Which suggests that in CP1, the government will not be auctioning any units at all - an ostensibly left-wing government has in the end gone with full grandparenting, transferring more than two billion dollars of public wealth to the forestry and industrial sectors (assuming the official lowball carbon price of NZ$22 / ton; it will probably be higher, and the wealth transfer greater).

(I should note here that it looks like I overestimated the allocation by about seven million units. Whoops!)

How does this compare to demand? The same note has a table showing the estimated demand from each sector, totalling 101 million units over CP1, so it looks like the government was underallocating (which is necessary for the market to work). However, the table predates the government's spineless decision to delay the entry of transport by two years. Once that is taken into account, the total demand from included sectors over CP1 is only 61 units. In other words, the government is massively overallocating, with the result that the market price for carbon will be low, and there will be little pressure on polluters to reduce emissions. Meanwhile, that extra 40 million units - almost a year's net emissions - will be sold on the international market, worsening our net position and funnelling over $800 million into the pockets of favoured industries (that of course is in addition to the billion dollars a year we will be giving our polluting farmers by covering their emissions). In other words, rather than a pollution reduction scheme, we have a corporate welfare scheme - just like the UK.

Post-2012, the government apparently plans to allocate only 52 million units a year (much less than I'd thought they would), requiring other sectors to buy permits on the international market. But as yet, they have set no downward path for emissions beyond that for free allocations contained in the ETS legislation. If that is the only allocation there is, and every other sector is required to buy permits on the international market, then that pathway is quite steep. But the law allows the government to auction permits, and there is no guarantee they will not - an action which would set a shallower path for reductions. The decision on which path to take will likely be in the hands of the next government.

Overall, this paints a pretty dismal picture. A good idea has been fatally undermined by overallocation, and the taxpayer will end up carrying the can. Thanks, Labour!

(BTW, I should thank the nice people at Treasury, who answered my request within a week of it being sent their way, despite it already having been bounced around several departments. They were forthcoming and helpful, and an excellent example of how an OIA should be handled)