Monday, February 23, 2009

Climate change: the effects of the recession

The Herald this morning reports that Climate Change Minister Nick Smith wants officials to recalculate our expected greenhouse gas emissions to take into account the effects of the recession. This is an obviously good move. Our last Net Position Report [PDF] was computed in early-mid 2008, when it seemed like the good economic times would continue forever. And its assumptions (p. 37) reflect this: apart from a small dip in 2008, economic growth hovers just short of 3%, the US-NZ exchange rate in the mid 60's, and the price of oil at US$100 a barrel. Now the global economy has fallen off a cliff and Treasury is projecting at least two years of recession, the exchange rate is around the 50 cent mark, and oil is back around US$40 a barrel. Updating the projection to take account of this is likely to make a real difference to our figures.

How much of a difference? Recessions in the 90's lopped a couple of megatonnes off our annual emissions due to declines in industrial activity and energy use. Which is enough to make a significant difference over CP1. But there are two obvious problems. First, emissions rose quickly again when the recession ended, so this isn't a free pass; we need to make sure they stay down. Secondly, this will likely throw the ETS even further out of whack. As I noted last year, the ETS is already massively overallocated: thanks to government freebies and cowardice on transport, there are far more permits than necessary to cover projected emissions. If industrial emissions decrease further, that problem will be exacerbated. There are two likely results: either the credits will be "banked", meaning that the emissions will simply happen later, or they will be sold offshore - meaning that the government will have to buy extra credits to replace them. The latter could be a significant expense: 40 million tons at $25/ton makes a nice round billion. That's money we wouldn't have to spend if the government hadn't been so keen on subsidising polluters.

The upshot is that the recession will not save us. While emissions may decline, our overall carbon account will go further into the red. The solution is for the government to take the opportunity to reduce its handouts to polluting industry to restore balance to the ETS. But that's highly unlikely under National.