Friday, October 16, 2009

Climate change: The PCE on the ETS

The government's proposed changes to the ETS lack transparency and will remove any incentive to reduce emissions.

That was the opinion of the Parliamentary Commissioner for the Environment - an independent officer of Parliament (like the Ombudsmen) with the task of "hold[ing] the Government to account for its environmental policies and actions" - at the Finance and Expenditure Committee yesterday. Their submission [PDF] takes the government to task for its move to unlimited intensity-based allocation, pointing out that they would effectively remove the price signal altogether for some sectors, and result in no reduction in emissions:

My greatest concern with the proposed amendments is the changes to allocation after 2012. The allocation of free carbon credits to industrial processes, industrial heat generation and petroleum refining sectors is extremely generous. Using the industry average baseline for allocation instead of aiming for better, the lack of a limit to the number of credits given away, and the increasingly slow phase-out, all result in allocation at very high levels. This essentially removes the price signal to this emissions-intensive sector, where New Zealand needs a carbon price signal the most.

Removing the price signal doesn’t remove the cost of emissions, since the taxpayer must pick up the tab. And without the incentive to invest in low carbon-intensive technology, emissions will continue to rise. This is not consistent with the stated purpose of the ETS.

The lack of a cap will allow emissions to grow, the phase-out rate is incompatible with the government's stated goal of a 50% reduction by 2050, and there is no justification for the allocation to agriculture. As for "protecting jobs", they point to research that the cost could be as much as $109,000 per job saved. Which is simply utter madness. Again, if we're willing to pay that much, then we can find something for these people to do which does not involve destroying the environment.

The second big problem is transparency. Allocation involves giving away billions of dollars of government money, yet it will all happen in secret. All the public will get is a total number. The PCE recommends that this be broken down by sector or industry, and with the free allocation justified in each case. I'd go further and break it down by firm - that way we can tell if we are really getting our money's worth (and whether the government's claims of "protecting jobs" are holding up). Screw commercial sensitivity - when they're sticking their hand out for millions of dollars a year in pollution subsidies in perpetuity, we have a right to know.

The PCE also pointed out that the allocation scheme is not politically durable as the Labour Party does not support it. I think that for the sake of the environment, Labour needs to be making a lot more noise about that. Business needs certainty on carbon costs to make investment decisions; denying them that certainty means they will not invest in pollution. Labour needs to be crystal clear: polluters may get a free ride under National, but that will end the moment the government changes, and large polluters will be paying the full cost of their activities. As for the Greens, they need to be making it clear that they will be demanding this as a bottom line in any future confidence and supply deal. And if business stupidly makes dirty investments in the face of such statements, they deserve to lose their money.