Tuesday, November 24, 2009

Climate change: A rort waiting to happen

One of the "features" of the government's gutted ETS is the "transitional period", during which polluters face not just a 50% discount on pollution (an obligation to surrender only a single credit for every two tons of CO2 they emit), but also a $25 price cap. Changes in the exchange rate mean that we are now below that price, but there's no guarantee that the dollar won't fall or carbon prices rise. And if either happens, the government will find itself in the invidious situation of directly subsidising carbon, buying credits overseas for, say, $50 to provide them to polluters for half that.

To prevent the obvious rort (selling your free allocation overseas at high prices, then meeting your obligation by paying the government $25/ton and pocketing the difference), the government has had to ban overseas sales during the transitional period. But the ban isn't complete - it doesn't apply to forest credits. This means that forest owners - who will (like everyone else) get a free allocation to help them meet the inevitable obligation when they cut their trees down - have effectively been given a legislated monopoly on carbon laundering, able to sell their forest allocation overseas at high prices while replacing it with non-forest credit bought at the capped price for instant arbitrage profits.

But there's another problem: the government still allows "banking" during the transitional period. Carbon credits don't expire, and if the price rises, polluters can simply sit on their free allocation, meet their obligation by buying from the government for $25 / ton, and sell up when the price cap and export controls are removed in a few year's time. Geographic arbitrage has been replaced by temporal arbitrage. At this stage, its worth pointing out that the government expects the price to double over the next three years (they assume a carbon price of $25 / ton until 2012, and $50 / ton after that). So they're setting up to give polluters a 100% rate of return over three years at our expense, which will flow directly into the pockets of their (mostly foreign) shareholders.

There's an easy solution to this: ban banking during the transition. This will reduce the exposure of the New Zealand taxpayer, and force polluters to use their free allocations to meet their obligations, rather than engaging in speculative shenanigans. But I forget: the point of National's ETS is to deliver windfall profits to their polluter-donors, not to actually reduce emissions.