Tuesday, November 23, 2010

Climate change: We're doing it wrong

Two years ago, after more than a decade of dithering, New Zealand finally got an all-sectors, all-gases Emissions Trading Scheme. Last year, National effectively gutted it, turning it into a pollution subsidy scheme instead. Today, a Review Existing and Proposed Emissions Trading Systems [PDF] by the International Energy Agency points out that on core issues such as allocation and supplementary measures, we're doing it wrong.

On allocation, the IEA is quite clear: free allocation to existing polluters, as seen in the NZETS, is a Bad Thing. It blunts prise signals, encourages high-emissions activities, produces windfall profits, and leads to over-allocation. More importantly,

if there is overly generous support for emissions-intensive industries, this runs the risk of preserving the status quo, whereas revolutionary change is required.
Instead, the IEA promotes allocation by auction, something which avoids all of these problems as well as providing a revenue stream allowing government to fund further supplementary measures. The NZ government, and the National Party in particular, would prefer to hand out free credits to polluters than have a fair mechanism.

The IEA argues that supplementary measures, such as energy efficiency regulations and support for the deployment of low-carbon technologies, are necessary to address pervasive market failures. Thanks to the legacy of Roger Douglas, we don't do that, instead relying on the purity of the market mechanism. So instead of regulating the fuel-efficiency of cars (for example), we expect consumers to work out the long-term costs and benefits for themselves - something we know they're remarkably bad at. Its a recipe for failure, and for preserving the status quo of high emissions. If we want to actually address this problem, we will need to introduce such measures. The sooner we do it, the lower the long-term costs.

The one bright spot is that Nationals' ETS changes are themselves unsustainable. They will cost $105 billion to 2050, something no government can afford. As a result, the next government will be forced to remove those pollution subsidies. Which will mean we will have a second chance to get it right. And the sooner we do it, the better.