Monday, May 23, 2011

Labour and the ETS

Labour's plans to pay for policy by bringing agriculture into the ETS (something which has, predictably, got the farmers whining) has got me thinking about their other options regarding this boondoggle. The present level of ETS subsidies is unaffordable, costing a total of $130 billion to 2050. Eliminating them and making polluters pay for their own shit would make a serious difference to the government's books in the long term. So, can Labour tap more money by making changes?

Sadly, no. The biggest short-term subsidies - National's $25 / ton price cap and 2-for-1 pollution deal - expire at the end of 2012. If Labour was elected, they would not be able to make the required legislative changes in time. Instead, they will have to let these subsidies quietly expire and let these polluters pay the full price from 1 January 13.

So what about the long-term? At the moment, industrial and agricultural polluters will get intensity-based subsidies (so the more they pollute, the more they get), starting at 90% and decreasing by 1.3% a year (meaning we will be subsidising them until the end of the century). This is where the real money is, especially as the carbon price is expected to rise over that period. Unfortunately, unless subsidies are completely eliminated overnight - something which would cause an undue shock - then reducing them won't free up a lot of money immediately. It has to be done, but its not something Labour can use to pay for its social policies.

As for what they should do, pretty obviously the phase-out rate has to change. Ten years is more than enough time for business to clean up its act and upgrade its plant (especially as most businesses don't even last that long); given the lack of short-term options for farmers, that could be pushed out another five years for them, but fundamentally they have to join the modern world and accept that their actions have consequences for other people, and that they should pay for those consequences. There's also the question of capped vs intensity-based allocation; the latter stinks, but it would be a much simpler change, requiring a lot less regulatory work. And Labour will have to work fast. The first year it can conceivably save money in from reduced allocations is 2013, so it would have to have the policy work done, and the bill passed in a single year. That's a big ask in our political system. But if they want a fair ETS, then they need to be planning for it now.

Update: According to Stuff, it looks like Labour is planning to go back to their original allocation scheme of capped subsidies with a phase-out by 2025:

Cabinet papers showed cancelling the delay for bringing agriculture into the ETS would save $570m and going back to Labour's original free allocation formula would save a further $270m.
Industrial polluters better start planning to pay.