Tuesday, August 14, 2018

Climate change: Fixing the ETS

The big problem in New Zealand climate change policy is that our key emissions control mechanism - the emissions trading scheme - is unfit for purpose. Stacked with subsidies to reward polluters, and flooded with fraudulent foreign "credits" in its initial term, it failed to do anything meaningful to reduce emissions. We need to fix it if we want to actually do anything about this problem (as opposed to twiddling our thumbs while the waters rise).

The good news is that James Shaw has been working on it, and has released a consultation document on its initial proposals. These include:

  • Announcing unit supplies five years in advance, and auctioning units rather than handing them out as pollution subsidies, with the option of putting the revenue into specific climate-change policies rather than general funding.
  • Limiting the number of international units that can be used, if New Zealand is ever allowed back into international carbon markets (and that's a big if).
  • Replacing the current fixed-price option (which will become a de facto carbon tax in a few years as prices rise) with additional auctions from a "reserve" - though its unclear whether this will form part of the official carbon budget, or result in it being blown.

Of these, the latter is the most controversial. The government's aim is to avoid sudden price shocks causing pain to business, but giving polluters the right to pollute more if they're polluting too much simply encourages pollution. Pre-banking the units is one option (and removing units from supply is more than justified given the banking enabled by the use of fraudulent credits in the past), but then that creates a pile of emissions credits which future governments will be tempted to spend for political favour. If you look at the electricity market, then when the spot price gets too high for too long, some companies just shut down production temporarily. And honestly, I don't see why carbon should be any different: the market will be sending a clear signal that we can no longer afford those people's pollution and that they should find something less polluting to do.

Of course, this is all technical stuff, about system design. None of it addresses the cow in the room: whether our biggest polluters, farmers, will have to pay their way like everybody else. And until the ETS includes agriculture, it will remain fundamentally broken.