Friday, May 17, 2019

Climate Change: Tweaking the ETS

Climate Change Minister James Shaw has announced the latest decisions in the government's programme to tweak the Emissions Trading Scheme to make it actually discourage pollution rather than subsidise it. There's a commitment to begin auctioning units from late next year, and to remove the price cap from then (or from 2022 at the latest). There are also plans to increase penalties for non-compliance, ensuring that polluters who refuse to engage with the scheme can be properly punished. But one of the biggest change sis around transparency, with a commitment to publish totals of emissions and removals for every ETS participant. This isn't actually as intrusive as it seems: because our ETS sets the "point of obligation" at a very high level, there are only about 300 mandatory participants (plus 2150 voluntary ones, mostly forestry companies), and we'll be seeing effectively how much oil, gas and coal is being imported and mined rather than how much individual companies are using. On the other hand, it will allow us to identify highly-polluting industrial users, as well as deforesters.

On the price cap, the government has committed to keeping it at $25 for this year. And while they plan to remove it next year if everything goes well, they haven't committed to a particular level in the interim. Which given that the price cap both harms the market and poses a financial risk to the government, suggests an obvious fix: legislate for a separate, higher cap to apply from next year until it is removed. Doubling it to $50, and increasing it by $25 a year until the 2022 deadline should give room for the market to find its level, while avoiding the current problem of prices being up against the cap. But that would mean they'd have to progress the legislation quickly to get it in place by next year, which seems unlikely, given that it hasn't even been introduced yet. Though a quick raise in the future carbon price caps seems like the sort of thing which could legitimately be done under urgency, given the time-sensitivity.