Thursday, June 24, 2021

We need to fix the ETS again

The Emissions Trading Scheme is one of the government's key tools for driving reduction of greenhouse gas emissions. By putting a price on carbon, businesses face an incentive to reduce emissions, either by cleaning up or shutting down. Or at least, that's the theory. In practice, exemptions, subsidies, persistent low carbon prices, and just the irrationality of our business leaders and their preference for complaining rather than investment prevents it from functioning properly. It has certainly got better since Labour's last round of fixes, which have seen carbon prices rise. But its still broken.

One of the ways it is broken is the "cost containment reserve". Basicly, if the carbon price gets "too high", the government floods the market, rewarding polluters for their failure to keep emissions within the cap by allowing them to pollute more. The justification for this is to prevent social damage from a sudden spike in carbon prices, and you can see that that might apply if current prices, say, tripled over a very short space of time. But the actual price they've set is a mere $50 a ton, barely higher than the current price of $43.50. Worse, based on the results of yesterday's quarterly ETS auction - which saw the government sell carbon at $41.70, over $5 a ton higher than it did in March - it might not be too long before that price is exceeded. If this trend continues, we can expect the cost containment reserve to be triggered in December.

Having this happen would blow the carbon budget. Having it happen in the first year of ETS auctions suggests that the system is (still) a joke, a pretence of action designed to continue to reward polluters.

In its recent advice to the government, the Climate Change Commission had some recommendations on this:

The NZ ETS cost containment reserve trigger price should be set well above expected market prices. An initial step up in value, to mitigate risks that it will be triggered and add to the NZU stockpile, should be followed by annual increases to give a trajectory that allows for prices of at least $140 in 2030.
The government needs to act on this immediately. An immediate increase to $75 or $100 a ton, with scheduled increases of $10 a year, will give space for the market to operate properly and breathing room to see where the price will land. Unfortunately, the government has tied its hands: s30GB(5)(a) says that the Minister can only recommend an increase in the trigger price if it has already been triggered. We should not have to wait for disaster to happen in order to prevent it. Instead, the government should follow the advice of the Commission, and legislate urgently to maintain the integrity of the ETS, and of our environment.