Friday, July 09, 2021

Climate Change: The credibility of the ETS is on the line

Stuff has noticed a story I've been keeping an eye on for the past month or so: carbon prices are rising, and we're about to blow the ETS budget:

The carbon price is at a record high – and while that may seem a good thing for the climate, the country could be on its way to blowing its first-ever carbon budget.

To reduce greenhouse gas, the Government has designed an elaborate game of chicken. Carbon-producing companies face rising costs to release greenhouse gas until some of them (and eventually all) back down – by cutting their footprints.

But the carbon price is reaching a point where the Government may be the one to pull out. If the price settles above $50 for a tonne of climate pollution, it could set off a trigger that could spoil the country’s chance to meet its 2021 emissions goal. Consequently, the Government may need to turn to other countries to buy extra carbon credits to balance the blowout.

That story was published yesterday, and clearly written late Wednesday, when the carbon price was at $46 a ton ($5 higher than it was in early March). Yesterday it rose another $1.50, to $47.50, and looking now, its already gone up another dollar. These are spot-market prices, of course, but the auction prices reflect them, so on the current trend, it'll be $50 next week, and we should be well above the trigger point by the time of the next auction in September.

What's driving this? At a guess, I'd say this. A major polluter tripling their pollution is exactly the sort of thing which will drive prices up. And its having positive effects, with Silver Fern Farms reading the market signal and deciding to decarbonise early. High carbon prices are a sign the system is doing what it is meant to - making polluters pay to pollute, and fight one another for a limited supply - and we should all want that market signal to be as strong as possible and to get stronger over time.

Pretty obviously, the credibility of the ETS is on the line. The government put in the cost-containment reserve as a protection against economic shocks, not ordinary market conditions. If it triggers in the first year of real operation, and effectively prevents the market from operating properly, then the system is pretty obviously a joke. As I noted last month, the government needs to fix this, with urgent legislation to replace the trigger points in Schedule 3 of the Climate Change (Auctions, Limits, and Price Controls for Units) Regulations 2020 (legislation, because to provide the market "certainty" they tied their hands on how often they could change this by regulation, and because if they merely remove this constraint and regulate, polluters might try and sue). The Climate Change Commission recommended an immediate increase to $70/ton, but looking at the way the market is going, I'd suggest a trigger point of at least $100/ton, and rising by $25 a year, to give the market space to find a price. And this needs to be done urgently, before the next auction on 1 September (so basicly when parliament gets back from its recess). If the government refuses, then it will be clear that their main carbon reduction policy is a joke, and that rather than discouraging pollution as it is meant to, they really have their thumb on the scales to encourage more.