Monday, August 23, 2021

Climate Change: Too little, too late, as always

For the past few months, I've been screaming about the government's ETS price settings: basicly, they set the price cap at which they will flood the market too low, creating a real risk that its going to happen this year, resulting in an extra 7 million tons of emissions, at a cost to the government of over a billion dollars. Well, today the government finally announced they plan to do something about it: they're going to raise the price cap next year:

To encourage individuals and businesses to stop burning fossil fuels, everyone must pay a price for each tonne of carbon dioxide they emit. The market price is currently $50 per tonne, teetering at an upper guardrail the Government set last year.

But since prices may need to go as high as $250 per tonne for the country to eliminate fossil fuels, according to the Climate Change Commission, the Government is resetting this upper guardrail, shifting it from $50 to $70. This will take effect next year.

(The announcement is here, and it was actually floated in a consultation document back in April).

This is better than nothing, but it doesn't solve the immediate problem. In fact, its made it worse, because the carbon price has now spiked over $50 / ton as buyers expect they'll be worth more in just four months. And if the auction price tracks the spot-market price like it did last time, the cost-containment reserve will be triggered at the next auction on 1 September, flooding the market with 7 million more tons of pollution. The government having to cover those seven million tons somehow (at currently twice the NZ market price) is the least of the problem. Fundamentally it is seven million tons the planet cannot afford.

And the icing on the cake: based on this year's growth, a $70 / ton cap probably isn't high enough, meaning we'll face exactly the same problem next year, and risk releasing another 7 million tons. And ditto the year after that, and the year after that as well...

Markets need room to move and space to find their price. Unfortunately, the government is clinging to prices developed literally in a different world: their price structure was developed back in the days when carbon was only $25/ton and hard up against the then-price cap, and to policymakers the idea that they could double seemed unimaginable. And even the Climate Change Commission's advice, from just six months ago when prices were $35/ton, suffers from the same problem: a complete failure to imagine that prices could rise. Meanwhile, the changes to the ETS (and the perception that denial was over and that they would stick) guaranteed they would. And then, that guarantee created further upwards pressure, as we've seen today. The government's failure to do what is required and legislate proper price settings to let the market find its level without the crutch of the cost-containment reserve has condemned us to repeated crises over the next few years, at a cost of millions of tons of completely avoidable emissions and billions of dollars of completely avoidable expenditure. The question is how much they will waste before they admit they were wrong, do the right thing, and eliminate the CCR entirely.