Saturday, September 25, 2021

Climate Change: Anatomy of a mistake

At the beginning of the month, the Emissions Trading Scheme turned into a farce, when the government flooded the market with credits in a failed and wasteful attempt to Keep Carbon Prices Low. This cost us a billion dollars while undermining the fundamental purpose of the ETS. So why did it happen? Pretty obviously, because the government set an important number, the Cost Containment Reserve trigger price, too low. I was curious about the reasons for this, so I asked Climate Change Minister James Shaw for the advice he had received on the matter. In response I received one of the most egregious "fuck you" responses to an OIA request I have ever seen:

I am withholding the remaining eight documents including the titles under section 18(d) of the Act because the information is or will soon be publicly available.
...which made it impossible to actually tell if the information was actually publicly available or not. Heckuva job, James. You're really complying with the Green Party's policy that "Politicians uphold high ethical standards [and] are open and accountable" there.

So what was the advice? Well, trawling through MfE's shitshow of a proactive release page for a while eventually led me to a May 2020 Regulatory Impact Statement on NZ ETS unit supply and price control settings regulations, which looks at the policy arguments on how that important number was set. MfE looked at four options for the CCR price trigger: $40, $50, $70, and $100. Important policy parameters were that the CCR should "help maintain NZU prices in line with other countries [to] prevent New Zealand’s emissions price from exceeding those in our potential linking partners and some of our major trading partners" and that it "should be set outside the expected cost of emissions abatement for meeting our targets, and therefore used rarely". The costs and benefits of the various options are laid out in a table and associated commentary on p69-71 for the usual Goldilocks exercise (dismiss the options at either end as extreme, setting up your preferred option as "just right").

The $40 price cap is immediately dismissed as too low as:

This would set the upper limit of New Zealand’s emissions price pathway too low to drive adequate levels of emissions reductions. It is probable that NZU prices will need to be able to rise above $40 over the PEB for net emissions to reduce in line with achieving the 2050 target.

The $100 price cap is likewise dismissed as being "too high", particularly because it might "allow an emissions price higher than what is required to achieve the 2050 target". That is, it might be effective, do more than the bare minimum, save the government from having to buy more expensive abatements internationally - not to mention consistent with the policy goal of price settings outside the expected market range, and therefore used rarely. But no, we can't be having that, so we're left with the middle options. Of which MfE chose the lower one, on the grounds that a trigger point of $70/ton was also "too high" and would allow emissions prices to rise to "unsustainable" levels, imposing "unacceptable costs on households and businesses". No, they don't bother to do any analysis of what might be "unacceptable", or to cost it against the cost of attempting to subsidise credit prices using the CCR, but from Treasury (p 66), we know that those costs would be around an extra $140 a year for the median household, and that the CCR costs around four times more than that.

So we're left with $50 - a price MfE notes is already roughly the same as that in the EU ETS (didn't they expect it to grow?) and lower than that in Korea, and which in reality was exceeded within six months. It also gave us the puzzling situation of a proposed $10 range for the market for five years - $40 being too low to produce required abatement, and $50 being the soft cap. And that alone seems like a recipe for disaster.

But the fundamental problem here is that MfE thought quite moderate carbon prices are bad, "unacceptable", "too high". And when you're designing a policy whose primary goal is higher carbon prices, that seems to doom you from the start.

All told this is very poor policy advice, and its no wonder Shaw wanted to keep it secret. After all, he signed off on this. The CCR and consequent seven million tons of extra emissions is his responsibility. And the worry is that he has learned nothing from it, and that the new price settings he announced last month are going to see this mistake repeated again next year.