Thursday, September 09, 2021

Climate Change: The CCR is a failed, counterproductive policy

Writing on Interest, and in the context of carbon farming displacing traditional sheep and beef farming, Keith Woodford says:

Given that this year’s cost-containment reserve is already exhausted, there is considerable speculation as to what will happen as soon as the next auction on 1 December. The Government will need to find some more firepower if it wants to put a lid on current prices.
To which the obvious response is "but why would it want to do that?" Because its clear from the progress of the ETS this year that the attempt to limit prices is both a failed policy, and completely counterproductive. Failed, because it did not work, and will not work; prices are already well above the government's $50 cap (set back in 2019, which is literally the dark ages for this area of policy), and the market clearly expects the CCR to trigger again at the first auction next year, meaning it will not control prices then either. Counterproductive because the cost of these failed attempts to limit prices is to allow more pollution, at a social cost significantly higher than any conceivable benefit, while even if it was successful it would mute the price signal and incentive for decarbonisation which is supposed to be the outcome of the policy.

So what should the government do with this failed, counterproductive policy? Abandon it. Not the ETS itself, which is producing a strong incentive to decarbonise despite the government's attempts to hobble it, but the idea of trying to cap prices. And the simplest way to do this, and one explicitly contemplated in law, is to set the cost containment reserve volume to zero (alternatively, it could be set to a much smaller amount, with a much, much higher trigger price to let the market find its level, but why piss about with half measures? If you want to end price limits, end price limits).

Unfortunately, Climate Change Minister James Shaw has already decided price settings for next year, which bake in the failure. Given that they will not work, are counterproductive, and are already being ignored by the market, he should reissue them. If the normal regulation timeline doesn't allow that, he should pursue urgent legislation to overwrite them instead. But with the clear and growing severity of the climate crisis, we cannot afford to pursue this failed, counterproductive policy. And we cannot afford to permit an extra 7 million tons of emissions every year doing so.