Thursday, September 02, 2021

Climate Change: The CCR was a huge waste of money

Yesterday the government held an ETS auction, and triggered the "cost containment reserve", flooding the market with an extra 7 million tons of pollution in an effort to keep carbon costs low. So how much "cost containment" did we get? Unfortunately, we're not allowed to know: the pre-CCR clearing price is not included in the information the auction monitor is required to disclose, and everything else is covered by a secrecy clause. I've asked under the OIA, but the government may be unable to tell us if their outrageous (and outrageously expensive) pollution subsidy policy was effective or not. Which would obviously be highly convenient if it wasn't...

But even if they can't tell us, we can take a stab at working it out. The government values carbon internally at $150/ton, so it thinks that 7 million tons of extra pollution was worth $1.05 billion. The "benefit" of that pollution is "lower carbon prices", so how can we put a value on that? We can use the cost plus household numbers from StatsNZ (interpolating between 2018 and 2023 gives 1,903,000 households in 2021) to get a weekly benefit per household required for the policy to be worthwhile ($10.61). We can compare that to Treasury's numbers on weekly change in household spending based on increases in emissions price (p 66), using the median household and remembering that we're already paying $50/ton, to get an effective carbon price rise where flooding the market would be beneficial. That number works out to be $14 extra per week per household, giving an implied carbon price of ~$125 / ton (the table stops at $100, but its linear between $50 and $100, giving an implied weekly spending of $13.60 at $125). Or, to put it another way, to be beneficial yesterday, to have a positive benefit / cost ratio, the CCR would have had to have prevented a sustained price increase of $75 / ton.

While the actual numbers are secret, it seems highly unlikely that the auction would have resulted in prices going up by 150%. Even if it deterred a 50% price increase (to $75 / ton, which also seems unlikely, but less outrageously so), it would only have produced benefits of $336 million, for a BCR of 0.32, which is about as beneficial as a motorway in Auckland. And because there's another 7 million tons next year, and the price at which it is released is only $70 (meaning the market expectation of where the price will be next year), the latter is in fact the upper bound on how effective this policy can be.

The conclusion: the CCR was a huge waste of government money, which increased emissions for no net social benefit for New Zealand. The mistake has been made, and now we need to do two things: hold the people who caused it accountable for that 7 million tons, and prevent it from ever happening again. And the latter requires a simple measure: repeal the CCR, and rip that 7 million tons straight out of future emissions budgets to ensure it is not actually emitted. Anything less would be a 7 million ton crime.

Update: And that's exactly what Climate Minister James Shaw says he will do. More carbon today means less carbon tomorrow! But unless he legislates, he'll be waiting until 2023 to fix this, and running the risk of a repeat early next year.