Tuesday, March 12, 2024

Climate Change: A test for National

He Pou a Rangi Climate Change Commission has released its latest advice on NZ ETS unit limits and price control settings for 2025–2029. This is, in theory, technical advice on how many units the government should allow to be auctioned. But because the ETS system is under pressure due to an accumulation of past poor decisions, its going to be a real test for National.

What are those past poor decisions? Putting trees in the system, which seemed like a good idea when the system was first designed in the early 1990's, but is now looking increasingly questionable. Handing out millions of tons of free credits every year to large polluters, which looked like a great idea to National in 2009 when it wanted to bribe its cronies, but has also come back to bite us. Having a fixed-price option until 2022, which again seemed like an acceptable transition measure in the 2010s, but was wildly rorted for the profit of polluters when the supply of fraudulent overseas "credits" was cut off, and the system transitioned to full auctions just a few years ago. Together, these poor decisions have led to the buildup of a huge pile of surplus credits in the system. And somehow, it managed to grow by another 15 million tons last year, despite nothing being auctioned.

The Commission's job is to ensure that the ETS settings are in accordance with our emissions budgets, so their solution to this problem is to radically slash auction volumes. There's no side-by-side comparison of the recommendations with the current settings, but you can get a sense of the scale from this graph, which includes 2024's volume:


For comparison, the current auction volumes for 2025 - 2028 (New Zealand units available by auction less the reserve amounts; the bit in dark blue on the graph above) are 12.6, 10.7, 9.1, and 7 million tons, so they are basicly halving them. And its clear that unless something is done about industrial allocation volumes, there's going to be very little auction supply from 2030 onwards.

This is, in theory, going to have an impact on prices, though it will be moderated if the surplus is used up. When the previous government faced a challenge like this, they fucked it up, trashing the market and causing a loss of certainty in the entire policy (though in retrospect this ultimately caused the removal of 23 million tons from the system, so: could have been worse). The question is whether National will do the same, trash the budgets and cause another year of chaos before being told to go back and do it properly by the courts. Or whether they'll take the lesson from last time, and accept the advice of the experts Parliament appointed to help them. Sadly, I don't have much confidence that a cabinet stacked with business cronies and climate deniers will do the right thing here.

(There's a number of other interesting things in this advice. Firstly, a warning that governments should not rely on the ETS as a source of revenue, because auction prices are uncertain and volumes will decline to meet budgets. Secondly, a recommendation that the reductions from non-ETS policies like the clean car discount and NZ Steel deal be locked in by ripping them right out of the ETS. Again, it remains to be seen whether National will listen on that, or whether they'll sabotage emissions reductions to make reality conform to their weird economic purism).