Wednesday, May 29, 2024

Climate Change: Another budget hole for National?

National's 2023 campaign was all about tax cuts for landlords. And one of the key ways they were planning to fund it was a "climate dividend" - basically, pillaging ETS revenue and redirecting it from decarbonisation straight into the pockets of the rich. But there's a problem: there might not be much ETS revenue this year.

The first ETS auction of the year didn't clear, selling only 2.974 of 3.525 million tons (and that for the minimum price of $64/ton). The second one - for the leftovers plus another 3.525 million tons - is due in three weeks. In the meantime, National has repealed key climate change policies, announced reviews, and promoted fossil fuels - all of which have destroyed confidence in the carbon market. Basically, the government's commitment to climate action is now highly questionable - and so is the future value of carbon. This has flowed into the carbon market, with the spot price reducing to about $45/ton - nearly $20 below the auction minimum price.

The implications for the next round if auctions ought to be obvious: people are unlikely to pay $20/ton more than they have to. It seems unlikely to clear, or indeed, to sell anything. And unless the direction of the government changes significantly, its hard to see that changing for the September and December auctions either. The result will be that 11.125 million tons of carbon will go unsold, and the government will get no money for it - creating a $700 million budget hole.

But while this is bad for National's books, its good for the environment. Unsold ETS credits are cancelled at the end of the year, removing them from the system. So if the auctions fail again this year, its effectively an 11 million ton emissions cut (plus another 7 million tons from the cost containment reserve). Polluters will instead plant trees, or burn down the massive stockpile of credits effectively given to them by the policies of the last National government - both things we need them to do. So, its a direct benefit to the future - unlike the National Party.

National's current consultation on ETS price settings includes a proposal to reduce the price floor, to ensure the government always gets some revenue. But they can't fix that this year, and any proposal which diverges from the recommendations of He Pou a Rangi is likely to face a judicial review. If you're interested in this consultation, you can submit on it here.