A legacy to be proud of

Insights Newsletter
2 February, 2024

James Shaw announced his resignation as co-leader of the Green Party earlier this week. Although retirement was not announced, one assumes it cannot be too far away.

Shaw has remained an interestingly divisive figure throughout his tenure as co-leader. He was respected by many on the right for his pragmatism and disliked by a core of the left for his perceived openness to compromise. All this, despite having led the Greens as they embraced a dramatically left-leaning US-style politics of identity and culture.

Regardless of his political palatability, Shaw will leave office with that rarest of political prizes – significant, positive, and effective policy change. He achieved this in the form of the sinking cap on New Zealand’s Emissions Trading Scheme (ETS). Possibly the greatest achievement in climate policy of our lifetime.

The ETS operates through Carbon Credits issued by the government. Each credit purchased entitles the user to emit one ton of CO2, or to sell on the credit. Companies can generate credits by removing carbon from the atmosphere.

Prior to Shaw’s intervention, there was no cap on how many credits the government could issue. This rendered the ETS functionally useless. If the government was concerned that total emissions would exceed the emissions budget (the number of credits released that year) they would simply release more. The lack of credit scarcity kept prices low and did little to induce behavioral change in emitters.

Shaw changed this. The introduction in 2020 of a decreasing cap on the number of credits released per year reinvigorated the ETS. A cap on the number of credits creates scarcity, causing credit prices to increase, as prices better reflect the value companies place on their ability to emit CO2. A continued decrease in the number of units means that the price will continue to rise, providing companies with a constant incentive to invent, invest, and alter their emissions-producing activities.

Not only this, but the legislation governing the ETS is strong enough that government attempts to tamper with the system have seen them brought before the courts. 

Of course, there is still more work to be done. A cap on total emissions from the present day to net-zero needs to be implemented. The government would also do well to consider a carbon dividend.

Nonetheless Shaw’s contribution is remarkably impressive. A capped -ETS is elegant in its simplicity and practical in its adherence to market principles. Shaw should be proud of his achievement.

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