An unnecessary takeover that will not lower emissions

NZ Herald
4 February, 2021

If the goal of emissions policies is to cut emissions for the smallest loss of our prosperity, then the Climate Change Commission delivered a fiasco this week.

Alongside its emissions budgets, the Commission has written the first draft of a plan for how New Zealand will lower its emissions over the next 15 years. The plan covers transport, industry, energy, waste, forestry and agriculture. For each of these sectors, the Commission has told the government by how much emissions should come down.

The Commission has not held back on the minutia. We must do 25% more walking by 2030, says the Commission. We will cycle 95% further. We will re-design cities, says the Commission, to make this happen.

If there is one thing to understand about the Commission’s plan, it is this: it is not necessary.

We do not need politicians and officials to tell us what to drive, how far to walk, how to make steel, or how to live to reduce emissions.

Tasking officials with the finer details of how we live is not only unnecessary, it is counterproductive.

Emissions must come down. But that entails trade-offs which officials are not in a position to see. They cannot know how much more you love your V8 than your gas heater, or how much harder it is for you to catch the bus to work than your neighbour.

The best place for those judgements is households and businesses. They have excellent knowledge of their own preferences.

As far as possible, the government should be operating on a principle of neutrality: emissions must come down, from where is secondary. Neutrality offers the greatest cuts in emissions. If that means V8s stay on the road, okay – provided overall emissions fall.

Unfortunately, that principle of neutrality is violated on nearly every one of the 847 pages in the Commission’s plan. The Commission has delivered a plan that is all about the V8s. It is an emissions plan in name only.

New Zealand already has a system for reducing emissions that lets households and businesses decide where emissions come down.

That system is called the Emissions Trading Scheme, or ‘ETS’.

The ETS puts a price on greenhouse gases. It works by raising the cost of petrol, coal and gas and (almost) everything else in the economy in proportion to their emissions. At least 25 countries have an ETS; ours has been running since 2008 and it may be the best.

That gas-guzzlers are still on the road is often seen as evidence the ETS does not work. Actually, it is evidence of lower hanging fruit elsewhere. The ETS cuts emissions from the most effective sources first. Right now, at a $38 per tonne carbon price, the ETS has a major effect on coal, natural gas and forestry, but not transport.

Transport’s time will come. As the ETS exhausts other more competitive ways to cut emissions, and as electric vehicles become ever more affordable, transport emissions will fall.

The Climate Change Commission is having none of this. It proposes to override the ETS and force emissions to come down through less effective channels, raising the cost of emissions cuts.

The Commission’s strategy is even more baffling because the enormous disruption it proposes – an unprecedented expansion of the government’s control over the economy – will not reduce emissions at all. That outcome is due to the way the ETS works.

The ETS caps emissions. The government sets the cap according to how many emissions permits it issues. The ETS uses permit trading to find the carbon price which will reduce emissions by enough to fit within the cap. Each year, the government issues fewer permits, meaning a tighter cap and lower emissions.

Here is the key point. If the ETS caps emissions, then other policies cannot reduce overall emissions any further. You can only cap emissions once.

The problem with the Commission’s plan is that nearly all of its proposals are already covered by the ETS. As a result, almost none of the Commission’s plan will have any effect on emissions. Even if the Commission successfully reduces transport emissions, its work will be undone by higher emissions (or less reductions) elsewhere in the economy. That is just how the ETS works.

That the ETS neutralises other policies is well-recognised. For example, in its AR5 report in 2014 the Intergovernmental Panel on Climate Change said:

“[I]f a cap-and-trade system has a sufficiently stringent cap then other policies such as renewable subsidies have no further impact on total greenhouse emissions.”

Except for agriculture, which sits outside the ETS, all the Commission’s plan will do is re-sort where emissions come down and raise the cost of cutting emissions.

The Commission says the problem is solved by linking the ETS cap with the emissions benefits of other policies. For example, every tonne of emissions removed by a transport policy could lower the ETS cap by one tonne. Emissions will then come down.

But that does not solve the problem. We could do better by just cutting the cap without the policy. That leaves the ETS free to find the most effective ways to cut emissions. There is more to this argument, which I will unpack in a future column.

With a binding ETS, the Commission’s plan is either redundant (things the ETS would have done anyway) or counterproductive (things the ETS postponed to cut emissions using the most effective sources first). Either way, the plan is unnecessary and wastes resources.

The Climate Change Commission says “[the ETS] alone won’t get us to where we need to be.” Policy, the alternative to the ETS, will to do the heavy lifting on emissions. The Commission wants New Zealand to subsidise, regulate and ban its way to lower emissions.

The ETS is not perfect, but policy has its own problems which the Commission seems to have overlooked. Emissions policies have already built a questionable track record.

To take a recent example, consider the government’s announcement of new vehicle standards last week. From 2025, imported vehicles will have to meet stringent new emissions standards.

Great. Except, by the government’s own numbers the policy will deliver only trivial emissions benefits, just 0.3% of New Zealand’s current emissions each year. That is a paltry 70 kilograms of emissions per light passenger vehicle per year.

Unfortunately, altering the composition of a large part of the car fleet does not come cheaply. Not that you would know from the Ministry of Transport’s analysis. They found the policy will have a negative price tag, a conclusion that appears to have been reached by ignoring most of the costs borne by drivers but counting all benefits.

Overseas research suggests vehicle standards are a relatively expensive way to cut emissions. Based on that research, vehicle standards could cost the country $4 billion by 2041.

Here is the kicker. Drivers could achieve the same cut in emissions as vehicle standards using offsets for less than $3 per vehicle per year. Offsets are derided, but recent reforms that finally gave the ETS a binding emissions cap means offsets based on the ETS should be seen as genuine.

So vehicle standards offer only small emissions benefits for a high cost. Unfortunately, that is the outcome of almost all emissions policies.

If the Climate Change Commission wants to use policy to cut emissions, it should look at the serious problems policy is having with emissions.

Consider what the government could have done with $4 billion if it were willing to cut emissions from the most effective sources. Based on the current ETS price, the government could have more than 100 million tonnes of emissions over the next 20 years, the life of the vehicle standards policy. (Yes, the ETS price will rise over time, but affordable opportunities will also be available overseas).

That amount of emissions, 100 million tonnes, is nearly two years of net zero emissions for the whole country, including agriculture. Vehicle standards will deliver just 33 days’ of net zero emissions for the same cost.

Policy must do better if we are to believe the Commission’s claim that net zero emissions will cost less than 1% of GDP in 2050.

There is a real risk that New Zealanders make the sacrifices demanded by the Commission only to see emissions stagnate. That is exactly what happened to Germany, which invested half a trillion Euro in solar and wind generation for almost no change in its emissions. The Commission asks us to bet the farm on a few technologies, which is risky.

To summarise, the Commission’s plan will not deliver any emissions benefits over and above those from the ETS. The Commission has an unfounded faith that policy will deliver lower emissions, something it has failed to do so far. The Commission has not told us why next time it will be different.

The government must find better policies if New Zealand is to meet its emissions targets. And before its advice becomes final, the Commission should explain how an unprecedented expansion of government control over the economy leads to lower emissions, because the logic is not clear.


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