Government chips away at emissions trading scheme

Dr Eric Crampton
26 April, 2022

Wellington is a confusing place.

In 2017, the Government wanted to plant One Billion Trees and set a lot of costly policies to achieve it. It thought tree-planting was an essential part of the country’s climate response.

Now, the Government is fed up with trees. It is consulting on whether it should break part of the Emissions Trading Scheme to discourage planting.

The Government was wrong in 2017, and it is wrong again today.

But let’s go back to 2017.

The Government set the One Billion Trees Fund to subsidise tree-planting. By mid-2018, almost half a billion dollars had been targeted at planting trees.

It also directed the Overseas Investment Office to make investment in rural land very difficult, unless the land were to be turned into forests. For forests, New Zealand was open for business. For anything else involving rural land in excess of five hectares, the gates to foreign investment were rusted shut.

So overseas investors wanting rural land had one simple option: grow a forest.

Times have changed.

Carbon prices have increased since 2017 and so more forests have been planted, even though the Billion Trees Fund has since closed.

Last Friday, submissions closed on a discussion document jointly authored by the Ministry for Primary Industries and the Ministry for the Environment.

Did the discussion document celebrate successes in tree-planting? More carbon sequestered in trees could give the government room to cut the ETS cap more quickly, getting us to Net Zero faster.

Sadly, no.

Instead, it proposed that the government not provide ETS credits for carbon sequestered in permanent exotic forests.

The weather in Wellington has changed, but the underlying irrationality has not. The Billion Trees Programme never made any sense, but neither does breaking important parts of the ETS when trees fall out of political favour.

Land use change

The discussion document worries forests will displace other productive land uses.

If a high carbon price turns a sheep paddock into a pine forest, that tells us something important. The value of that land in sequestering carbon must be higher than the value of that land in producing wool and lamb. Officials in Wellington are not well-placed to second-guess the landowner’s decision.

But it is likely that in some parts of the country, rapid afforestation would lead to rapid economic change and intense political pressure.

Government’s standard and better response to structural changes is to ease the transition: for example, making sure that workers disemployed in a declining sector have access to training.

Just think about the consequences of applying the document’s logic more broadly. Automated apple-picking machines could be banned because of their potential effects on rural employment. And timber companies could be required to use axes rather than chainsaws.

The effects of afforestation on local communities are real but are, by definition, local. Councils would be the appropriate place for any policy seeking to mitigate local effects. In places under severe pressure, councils could decide to make permanent forestry a consented activity – and hopefully would compensate affected landowners for the loss.

So if there is a policy problem here in need of remedy, local land use planning would be the place to look – not the Emissions Trading Scheme.

Net and gross emissions

The discussion document then argues that excessive reliance on forest-planting could make it more difficult to achieve climate targets. But it does so in a rather shady way. Trees obviously help reduce net emissions by sequestering carbon. New Zealand’s Net Zero legislation sets a net emissions target, recognising the role that sequestration plays in reducing atmospheric carbon dioxide.

The document argues that emissions credits generated by tree-planting discourage reductions in gross emissions. The document argues there should be a strong preference for gross emission reductions over sequestration or carbon removals.

There are substantial problems with the approach.

First, forbidding the currently most cost-effective way of reducing net emissions necessarily forces emission reductions to happen through more costly channels.

The government has already demonstrated that it is acutely sensitive to rising energy prices. It even raided the Covid fund to cover the costs of a petrol excise holiday.

Rising ETS prices do not have to be a political problem for the government. It could decide to rebate the government’s ETS auction revenues back to households through a carbon dividend. But unless a carbon dividend is in place ahead of any substantial rise in carbon prices, the government could find itself looking for new knee-jerk responses to rising energy costs.

Second, the proposal breaks an important part of the ETS. As carbon prices rise over time, new ways of sequestering carbon or directly removing it from the air become viable. Expectations of rising carbon prices help encourage that kind of research.

Currently, researchers at the University of Canterbury are exploring ways of using olivine to cost-effectively remove large amounts of carbon dioxide directly from the atmosphere. If their research proves successful, their technology could generate a lot of carbon credits, making it far easier for New Zealand to reach net zero – or to go beyond net zero by sequestering more carbon than the country emits.

But if the government can decide, on flimsy grounds, to simply not award ETS credits for real and verifiable carbon removals, we can expect less progress in developing ways of pulling greenhouse gases out of the atmosphere.

Arbitrary policy like this increases the riskiness of investing in New Zealand full-stop.

Finally, and this is the really frustrating part, even if you prefer gross emission reductions to net emission reductions, that is still no reason to put a thumb on the ETS’s carbon scales. If forestry is expected to generate a lot of carbon credits, the government could simply decide to issue fewer carbon credits between now and 2050. Or it could decide to reach net zero more quickly.

The Ministry for the Environment should know this.

For the past few years, the Ministry, and the Government, have proposed a lot of regulatory policies targeting areas already covered by the ETS, even though those policy are offset by the ETS. Electric vehicle subsidies cannot reduce net emissions because an ETS credit not purchased by a fuel company is available to be purchased by someone else instead.

When faced with that challenge, the Ministry and the Government like to claim that regulatory policies would enable the ETS cap to reduce more quickly – ignoring that they could reduce the cap more quickly, and more cost-effectively, if they simply reduced the cap without the policy.

But when forestry provides a very real opportunity to cut the cap more quickly, the Ministry prefers to ban the forests instead.

The opportunity to cut the cap more quickly, for the Ministry and for the Government, seems mainly to be a convenient rationalisation for regulations that they prefer for other reasons.

Environmental impacts

The discussion document warns that poorly managed exotic forests bring environmental risks including fire, disease, wilding conifer spread, and instability on some slopes.

The problem is real, but it is hardly unique to permanent forests. Production forests bring similar risks, along with risk from mismanaged slash. And farmers regularly complain that severe mismanagement of Crown land leads to pest infestation.

The solution to the problem is obviously not to be found in ignoring the carbon sequestered in permanent forests. The environmental risks of other exotic forests, or of poor land management more generally, would remain.

The solution instead is with councils. In places where slope risk is high and more monitoring is needed, councils could make forestry a consented activity. Ensuring councils are doing their job in monitoring against the kinds of problems raised in the document would have benefits beyond permanent forests.

And, finally, there are real biodiversity benefits of native planting over exotics. But planting native forests should be encouraged directly, through a biodiversity subsidy, rather than by putting a thumb on the ETS’s calculations. The ETS has one big and important job in dealing with greenhouse gas emissions. It should not be used to try to achieve additional objectives lest it wind up doing a poor job in both.

As carbon prices rise between now and 2050, new and impossible-to-predict challenges will emerge.

Today it is afforestation, and a whipsaw from direct subsidies for forests to banning carbon credits generated by them.

If the government’s response to every new challenge is to break part of the Emissions Trading Scheme, rather than leaving the solution to the part or level of government best suited to dealing with it, getting to Net Zero is going to be far more costly than it needs to be.

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Eric's submission on the Ministry for the Environment and Ministry for Primary Industries’ Discussion Document is available here.

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