Blowing the budget

Roger Partridge
Insights Newsletter
20 May, 2022

Yesterday’s budget was not the only budget in town. It followed hot on the heels of Climate Change Minister James Shaw’s announcement on Monday of the Government’s $2.9 billion Emissions Reduction Plan. The plan sets out the steps the Government will take to meet the first of three national emissions budgets.

Like yesterday’s budget from the Minister of Finance, Shaw’s announcement showed an alarming air of unreality.

The Finance Minister’s error was failing to respond to the change in the country’s economic predicament. Shaw’s error was failing to realise the Government has already implemented a policy to achieve the very objectives proposed for his costly Emissions Reduction Plan – at least for non-agricultural emissions.

New Zealand’s Emissions Trading Scheme uses carbon pricing to lower net emissions. Those responsible for emissions must use tradeable carbon credits to offset them. The Government issues carbon credits using free allocations (to some industries) and auctions. It also issues credits for activities taking carbon out of the atmosphere like forestry.

Over time, the government reduces the number of units supplied by free allocation or auction. This limits or “caps” the quantity of New Zealand’s net emissions. Restricting supply increases the price of carbon credits (currently about $75 a tonne). This makes carbon emissions increasingly uneconomic. The scheme is designed to ensure New Zealand follows a pathway to net zero by 2050.

Aside from agricultural research and development, Shaw’s Emissions Reduction Plan has no chance of altering New Zealand’s net emissions. Subsidising electric vehicles may reduce gross emissions from private cars. But that will just free up carbon credits for use elsewhere in the economy. This will allow emissions which would otherwise have been avoided if credits had not been made available. Economists call this the “waterbed effect.” Push down on one side and the other side goes up.

The beauty of the ETS is it puts a price on carbon. This allows market participants to work out where carbon emissions can be most economically avoided.

The Minister knows private car use is not the most efficient place to save emissions. In an answer to a question in Parliament last week, Shaw said the price of carbon would have to reach nearly $600 a tonne to achieve the same result as the EV subsidies proposed in his Emissions Reduction Plan.

But at nearly ten times the cost of a carbon credit, that means this part of Shaw’s plan is grossly uneconomic. But more than that, the plan is futile. The ETS already has the country on a course to net zero by 2050.

Blowing a $2.9 billion budget on a futile plan is some feat.


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