The government should reject the Climate Commission’s plan

Matt Burgess
BusinessDesk
11 June, 2021

The first rule of any emissions reduction plan is that it reduces emissions. Yesterday’s plan from the Climate Change Commission does not pass this test.

The government can cut more emissions sooner if it ignores the Commission’s advice and instead uses a strengthened Emissions Trading Scheme (“ETS”) to lower emissions.

Yesterday’s final report from the Climate Change Commission is based on a misunderstanding of how the ETS works.

The ETS is a cap-and-trade scheme. The key word for the Commission’s plan is “cap” because an ETS cap means other policies – including most of the proposals from the Climate Commission – cannot reduce emissions any further.

The ETS cap is not some theoretical nicety. It is the government’s policy and, since June 2020, the law.

As James Shaw said at the first reading of the amendment which introduced a cap to the ETS:

The emissions trading scheme is known as a cap-and-trade system, but ours has been operating with no cap. For the first time since it was introduced in 2008, we will actually be able to cap emissions covered by the scheme…. This will create a predictable sinking lid on climate pollution… in line with the emissions budgets.

It is well known that cap-and-trade schemes can neutralise other policies. In its AR5 report, 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.”

The Climate Change Commission recognises the problem that this neutralising effect of an ETS cap poses for its plan. Its response? The ETS does not have a fixed cap, says the Commission.

That is because there is a stockpile of 130 million emissions units, a hangover from the worthless emissions credits which flooded the country last decade. Companies banked their New Zealand Units and surrendered foreign units until the window closed in mid-2015.

But this stockpile does not break the cap. The Ministry for the Environment says the government takes into account the stockpile when deciding the number of new units to issue. If the stockpile were not there, the government would auction more units. The Commission's claim is wrong.

The Commission also says the ETS price cap, a safety valve to stabilise prices, affects the cap. That was true until last year. Previously, emissions units sold by the government at the price cap did raise overall emissions.

But not now. The 2020 reforms require each unit sold at the price cap to be backed by an offsetting unit from another country, effectively sanitising any new units issued at the price cap so that they do not change overall emissions. Eric Crampton has posted a more detailed explanation including market failure.

In short, the Commission’s story for how its plan avoids being neutralised by the ETS is unconvincing. This is the second botched attempt by the Commission to explain away its ETS problem, which is crucial for its whole strategy.

While the Commission has not shown its plan lowers greenhouse gases, there is no doubt its plan makes our emissions targets more difficult.

The Commission says New Zealand could reach net zero emissions by 2050 with a carbon price of $50 per tonne. However, under the Commission plan we will pay at least five times more, $250 per tonne, to get to our targets.

With less than 29 years until January 2050, net zero is already an ambitious goal. Such hefty cost inflation puts our targets at risk. That should worry a Climate Change Commission whose statutory purpose is mitigation.

The Commission justifies the extra costs of its plan mainly on planting the right type of trees. With current policies and a $50 carbon price, we will plant too many exotic trees before 2050 says the Commission. That will permanently tie up land in forests and only kick the can down the road for future generations.

Except that the Commission’s plan will likely plant more trees than current policies. Native trees capture carbon at only a sixth of the rate of exotics. The Commission compensates for this lower efficiency by covering more land with trees.

The Commission’s fear of exotic trees led it to expressly abandon a principle of reducing emissions at least cost.

The Commission correctly noted a least-cost approach will drive investment in exotic trees, thanks to their unparalleled ability to hoover carbon dioxide from the air.

While it is true that many people do not like the idea of more exotic forests, that is no reason to reject a least cost approach across the board.

A more rational Climate Change Commission, one more focused on its mandate, would have kept the principle but recommended limits on new tree planting. Or perhaps recognised councils can always restrict new planting in sensitive areas and not take any view at all.

But no, the Commission threw away least cost and predictably delivered an expensive, risky plan which threatens rather than supports our emissions targets.

New Zealanders, take note.

Bad emissions plans exist.

The Climate Change Commission has just delivered one.

Anyone concerned about climate change and the prosperity of future generations should oppose the Climate Change Commission’s plan.

So should the government.

We deserve far better from our public servants.

 

Matt Burgess is Senior Economist at the New Zealand Initiative. Disclosure: Matt Burgess owns a small number of NZUs through the New Zealand SALT Fund.

 

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