The Climate Change Commission should do what works

Matt Burgess
NZ Herald
22 January, 2021

On 1 February, the chair of the Climate Change Commission, Dr Rod Carr, will descend the mount with his first emissions budget. He will deliver not commandments but advice, the first draft of a plan for how New Zealand will cut emissions over the next 15 years.

The ultimate owner of the plan is the Minister for Climate Change, James Shaw. He has said the plan will be “shocking”.

The question will be whether the plan charts a credible course to our emissions targets.

The Commission will likely recommend deep cuts in transport and industrial heating emissions, each a major source of greenhouse gases. The Commission may even propose to replace the country’s car fleet within 20 years.

But as important as where emissions will be reduced is how emissions will be reduced.

The government has two levers to cut domestic emissions. One is policy – electric vehicle subsidies, renewable energy mandates, oil and gas bans, and so on.

The other lever is the Emissions Trading Scheme (ETS).

The ETS is simply a tax on emissions. It covers all parts of the economy except agriculture. The idea is to make green alternatives to high emissions goods more attractive to households and businesses.

But received wisdom among officials, including at the Climate Change Commission, is that the ETS is a nice theory but not enough.

Though the ETS will be part of the Commission’s plan, the Commission will recommend policy does most of the heavy lifting.

However, new research suggests the Climate Change Commission may need to reconsider its position.

A study by economists at three universities in Europe, (published a week before Christmas) estimates the effect of Britain’s ETS on electricity sector emissions. It compares the results to Germany, which has mainly used subsidies for solar and wind generation to lower emissions.

The results are striking. After Britain added a price floor to its ETS in 2013 – essentially a guaranteed minimum carbon tax – owners of coal generators responded en masse by converting their plant to natural gas. Emissions from Britain’s electricity sector fell by 55% in five years. More than half of this fall, says the study, was due to the ETS.

Emissions from Germany’s electricity sector stagnated over the same period, despite large public investments in solar and wind generation.

The study calculates that Germany pays nearly €200 to remove each tonne of greenhouse gases using wind generation; using solar, nearly €1,000 per tonne. Britain pays just €30 per tonne with its ETS.

These results show an ETS can be effective even with a modest price on carbon. That should get the attention of the Climate Change Commission.

Here in New Zealand, we have new evidence on the performance of the government’s emissions policies. It is appalling.

The government has released data on the expected emissions benefits of coal boiler conversions and electric vehicle subsidies. These policies will cost more than $100 million.

About three-quarters of that money will go to projects that spend more than $1,500 to remove each tonne of emissions. What does that mean in practice?

At $1,500 per tonne, the government could spend the entire health budget on emissions each year, $21 billion, and get only a quarter of the way to its net zero emissions target.

At $1,500 per tonne, net zero emissions will cost 28% of GDP and would double the size of the government.

By contrast, the ETS can remove a tonne of emissions for $38.

If the government shuttered its least effective policies and used the ETS instead, it could remove 40 times more emissions for the same cost.

It is said that policy beats the ETS on distribution grounds. “The ETS doesn’t care about distribution,” a senior official told us.

But low income households can be the hardest hit when policies sink astronomical to remove each tonne of greenhouse gases. That is because households on low incomes spend a greater share of their money on energy and transport, areas that are usually the first to be targeted by emissions policies. Officials are right to worry about distribution and should prefer cost effective options like the ETS for that reason.

And remember, the ETS raises revenue, which the government can return to households as a carbon dividend, something policy cannot do.

New Zealand’s emissions have remained stubbornly high. That is probably because emissions policies have been mostly ad hoc, often tied more to a good soundbite than better outcomes. We need more bang per buck from our policies.

The Commission will likely recommend policy should take the lead on emissions. If that is the plan, then the Commission should also confront the fact that policies have not delivered so far. To date, the Commission has been quick to criticise the ETS but said little about policy.

Emissions policies have long tails – a bad policy is many times worse than average.

So a powerful way to cut emissions is to avoid the worst policies. Measure what works, shut down the least effective policies and use the money to scale up the best alternatives.

That will require a well organised system of checks and balances for every emissions policy, something that an independent, expert Climate Change Commission can help with.

Whatever the outcome on 1 February, commissioners and staff at the Climate Change Commission have achieved much in a short time. As they lead us to the promised land, let us hope they choose the shortest path.

Note: The cited study is “Effectiveness of climate policies: Carbon pricing vs. subsidizing renewables,” by Klaus Guglera, Adhurim Haxhimusab and Mario Liebensteiner. It is available here.

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