Want to cut carbon emissions? Simple. Make it pay off for investors

Dr Eric Crampton
The Dominion Post
1 November, 2021

Watching government agencies scramble to find solutions to problems they or other government agencies caused is darkly amusing. They rarely notice the root cause of the problem they are trying to solve, or that their proposed solutions only set the stage for the next round of problems to come.

Over the past week, the Commerce Commission has been investigating grocery prices.

The Commission spent days considering pricing and promotional strategies of the incumbents, measures of profitability, international price comparisons and more.

Then, for about twenty minutes on Thursday, they considered whether perhaps restrictions on overseas investment combined with council zoning and consenting processes make it nearly impossible for an overseas supermarket chain to enter New Zealand.

That small matter over, they returned to consideration of their presumably preferred alternative on Monday: a day-long session on how to break up the supermarkets or sponsor some KiwiGrocer alternative.

If it were legally simple for overseas supermarkets to set up shop here, the Commission would have no problem to try to solve. And whatever other solution the Commission might devise will only cause the next round of problems for someone else.

Grocery retail in New Zealand may be small potatoes in the grand scheme of things.

But consider a similar problem for the United Nations Climate Change conference this coming week: climate finance.

There are many promising projects for reducing net carbon emissions in poor countries. Gross emissions could be reduced through investment in cleaner technology. Carbon sequestration through protection or renewal of forests can be encouraged.

But in countries without carbon prices, there can be little value in making those investments.

Countries able to afford costly investments in cleaner technology as carbon prices rise will make those investments. The most promising options will be the first ones taken up, and carbon prices will rise. Meanwhile, opportunities to reduce emissions at low net cost in poorer countries will fail to be taken up for want of the funds to do so.

Governments have seen this as a problem of market failure in need of their enlightened intervention. The Reserve Bank of New Zealand joined the Network for Greening the Financial System – a coalition of central banks that want to “mobilise mainstream finance to support the transition toward a sustainable economy.”

Despite reserve banks worldwide having printed enormous volumes of cash and despite global credit conditions being rather liquid, financing of carbon mitigation projects, particularly in poorer countries, is seen as a problem. And so they support Green Bond initiatives encouraging investors to seek social returns on climate investment projects rather than strictly economic returns.

And organisations like Climate Action Tracker rank countries’ commitments to climate finance on a scale ranging from insufficient, like Norway, to “highly insufficient”, like New Zealand and Switzerland, all the way to “critically insufficient”, like Japan, Australia, the US and Russia.

When the world is awash in investment capital searching for positive returns, the problem in carbon financing is unlikely to be a lack of capital. The problem will rather be a lack of returns.

And so we turn back to a potential root of the problem – and a more promising solution.

Right now, anyone able to mitigate a tonne of carbon dioxide emissions in New Zealand can earn $65.25 for doing so. That is the current price of carbon in New Zealand’s emissions trading scheme.

Think about the kinds of international projects that international green bonds might find philanthropists to back, from reforesting and protecting the Amazon to building clean power generation abroad to retire old coal plants.

If any of those projects can reduce emissions at a cost of less than $65/tonne, there would be a simple way of financing them. New Zealand’s Climate Change Commission could run a diligent audit process to make sure that the promised benefits are real and are not double-counted.

If the projects stacked up, Kiwi investors could back those projects to generate New Zealand emission credits. Promising projects abroad would find financing because they would represent a real investment opportunity.

Unfortunately, it is not yet legally possible to do that. New Zealand’s Climate Change Commission is more interested in banning cars and gas connections than in reducing global net emissions.

The de facto ban on pursuing carbon mitigation options abroad means New Zealand will not be doing nearly as much as it could in financing necessary change.

Government agencies really like to blame markets and the private sector for problems caused by government policy.

It makes as much sense to complain about market failures in carbon finance, while not allowing that investment to generate carbon credits here, as it does to complain about a lack of competition in grocery retail while regulations make it next to impossible for a new competitor to set up shop.

In both cases, striking the root is the only sustainable solution.


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