World best ETS ruined by costly emissions nonsense

Dr Eric Crampton
The Australian
19 January, 2023

Updated Jan 19, 2023

In June 2020, the Labour government strengthened New Zealand’s Emissions Trading Scheme, ensuring it would be effective in getting the country to net zero by 2050.

The government then promptly forgot how an Emissions Trading Scheme works – if it ever understood the ETS in the first place.

It is premature to talk about the legacy of a government still in office. But so far, the Ardern government has delivered, on the planet’s largest environmental issue, one of the world’s very best Emissions Trading Schemes, comprehensive across every substantial source of domestic greenhouse gas emissions other than biogenic emissions in agriculture. It has built cross-party agreement for achieving net-zero emissions by 2050.

And it has added an assortment of costly policies that are utterly futile when an ETS is working as it should and that risk undermining the path to net zero.

How did we get here?

Before the 2020 changes, New Zealand’s ETS operated more like a carbon tax set at a low level. The government would issue as many credits as people wanted to buy at a carbon price of $20 per tonne.

Under that kind of regime, all kinds of policies targeting emissions covered by the ETS might work to reduce national net emissions. Ideally, analysts would test whether a proposed policy were cost-effective, but even ridiculously expensive policies would at least reduce net national emissions.

The 2020 changes capped the number of carbon credits the government can issue. Carbon prices quadrupled after 2020.

The binding cap on net emissions makes net zero achievable. All the government needs to do is steadily reduce the number of credits it issues, and issue no more credits after 2050.

The binding cap on net emissions also means additional policies targeting emissions from coal boilers, from cars and buses, from landfills, or from any other source covered by the ETS do not reduce net emissions.

Since 2020, the government has launched a hodgepodge of initiatives targeting emissions already covered by the ETS. Surtaxes on high-emission vehicles and subsidies for electrics. Requirements that councils consider emissions when approving new housing. Subsidies for businesses to shift to lower-emitting equipment, even though high carbon prices mean carbon costs already hit a company’s bottom line. None of these policies can affect national net emissions. They can only affect where emission reductions happen while increasing the overall cost of getting to net zero.

This year, the government has auctioned 4,825,000 carbon permits every quarter. Carbon prices are about $80. That provides about $1.5bn in ETS revenues this year.

Finance Minister Grant Robertson has been using ETS revenues as a slush fund, subsidising all kinds of activities that will not reduce net emissions but will easily cost thousands of dollars per tonne of emissions shifted from one sector to another. Meanwhile, the real political constraint on getting to net zero is political acceptability of high carbon prices.

Robertson could follow Canada’s lead in rebating carbon revenues back to households as a carbon dividend. He could tell households to use that money to assist in their own transition to a lower carbon footprint because carbon prices will continue to rise. Doing so would ease real political constraints against a faster path to net zero, at least over the medium term.

But he has preferred to have his slush fund. And to promote a host of micromanaging carbon policies that cannot affect net emissions but can serve as a combination of industrial policy and lifestyle regulation.

The Ardern government achieved something important in building cross-party consensus for net zero, and by making the ETS a credible way of getting there. But piling costly nonsense on top of an excellent ETS is not a good way of maintaining that consensus.

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