Emissions trading just got interesting, in ways the government probably didn’t intend. They’ve mastered the first lesson, but maybe not the second

In its reluctance to give Phil Goff a platform from which to launch his 2011 campaign, the government may inadvertently have opened a window for him.

Labour and National had been sporadically engaged in cross-party talks about emissions trading, amidst speculation this could be Phil Goff’s opportunity to reprise John Key’s section 59 (“anti-smacking”) chutzpah. On Monday National broke faith with the process, abandoned ambitions of bipartisanship, and found the necessary bare majority with the Maori Party (and Peter Dunne).

I won’t rehearse here what’s proposed; it’s been widely covered by the major daily papers, Radio New Zealand National, and in yesterday’s Parliamentary Question Time. It will be debated in the House again next week, when a government Bill giving effect to the changes is introduced.

Nick Smith’s press release includes a candid admission (probably only one - there's a notable lack of candour in anything else that he said). The changes his government is proposing to the emissions trading scheme (ETS) will make no difference to the size of domestic emissions reductions in the short term. In other words, any reductions that it achieved were always going to be small.

The ETS implements a price on carbon, and as such, has been presented by both major parties as the centrepiece of carbon emissions reduction policy. That sits uncomfortably with actual forecasts as to its likely efficacy.

David Parker, the Minister originally responsible for it, thought that at best it might reduce domestic emissions by 10% - a 0.02% reduction in global emissions. Treasury and external independent economic experts are similarly cautious, or realistic; their papers and presentations all, without exception, note that if the only inducement for domestic emissions reductions was the price on carbon imposed by an ETS, domestic emissions reductions would be small. (Hence the high cost identified by Smith to meet a “bold” -40% by 2020 target: it was based on the assumption that most of the credits would need to be purchased offshore.)

The ETS is an inadequate “nudge”, because international emissions reduction targets, that affect the carbon price, are too low. They are based on out of date science, and negotiated downwards after that to meet political considerations.

Taking the Copenhagen negotiations as an example, the -25-40% by 2020 target, identified as necessary to yield a 50% chance of capping global warming at 2 degrees, was based on the IPCC’s Fourth Assessment Report (2007). Since then, the scientific outlook has been revised. Actual outcomes are scarier than predicted. Yet by contrast, the country average target offered to date at Copenhagen is -15% by 2020.

So, not only is the ETS a public soporific; it’s arguably pretty irrelevant. A price on carbon is important, but settling the bureaucratic mechanism for achieving it is proving a major distraction from the real business of doing something real, now.

However, as of Monday, when the government proposals were announced, public interest in the ETS should be piqued. An unwieldy failure, from a climate change response perspective, morphed into a vehicle for wealth transfer.

Smith says he is focused on reducing the economic impact on households, by ensuring power and petrol prices do not unduly rise; this coincides nicely with the way the ETS is often presented by media as “the thing that will make power and petrol more expensive”.

That is true. But the reason why it is true is important. The logic behind the scheme was “polluter pays”; power generation and fuel consumption pollute. But what Smith has done is take a transparent incentive, and bury it. The cost to the taxpayer doesn’t go away. As a country, we will still have to pay the international cost of carbon emissions if domestic reductions are insufficient, and everything from the government to date indicates an intention to do that by purchasing tax-funded credits.

Instead, what households will do is subsidise half the cost of greenhouse gas emissions from polluters such as the dairy industry (from 2015) and Comalco, as well as any additional cost incurred over and above the proposed $25/tonne cap on the carbon price. For the first time, we see a cap on this “cap and trade” scheme, but on the wrong bit of it from an emissions reduction point of view - on the price, not the emissions.

Smith said in the House yesterday that climate change is a long term problem; what we do in the transitional period to 2013 really doesn’t matter. He couldn’t be more wrong. Whatever happens after 2015 may be immaterial; that is scientifically judged to be the point at which global emissions must peak and start to decline.

There are some - not many - defensible reasons why the government has structured things this way, for example, minimising risk of industry “leakage” offshore, which would have adverse economic impacts. It’s contestable whether the net effect of avoiding this is positive or not in the circumstances.

The ETS enacted by Labour had similar features. However, after nearly a year spent reviewing it, the government is proposing to make the problems worse: more cross-subsidisation, longer time frames out to 2050, and a more bitterly riven Parliament.

It’s endorsing a regressive redistribution of tax, whereby the wealthy, in the form of big business, are subsidised by those less able to bear the cost. Again, it’s contestable whether that would have been the end result anyway, from costs being passed through to consumers - but at least “polluter pays” set a clear principle.

Smith’s concern about the economic impact on households sits oddly with the lack of any clear government direction, bordering on recalcitrance, about helping households re-equip for life in a low carbon economy, or reduce their exposure to economic pressures such as electricity prices. But when the issue is shielding business from the rough edges of transformation by, er, covertly increasing households’ fiscal burden - no problem.

We’ve had some grudging government interventions, and a lot of talk about free market preference. Bluster about confidence in the free market is a substantial irony in the circumstances: the ETS was supposed to be a market mechanism, and the government is not allowing it to operate.

There’s also been a lot of time spent lately charging Labour with fiscal irresponsibility (“whack it on the bill, Phil”). You’ll find no better evidence of fiscal and indeed social irresponsibility than the government preference for buying credits offshore, whilst making only minimal efforts to identify cost-negative emission reduction options.

Options are available, that would yield both a private and public return on the investment, and have both social and fiscal benefits. They would be good things to promote, even if the climate change phenomenon was all bunkum. They are independently expertly confirmed, here (The McKinsey Quarterly, p 38) and here (Ministry for the Environment, figure 2).

They include home insulation retrofitting; commercial building standards; energy efficient lighting and home appliances; vehicle fuel economy standards; water heating; some biofuels. There is a significant policy challenge in finding ways to overcome the up-front cost hurdles, particularly for low income earners. However, the incentives are correspondingly large, including potential for extracting ourselves from our recession predicament by selling carbon credits.

If that all sounds familiar, it’s because they’re same policies doggedly pursued year on year by the Green Party, chiefly, Jeanette Fitzsimons. The government’s track record is patchy, at best. Some things are being done (home insulation), or worked on (commercial buildings), others have been abandoned (fuel economy), or their implementation is partial and flawed (light bulbs, biofuels). We’re yet to hear very much in the way of reasoned rebuttal, perhaps because we’re yet to hear anyone asking the hard questions.

In case the government was congratulating themselves today on cleverly sidelining Labour in the ETS negotiations, I’d say the reverse is true. They’ve illuminated government priorities, and given Goff exactly the platform he needs to differentiate what his party stands for.

As Fitzsimons brilliantly observes, the things above match the values set out in Goff’s speech to his party conference. They concern the quality of life children will have, and ordinary people’s struggle with the daily reality of getting by. They’re the things that will make the difference, not the ETS. If he can lay "nanny state" to rest, they fit the image he wants to purvey of a party that rolls up its sleeves and gets things done, rather than spectating on the sideline. What a vote winner and photo opportunity it could be, if the Greens, Labour, and Greenpeace all rallied their troops, and got out there in their gummies doing practical stuff, like digging some vege gardens.

Comments (16)

by George Darroch on September 17, 2009
George Darroch

I don't think Phil Goff has the imagination. Others, yes, but they're a minority within Labour's leadership.

by Claire Browning on September 17, 2009
Claire Browning

Don't think he has the imagination for ... what, George?  Differentiating Labour?  Framing policies non-didactically?  Gardening?  Capturing the public's imagination?  All of the above?

by George Darroch on September 18, 2009
George Darroch

Sorry, that was a little cryptic! This is how I see things;

I meant to say that Phil Goff's approach to this issue, as I see it, has followed an essentially cautious track. Helen Clark made it Labour's business to be cautious, and to take a conservative line, with the recognition that this would eventually pay-off as programs were implemented over time. This worked relatively well for them for much of their 3 terms, so I don't blame them for holding to it.

If we look at Labour's approach to climate change, they're still operating within the same approach as they were last year, and committed to an ETS that effectively shelters most of the economy from any real change for the next decade, and then gradually thereafter. Labour's ETS was strongly tilted this way, National's is extremely so. More to the point of your article, they have put forward few policies that would see direct interventions in the economy (the now repealed thermal ban was the most important), instead relying on gradual improvements in technology and practice. Goff's speech signals an affirmation of the cautious approach, and that where Labour went wrong was in stepping away from conservatism in policy. They tried to sell (or oversell) what there wasn't a market for, and paid the price. He has a point. However, critics such as myself and Jeanette Fitzsimons would say that you create a market through advertising, and selling policies. I'd say they didn't try to sell them properly, because in their hearts they weren't committed to them as ideas.

Labour's is a business as usual, don't rock the boat, type approach. And it would make sense, if this wasn't such a matter of extreme urgency. It fails to recognise the need for a total economic transformation, and the need to build a consensus to do this among the population (bypassing National). Perhaps they're just waiting, for a change of political climate, for dramatic new technologies, for international agreements that force our hand. But I can't see it.

So, when I describe Phill Goff's lack of imagination, it's because for me his vision is essentially one of business as normal, with a slow and gradual change over time. There is no attempt to imagine other futures for New Zealand which would involve actively reshaping things, something which they feel would involve risks (but does not have to be the case, if they were sold properly. Most of these save us money, and can be popular - see insulation). The elements within the New Zealand Labour Party (both Parliamentary and membership) advocating for directly reshaping the country seem small and marginalised. I'd love for my perception to be proven wrong.

by Claire Browning on September 18, 2009
Claire Browning

Yes. He's an essentially cautious chap! And tour de force, by the way.

Two things interested me about the speech. First, the diagnosis of where Labour went wrong. I don't of course have the benefit of all the bussing about the heartland - can only speak for myself. But still ... parts of it left me going ... huh? 

I would have said that, while there were some obvious policy areas where Labour pushed beyond the average voter's comfort zone, or focused on seeming irrelevancies, there was a much larger problem of style and tone in the later stages of the government that doesn't seem to be acknowledged or grasped at all, other than saying "we're listening" every time he can squeeze it into a soundbite. IMHO it was bigger than "not listening", more about high-handedness as Jeanette has put her finger on - so long as they could cobble together a majority, nothing else mattered, certainly not the substance of things like ETS and EFA. Ultimately being in power seemed to be the thing that mattered most (viz standing grimly by, eg, Philip Field, Winston Peters, when earlier in the Parliamentary term Dover Samuels et al would have been out into the political wilderness at the merest whiff). Even now they can't seem to shake the mindset of the essentially competent much-loved government, only a matter of time until we all realise we've been duped by that slippery Mr Key, etc - which is sort of a symptom of the same "we know best" type problem and sense of entitlement, really - not to mention really really insulting, as regards voters' smarts.

The second thing was also zero acknowledgement in the speech at all that climate change is right up there with the economy as the other big challenge of our time, and will determine "the quality of life for our children" by which he wants his leadership to be measured. It's in danger of becoming trite, of course - and time and a place for everything blah blah, and he was (I assume) in that particular time and place talking to the party base. But you have to worry that there's a total failure to grasp the scale and inevitability of the problem - or even if it's grasped (because I don't see how anyone as intelligent as Goff could fail to), unwillingness for whatever reason to trouble the party base with it. We can adapt before the world changes, or afterwards - and if the latter, at mind-blowing heart-rending cost - so as far as I can see, there's never going to be a better time and place than, um, now (other than yesterday, or last year ... )

It's "business as usual" economically, too - no possibility of divergence from Working For Families, Kiwisaver entitlements, Cullen Fund contributions, and so on. I'm not quite ready (yet) to accept that those decisions are misjudgements by the government, or that the "whack it on the bill, Phil" allegation is totally unjustified.

I've said on Pundit before that, if cross party accord had eventuated from the ETS review, it would have made it worthwhile. But not at any price - not when the suite of options on the table moves things so far in the wrong direction. You want the perpetuation of such nonsense to be as short-lived as possible, not locked in for the foreseeable!! 

So I guess in the absence of that, I was trying to find a fresh straw of hope to clutch ... In theory, the way goverment's handled this could turn out to be a back-handed boon if (which admittedly is not likely at all) it would piss off Labour sufficiently to set them on the war path. And in seeking to differentiate themselves from both this government and Clark's, as they must, they would acknowledge that the differences between this government's position and Labour's former position are differences of degree rather than kind - what we need in the light of what's now known is something totally fresh. And that would prompt them to address the gap between Labour's former rhetoric and reality, instead of carping on about how the government has dismantled the "sustainability agenda" (which Charles is guilty of too, not just Helen Clark). 

It's a childish fantasy, really ... but things said here on Pundit do have a way of popping up again later in a  "from your lips to God's ears" kind of way, so I'm guessing Goff or his staff read Pundit and ... you never know. Worth a try.

And finally ... I could have made the post so much more eviscerating, if I'd mulled it over for, you know, another month or two. But I do have one more question in particular.

This carbon credit buying tab taxpayers are picking up, on behalf of polluters, out to 2050, comes on top of a growing list that we already know we probably can't afford: boomer pensions, Cullen Fund catch-up, prison population ...  and that's without factoring in the economic implications of climate change. So I just wondered: the only "whack it on the bill" difference seems to be that Bill (as opposed to Phil) is getting the next generation to pay for it. Of course, Don Brash, or our very own minerals boom, or something, is going to conjure that ever-elusive economic growth. We never talk about how, precisely, that's going to happen on a finite planet that can't even sustain present levels. We've moaned all year about the global recession. In emissions terms, it might be the only thing saving our collective arses, buying a bit more time.

by George Darroch on September 19, 2009
George Darroch

I found that last comment very insghtful, but I'm not sure how to respond.Because I can't see a way forward from this mess.

The gulf between reality and the perceptions of most of the political and business elite that run New Zealand is large. I actually think it has grown recently, and that more of them believe that it can be addressed without requiring aggressive action - that hybrid cars, new lightbulbs, and and ETS will be sufficient. You only need to look at the comments today of Fran O'Sullivan and John Armstrong, purportedly among our leading political journalists, to realise how this understanding is being perpetuated and entrenched. Outside of exogenous shocks to the country (severe climate related events, or trade restrictions), I can't see it happening.

The Labour Party likes to think of itself as sympathetic to popular movements for the environment, but the reality is that they are now very much on the outside, and where their demands fall outside the consensus established in the late 80s-early 90s (which Helen Clark and then Chris Carter has been an able steward of), they are likely to be rejected, or more often incorporated in a symbolic token way (rather than systematic). For this reason I don't think it is likely that a mass environmental movement would have much of an impact, even if they could muster 30,000 down Queen St. Only if it becomes a significant election issue will Labour move to accomodate it in more than a symbolic fashion.

When the price of carbon rises, and when the impacts of climate change start impacting New Zealand, there will be more call for action. But we'll have missed a lot of opportunities by then.

As an aside, it is immensely frustrating when people say that New Zealand only makes up a very small part of global emissions. This is true, of course. But it belies the fact that New Zealand has an undeserved reputation as an environmental leader, and that people really do see New Zealand as the country of 100% pure. When New Zealand is seen to be indifferent to action, as is the case with current climate negotiations (see the comments of the South African delegation and others), it actually does hurt global negotations. Contrary to the claims of libertarians and the far right, fairness is a virtue humans put a high premium on (there is growing scientific evidence to back this up). I also wish Labour people weren't so high and mighty about National - things were not very different under Labour's MFAT - there is a large degree of continuity in trade and foreign policy, and New Zealand's positions were seen by many internationally in an unfavourable light last year too. Unfortunately, it appears Helen Clark really does believe that New Zealand was on a zero emissions pathway when she left Parliament. As long as this perpetuates, real change won't come from this direction.

by Claire Browning on September 21, 2009
Claire Browning

As an aside, it is immensely frustrating when people say that New Zealand only makes up a very small part of global emissions. This is true, of course. But it belies the fact that New Zealand has an undeserved reputation as an environmental leader, and that people really do see New Zealand as the country of 100% pure.

Yes. It's what I was touching on, when I said insulation and so on would be good things to pursue, even if climate change was bunkum. There is, of course, still a very substantial minority - perhaps even a majority - of ordinary people who, if they know about global warming at all, believe it is mass delusion. But never mind that now; even if they're right, NZ has two good reasons to get its act together anyway. First, fiscal and social responsibility (to the extent that many of these initiatives will pay for themselves in the medium term); secondly, the 100% pure brand on which our trade and tourism depend. 

If even tiny manageably-sized NZ, with its branding opportunities, can't turn the man on the street around, I can't fathom the size of the task elsewhere in the world. And increasingly, I think we are not actually going to get there. I can't tell how sad that makes me feel. And frightened, too - I'm young enough to have hoped to stick around until 2070 or so, give or take a few years! But mostly just deeply deeply sad.

by George Darroch on September 21, 2009
George Darroch

I think there's considerble ignorance of the degree to which China is becoming an environmental leader, on climate change and other issues. They have their huge amounts of pollution at the moment, and change is happening at a very rapid pace there despite and because of it. The determination at the top level to address these issues is there. It is much less so at the local levels, where business considerations and corruption push things back (China Dialogue has useful commentary - http://www.chinadialogue.net/). If they move things along in the next five years, they could bring the US and others along with them. But for that, we'll just have to wait and see. Cautious pessimism would seem like the most rational outlook at the moment.

A good point you make about later this century. I'm also young enough that I'll be around in 2070 (insh'allah), and any children I have will be around in that part of the century. Climate predictions tend to end around 2100, but on current life expectancy, someone born just ten years from now is likely to make it there. We've got to start thinking longer term. Unfortunately, New Zealand politics, and the media that feeds it, seems to think only as long as the next press cycle, and then perhaps the next election. I'm not sure if 'lack of imagination' is the right way to describe it, but we need to get politicians who are willing to think in different ways, and in public (many will express these views in private, but are too scared to share them in the world).

by Claire Browning on September 21, 2009
Claire Browning

I certainly didn't know that, about China. Thanks.

On another brighter note ... if Labour does prefer to play Tweedledum(b) to National's Tweedledee, and the Greens can sustain current form (performance-wise, as opposed to polling), it should help them.

I think we've discussed this before here on Pundit; Conor Roberts commented that, based on international trends, the Green vote was already maxed out at around 7%. Depends, I suppose, on how far public opinion can be shifted, if at all, to make climate change a priority over other political priorities. Which is circular, because if that happened, the big parties would follow too ... and in such a utopia, I don't know what the Green raison d'etre would be!

by Claire Browning on September 22, 2009
Claire Browning
by J Keenan on September 24, 2009
J Keenan

Well I challenge you to think outside of the box too in regards to policy. No point feeling sad and dejected about the present state of affairs.

Climate change is the "Black Swan", not just because of its environmental complexity (which if we are honest we don't understand), but because it draws the two true elements of randomness to it, economic and political (re)action.

Nobody knows what will happen in the future whether we do anything or not or something in between, there are just too many "unknown unknowns".

What we do know is that NZL is sitting on a world class mineral deposit - Southland Lignite Coal.

What we do (roughly) know is that it will require $25b to fully develop.

Now we know this regardless of if we like it or not. This is our equvalent of the (Dubai) UAE's oil fields (and we may damn well have one of them too in the Great South Basin!)

But back to what we know. Legislation needs to be developed that channels this coal into an almost exculsively export orientated earner. We create a "sustainability levy" (say 10c in the $1 probably more) that drives innovative R & D into new generation clean technology (we attract world leaders in their fields), that helps us develop our geo-thermal potential for base load power, that incentives (re)forestation and improves on our already significant science in this area etc.

For NZL to become a truly developed and sustainable nation we will need to do it on the back of a solid source of mineral income.

We know we have this resource, and we know that China and India need it, as will potentially Africa and South America and the developed Western hemisphere for the foreseeable future (i.e. 2070 since its been bandied about).

Now we can choose not to use it and continue to be poor, under funded and irrelevant in our future sustainable science or we can develop progressive policy around an unpalatable commodity that can be a true driver of a more prosperous and ironically far more sustainable NZL.

by Claire Browning on September 25, 2009
Claire Browning

Thanks for your contribution. However, you seem to be on the wrong thread. Would you like to respond to my post, as opposed to hijacking with your little lobby effort?

I will be posting on Southland lignite coal, in the not far distant future, but not today. Look forward to discussing it with you then.

by Claire Browning on September 25, 2009
Claire Browning

Latest in stoush about costs: http://www.scoop.co.nz/stories/PA0909/S00382.htm

by J Keenan on September 25, 2009
J Keenan

Fair enough Claire, its just that I got to the bottom of your quite lengthy conversation (Claire speaks then George speaks, Claire speaks...) and I had kind of forgotten exactly what the blog was about and by the seventh or eighth comment the thread is reading a little bit like "we are all doomed and there's nothing we can do about it".

So I guess my post while admittedly not being on topic (though what thread ever is?) was really a reaction to the negativity that seemed to be creeping in at the end.

What I wanted to get across was that I don't know, you don't know and if the politicans and scientists were honest they don't know what will unfold in regards to climate change and policy response.

The biggest problem at the moment is that we (i.e. NZL, the world) have not dived in yet, we need an ETS in any form from which we can modifiy. Theory (and best practice) needs to follow reality not the other way round.

Hijacking with my little lobby effort? that sounds (or comes across in written form) as a little bitter. I am certainly no champion of the mining sector but I'm not blind (completely shut off from it) to its ability to be a major economic driver for a more sustainable NZL.

I too look forward to your posting on our world class resource, it will be very interesting to see how you frame it.

by Claire Browning on September 25, 2009
Claire Browning

Likewise, fair enough J. Apologies for being/sounding curt and, evidently, not making myself sufficiently clear.

My position is not "we're all doomed and there's nothing we can do about it". On the contrary: it's that we're not currently doing enough about it and, if that continued, we'd have a big problem. Important difference, and not really such a subtle one. 

Sorry if George and I bored you; I thought it was a good 'un, myself, but perhaps you had to be there.

I don't know, you don't know and if the politicans and scientists were honest they don't know what will unfold in regards to climate change and policy response ...

Agreed. But we increasingly understand the size of what's at stake, the undesirability of running the risk, and the very small window of opportunity. As regards policy response, voters/politicians are the ones who get to decide. Cavilling about the known and unknown unknowns isn't an option for much longer. 

Look forward to debating sustainability with you, some time shortly. I'm guessing our definitions differ a bit.

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