Emissions trading: learn to count, and look before you leap

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 They are based on out of date science, and negotiated downwards after that to meet political considerations.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.