PCE and Groser: fix the ETS

In which expert advisory work from the PCE illustrates why the ETS in its present form risks a massive lignite subsidy, and Tim Groser — quite rightly — observes that this would be “ridiculous” and “incoherent”

December brought more proof the emissions trading scheme is broken, in the opinion of the Parliamentary Commissioner for the Environment; also, some interesting remarks from Climate Change Negotiations Minister Tim Groser who, presumably unintentionally, expressed the same view.

The Parliamentary Commissioner for the Environment (PCE) has had a long interest in lignite. The latest report from her office, Lignite and Climate Change: The High Cost of Low-Grade Coal (November 2010) — which was to have been released in the week of Pike River and, in the event, was deferred to mid December — assesses the likely impact of proposals by Solid Energy, L&M Mining, and Chinese joint venture Qinghua, to mine lignite in Southland.

Lignite’s environmental challenge is its greenhouse gas emissions. The emissions trading scheme (ETS) will not mitigate them. On the contrary, it may assist with the business case, by us all paying large amounts of money to polluters, not vice versa.

Among other uses (urea, briquettes), are proposals for transport fuel production: two plants producing, respectively, up to 35,000 barrels of diesel per day (two-thirds of New Zealand’s current diesel use) and up to 50,000 barrels per day (New Zealand’s entire diesel use). These, say the PCE, “may well qualify for significant subsidies” under the ETS, despite their massive emissions impact.

She calculates that a plant making 35,000 barrels of diesel per day from lignite (that is, only one of the proposals) would emit, per year, 5.5 million tonnes of greenhouse gases more than the same amount of diesel made conventionally, from crude oil.

This is “incompatible with the promises the government has made internationally to reduce greenhouse gas emissions” to between 10% and 20% below the 1990 level by 2020. Instead, our emissions are projected to continue to rise, until 2019, and be 30% above the 1990 level in 2020 — an “enormous” gap (shown at figure 3.2), costing us anywhere between $1 billion and $6 billion to buy offshore carbon credits.

That is without counting lignite, which would increase the gap by 20%, if just one of the two proposed plants was built, and 50% if both were built (figure 8.1).

Whereas Solid Energy has talked up the importance of “taking full responsibility for greenhouse gas emissions” (sort of — “We are investigating a range of options to help reduce or offset CO2 emissions ...”) and “full carbon compliance”, and carbon capture and storage, the PCE says whether talking about trees, or storage underground, this last is magical thinking.

The ETS, in theory, is ‘polluter pays’ for the necessary credits. In practice, in its present form, there are ‘allocations’ for trade-exposed carbon-intensive industries: up to 90% taxpayer-funded free credit, for the worst polluters.

The PCE sees a risk and a likelihood that in future, the process of refining lignite into transport fuel would be an allocation-eligible activity, costing additional billions, totally contrary to any principle that might be discerned in the ETS.

“It makes no sense for taxpayers to subsidise new investment in carbon-intensive technology,” she says, noting that it raises the policy question of how we decide what activities are eligible, and suggesting that the “review of the scheme in 2011 provides an opportunity to address this and other serious shortcomings”.

This all seems to have fallen on fertile Ministerial ground. Here are some remarks from Tim Groser, reported by Colin James about:

… another important initiative he conceived four months ago and got endorsed at a meeting he called in Cancun: a push for cuts in national subsidies for fossil fuels. … It is, Groser says, “ridiculous” and “incoherent” to negotiate cuts in emissions while also subsidising them. Eliminating the subsidies would be a major contribution to containing emissions.

If Groser is taken at his word, it is not just the subsidy of new investment in carbon-intensive technology (as per the PCE) that makes no sense, although that is certainly true. It makes no sense for taxpayers to subsidise any fossil fuel; or greenhouse gas emissions; or indeed (since, in these remarks, he has taken agriculture as his model) the late entry of agriculture in 2015 — if at all — followed by 90% allocation. Indirectly, that is a national — in both senses, actually — subsidy.

Groser is saying precisely what the ETS’ critics have been saying.

Whatever the answer may be in the end to the policy question, the legislation, right now, creates a problem of economically inefficient and risky uncertainty, by not telling us the answer.

The impetus of lignite mining proposals must be a worry for ETS Minister Nick Smith, who says that tackling climate change is his government’s number one environmental priority. The ETS, as far as anyone can tell, is his government’s number one tool to achieve it; yet here we have proposals enthusiastically being progressed that would significantly increase, not reduce, greenhouse gas emissions, contrary to promises and policy.

The ETS is patently not, at present, any real obstacle to commercial investment decisions, even marginal ones.

Two days before Christmas, the ETS review panel was announced. Its members are “not appointed as advocates or representatives of a particular interest or sector group”; however, the seven members reflect this government’s forestry focus, and there are two farmers, one of them a former Federated Farmers president. No environment representative, objected Russel Norman, slamming the review as “one-sided” with representation from “the polluting industries”.

Groser’s remarks are perhaps more fruitful, I think, than close analysis of the review panel’s qualifications.

He can quibble and cavil about what a ‘subsidy’ means; and deny that there are any, domestically, in quite the same way as some other countries; and reconcile his policy with the ETS quite easily, by reference to the “gradual reform over decades”. He can say “That is not what I meant at all. That is not it, at all …”.

However, it would strengthen the moral weight of his “high Cancun profile”, if his government did act in 2011 domestically, to ensure that any current fossil fuel subsidies are eliminated, and new ones are not supported directly or indirectly under the ETS, so that large-scale long-term plans to emit, such as the lignite proposals, can be properly costed and contained.