Lord Stern's visit to New Zealand last week didn't upset any apple-carts, but it again raised the question of whether or not New Zealand's ETS is a world leader

Let's cut through the shilly-shallying and be clear about this. New Zealand's emissions trading scheme is a world leader... in some respects, but not in others; at least, it could be one day, depending on what other countries do; or rather, it is now, potentially, but may not be for long; not that it really makes that much difference or is really a measure of world leadership on climate change anyway.

Phew, are we clear now?


The question of whether New Zealand's ETS is a world leader or not remains dry political tinder. It has been since the 2008 election campaign when John Key promised:

The ETS must strike a balance between New Zealand's environmental and economic interests. It should not attempt to make New Zealand a world leader on climate change.

Nicholas, Lord Stern, author of the game-changing Stern Review in 2006, was one man who could have set that tinder alight, but during his brief visit to New Zealand last week, he kept his matches in his pocket, simply saying he didn't know enough about New Zealand to comment.

He is, after all, an impeccably polite, quietly-spoken, academic economist, not, as he frequently says, a campaigner.

But it got me thinking about it again, and realising there's no simple answer to the question. Any answer is true and untrue and insufficient, all at once.

Yes, an "all sectors, all gases" scheme is world-leading. No-one else has one. But then neither do we, yet. Ours is still almost five years away, and even then this government has left some wriggle room as to whether it will herd farmers into it.

All we've included thus far is forestry, energy and industry – a big chunk, but not unprecedented. One key question is what other countries do in the next five years.

The political commitment to emission reduction in Europe is, broadly speaking, stronger than here, so further action can be expected there. Labor's win in Australia means that, if Gillard can survive a year in power, our neighbour should have a price on carbon in that time. I'm not expecting much from an embattled President Obama, but a second term and who knows? And anyway, a number of states have made moves of their own, regardless of federal inaction (even though California could be wavering).

All of which suggests that by 2015, our world-leading scheme may not be as world-leading as it seems now.

The next question is, in what regard is it world leading? In emissions reduction? Well, even the minister pushing this through– Nick Smith – has said:

I’m not one that says that this quite moderate ETS is going to result in big reductions in emissions. Ultimately New Zealand's going to need to go through a revolution, not dissimilar to that we went through from 1900 to 1950 in moving from steam and coal to the internal combustion engine”.

In that light, our ETS can be regarded as pretty timid.

Which brings me back to Lord Stern. After his interview on Q+A, I asked him again about whether our "all gases, all sectors" scheme was really a shining light unto the world. He said that undoubtedly developed countries needed to lead, or else poorer, devloping countries would simply say, 'well if they won't make the sacrifice, why should we?'. And we talked about how there were few countries of four million people in the world who were as well known and well respected as New Zealand.

But he also made this particularly interesting point... That an ETS is simply one way of many to reduce emissions, and it alone doesn't make any country a world leader – or a follower, for that matter. Other countries have led by requiring lower exhaust emissions in cars; others still have stricter building regulations; others again are using carbon taxes. And on it goes.

So while the politics around whether our ETS remain hot, the question of whether we should, could or want to lead the world in reducing emissions goes far deeper.

Lord Stern's visit should remind us it's just the tip of the iceberg, should we want to still have icebergs.


Comments (9)

by Claire Browning on September 13, 2010
Claire Browning

Thanks for interviewing him, Tim (or arranging it, anyway). And thank you for the post.

by Tim Watkin on September 13, 2010
Tim Watkin

Ta Claire, always fascinating to meet someone who's THAT much influence on world affairs.

by Claire Browning on September 13, 2010
Claire Browning

Humph. I wish he'd be a damn sight more influential, and a fraction less diplomatic. He prefaced his first Robb lecture with a good quote:

"When discussing the reasons people don't understand, people say, 'I don't believe it. It's too crazy. I'm not going to accept it… You'll have to accept it. It's the way nature works and if you don't like it you can go live on another planet where the rules are simpler, philosophically more pleasing and more psychologically easy."

by Simon on September 14, 2010


Okay, so Stern is too reticent to express an opinion on the NZ ETS. He responded in the same way to Catherine Ryan on his Nine to Noon interview.
Anyway, do we need an international view when we have an indigenous analysis of the NZ ETS in Geoff Bertram and Simon Terry's book "The Carbon Challenge"?

Bertram and Terry are very clear that the NZ ETS is, in terms of applying the methods of resource economics to reducing GHG emissions,  "a complete dog" (Bertram's words at a VUW IPS seminar in 2009).

To try sum up the argument in 25 words or less, the NZ ETS is badly designed because:
It is not a "cap and trade" scheme as it has no limit on NZ or Kyoto units that may be issued or used in it.
It will earn NO revenue for Govt as 100% of the industry-related units will be gifted to existing and new emitters.
Okay, 47 words, not 25!

Bertram and Terry conclude that the NZ ETS will create a massive and regressive redistribution of wealth to big emitters, power companies, agriculture (who will get free allocations of units) from consumers and small businesses who pay higher downstream prices and receive no free units. And there will also be almost no reduction in emissions.

To me that sounds like leading the world - in bad ETS design!

by Tim Watkin on September 14, 2010
Tim Watkin

Simon, you're right about the 'no government revenue', but does that really matter? I'd be interested in your thoughts.

The goal is lower emissions, and any financial disincentive to emit more GHGs is useful, regardless of where the money goes... Smith has repeatedly made the point that the money will go to plant more trees, which is a good way to improve our position.

The cap and trade point though does seem to be more of a worry!

by Claire Browning on September 14, 2010
Claire Browning

you're right about the 'no government revenue', but does that really matter?

Well, yes, depending on what the money might be spent on. Shielding the little guy from the sharp edges of the recession -- whoops, I mean, green revolution -- anyone?

Smith has repeatedly made the point that the money will go to plant more trees, which is a good way to improve our position.

Is it? What happens when the trees come down? And whose trees are they? Is this not just another example of credits going to shield private (in this case, forestry) enterprise from the true costs of their activities, even if, temporarily (for the term of this government) it makes it look good on the books?

by stuart munro on September 14, 2010
stuart munro

The trees, together with the land, will most probably be sold offshore to some longsighted institution. The consequent loss of revenue as money ceases to circulate locally will have to be made up by... the eternally ripped off New Zealand citizenry. And English will crow about foreign investment, as his country grows poorer, wilder, and more desperate.

by Tim Watkin on September 14, 2010
Tim Watkin

Before you jump off that metaphorical bridge, Stuart, the NZ Super Fund is investing heavily in NZ forestry and is the country's single largest forestry owner. Some iwi are getting into it as well.

And Claire, isn't there hope that with the credits as incentives more people will plant more trees, replacing the ones cut and on and on? Plant, harvest, plant, etc...

by Simon on September 15, 2010


Yes, 100% "grandfathered" units means 'no government revenue', and you ask "but does that really matter?"

Well, yes it does matter - a lot!

With an ETS, we are using the economics theory of  "assign tradable property rights to an environmental commons" (a la Ronald Coase) in order to put a price on GHG emissions.  There is nothing written by Coase or his interpreters that says the property rights in the commons (in this case the capacity of the atmosphere to absorb GHGs) have to be assigned to the emitters. The key point of Coase is if rights are fully assigned (to whoever) and tradable in competitive markets with no transaction costs then the rights will eventually be efficiently allocated by trading.

Geoff Bertram wrote as early as 1992 that assigning property rights in the atmosphere globally on a per capita basis would be entirely consistent with Coase's theory. Equity says that the proceeds of auctioning units should, on first principles, benefit all taxpayers. And couldn't Bill English use a few exrtra billion for our debt repayments right now?

Secondly,  100% grandfathering of units almost completely relieves those emitters from the carbon price signal. And economics predicts that emitters will set their prices to consumers to include the opportunity cost of the free units i.e. their market value. So the benefit of grandfathered units will not be passed on to consumers. Contrary to Dr Smith's opinion to the contrary.

Yes, Smith has often said that most of money from the ETS will go to new carbon-sequestering forestry. As has Key.

That is sort of true but misleading. Lets look at 2008-2012 . The Kyoto commitment period.

According to B & T 2010, between 2008 and 2012, 42 million units will be given away to emitters (16 million units grandfathered to industry, another 10 million units given to industry as compensation for increases in electricity prices, and 16 million units grandfathered to pre-1990 forest owners). MfE estimate that new post-1989 forests will be issued with 80 million units (for sequestering 80 million tonnes of GHGs).

But, we need to factor in the delayed entry of agriculture (2015) and fossil fuel energy (2010) into the NZ ETS. The delays mean that only about 15% of commitment period 1 GHG emissions of 386 Mts are covered by the NZETS. 286 Mts of GHGs are exempted by delayed entry.  Another 46 Mts of GHGs are exempted by the 2 for 1 deal at $25 tonne. Leaving a net demand of 54 Mts.

So Smith's forestry number for 2008-2012, 80 Mt, is only bigger than the giveaways, 42 Mts, because forestry was 100% in the NZETS from 2008, and fossil fuels etc are only 15% in the NZ ETS by 2012.

The quantities of grandfathered units will really rack up after 2015 when agriculture enters the NZ ETS and the 2 for 1 $25 deal has ended. From 2015 onwards, something like 80 million units per annum will be grandfathered. If the market value is $18, the recent CER price, thats $1.4 billion a year of subsidy.

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