Painting features as bugs

I hadn't quite understood New Zealand's carbon emissions trading scheme before I moved to Wellington. The thing seemed a little dodgy with a fair bit of reliance on dubious foreign credits. But then the genius of the thing was explained to me. I've not looked at it properly myself, but the story is interesting, and seems plausible.

It goes something like this.

New Zealand's first preference is for everyone in the world to be on-board for serious GHG reduction. But we can't get to the first best directly. Plenty of countries have dodgy emissions trading regimes with credits of dubious origin. And the worst case for New Zealand isn't doing nothing. Doing nothing is bad, but even worse would be New Zealand taking GHG reduction seriously while other countries don't.

Why is that bad? New Zealand is, relatively speaking, one of the less GHG-intensive producers of milk. Our pastoral systems might not be nice for water, but they're not as bad on methane emissions as barn systems elsewhere. And NZ pushing too hard too fast on GHG abatement, when other places aren't, isn't just bad for the NZ economy. It also risks pushing production away from relatively clean NZ to places where production results in more emissions. Bad for the economy, likely bad for the environment too.

So what's the solution? NZ joins an emissions trading scheme and is happy to accept whatever dubious credits other countries are willing to countenance. Why is that good when dubious credits are, by definition, dubious? It means that New Zealand gets serious about GHG reduction whenever other countries do too. As soon as the international trading systems stop accepting dodgy credits, New Zealand stops using them too. And that means NZ is on board for more substantial climate change action at the same time that everyone else is.

At least that's the potted history I've heard around the Wellington traps. If that's what's going on, it's genius. The dodgy credits are far from hidden and far from a bug. They're a feature that lets New Zealand set up an ETS apparatus that automatically scales to being serious when it's the right time to be serious, and avoids imposing serious costs until the international community is ready to take things seriously.

The Morgan Foundation's report goes through some of this, noting that New Zealand disproportionately makes use of dodgy credits. But it draws a different conclusion than I would. Rather than follow some countries in unilaterally cancelling carry-over credits into the next round, New Zealand should be arguing that all of the trading schemes use a stricter standard on credits. Then everybody tightens up, us included.