Strengthening the ETS

Looks like climate policy is coming together:

The main proposal is a change to the ETS so that there is an overall limit on the amount of emissions credits in the system, and a price cap of $50 instead of $25, along with a $20 price floor.

The current price of European emission allowances is 25 euros per tonne, or NZD$42. A price cap at $50 then isn't nuts. I still think that best policy remains a dirty cap, where we set a path for the cap that tracks to the government's commitments, but where the cap stops tightening or even relaxes a bit whenever prices get out of step with prices in Europe.

Setting that as policy commits New Zealand to achieving the government's climate goals, but only to the extent that the rest of the world plays along. Letting prices here get ahead of prices in Europe could prove pretty expensive. Carbon-abating tech will be developed in line with prices in the big markets; if we run ahead of prices in Europe, we'll be frontloading abatement efforts in particularly costly ways.

And before everybody freaks out about what this means for fuel prices, remember that the ETS charge in a litre of petrol is around 7 cents. If ETS prices doubled, then the price of petrol would go up by about 7 cents. That's not the end of the world; that's less than the discount you might get with one of the good supermarket vouchers.

I don't know why the government wants to bundle this in though. This is exactly the kind of thing that you don't need to do if you've published a credible price path for carbon.

One of the main prongs of the proposal is something of a war on the use of coal for heat.

All new coal boilers for low and medium temperature heating would be banned under the proposal.

Medium temperature heating includes drying milk powder and wood products, while low temperature heating is used to heat spaces and water.

Existing coal boilers used for low-temperature activities would be phased out by 2030.

Coal boilers would still be allowed for high temperatures of above 300C - used for things like making steel.

The Government is keen to do this quickly as new boilers have a long life and lock in emissions once installed.

If a coal boiler makes the most sense over the lifespan of the kit, despite a carbon charge set to rise to $40 in the medium term and to rise from there, then folks should be able to put in a coal boiler. Every bit of carbon dioxide emitted by the thing has to be paid for through the ETS, and with a binding cap that can't mean a net increase in CO2. It just means that the coal boiler outbids other potential uses of CO2, so other emission sources cut back their emissions.

That's the magic of the ETS - it makes sure that the tonnes of CO2 emitted are the ones that are most important to be allowed to be emitted, while making sure that total emissions are capped, without anyone having to make big central calls about which emissions are most important. That information simply cannot be known by carbon planners; the ETS harnesses dispersed information about which emissions can most easily be abated, without need for that central planning.

How can the government know that coal boilers are sufficiently low value that they can be banned? If the government is right, folks with money on the line will see that too and will avoid investing in coal. If the government is wrong, then firms will be forced into up-front investments that have a higher cost-per-tonne of CO2 abatement than the ETS price.