Let the ETS do its job

This week's column in the Dom Post and Stuff papers covers the results of the second Expert Economist Survey. 

A snippet:

New Zealand’s emissions trading scheme (ETS) has improved considerably over the past few years. Through the 2010s, the ETS was a lot more like a low carbon tax set at $20 per tonne.

Now that there is a real and declining cap on net emissions, the price of carbon has risen to $80 per tonne. The carbon charge in a litre of petrol rose accordingly, from about $0.05 to about $0.20.

A lot of Wellington officials support adding policies on top of the ETS. They argue that doing so can force emissions to reduce more quickly.

But when policies target sectors covered by the ETS and those sectors purchase fewer carbon permits, more permits are left for others to buy instead.

And while it is true that the government could take that opportunity to cut the ETS cap more quickly, it could cut the ETS cap more quickly and at less cost to the country as a whole without regulating fuel economy.

We asked whether our expert panel agreed or disagreed with the following proposition: “Tightening the ETS’s cap on net emissions would be a less expensive way to reduce carbon-dioxide emissions than a collection of policies, such as fuel economy standards for imported vehicles, that target emissions already covered by the ETS.”

Thirty-one per cent strongly agreed with the proposition, 54 per cent agreed, and the rest were either uncertain or had no opinion. No surveyed economist disagreed.

But that hardly means that economists see no role for complementary policies. Complementary policies can have an important role to play if there are complementary problems to solve.

The ETS puts a price on carbon that deals with the market failure we would otherwise have in carbon emissions. If other market failures unduly hinder adjusting to rising carbon prices, policies directly targeting those market failures may reduce the cost of mitigating emissions. Seventy-seven per cent of our surveyed experts agreed, and none disagreed.

So it is not that economists are opposed to regulatory activity per se. It is rather that those policies need to be appropriately targeted at real additional market failures.

To take an example, if you thought that an $80 carbon price hurt biodiversity because of pine tree planting, the solution would not be to tweak the ETS settings to ignore carbon sequestered in pine forests.

The solution instead would be a subsidy for planting native forests, or a charge reflecting the biodiversity cost of additional pine tree planting in places where more pine trees caused demonstrable harm.

Finally, we asked our experts to choose between two options for dealing with the harms that rising carbon prices can impose on poorer households.

The Government has been trying to target emission reductions in sectors that might be less likely to affect poorer households while also providing subsidies for electric vehicles.

But the Government has another option. It planned on selling 19.3 million ETS credits this year. At $80 per tonne, that would raise enough money to give every family of four a carbon dividend of more than $1200.

Our experts agreed that a carbon dividend is the preferred option: 15% strongly agreed, 54% agreed, 23% were uncertain, and 8% had no opinion.

The full results are up over at the NZAE page.

Wellington has been trying to gaslight me for too long, trying to make me think that I'm the crazy one for continuing to think that the standard lessons I taught at Canterbury, the same standard core micro that's taught everywhere, is now somehow all wrong. The Survey is a nice sanity check for me. I'm not mad; the Ministries are madhouses.