Messing up investment signals

My column over at Newsroom this week picks up on a post looking back at Hotelling pricing and carbon forestry. It concludes:

Insecure property rights can undo the optimal paths that Hotelling described.

And we’re already seeing it in carbon forestry. The Government keeps sending worrying signals about the place of carbon forestry in the Emissions Trading Scheme. Will it ban new carbon forests? If so, you might want to plant in a hurry, to get ahead of a ban. Will it mess up how existing forestry credits are treated? If so, you might want to dump those credits in a hurry if you cannot bear that risk.

CarbonNews reported that carbon market participants are switching to non-forestry carbon credits, and a split-market is developing, because the Government has been scaring the hell out of small forestry owners. Those owners are dumping their credits because of worries about what would amount to expropriation.

And others, who expect existing forests to be grandparented after a rule-change, will be turning paddocks into forests as quickly as possible – in case government bans future conversions.

One sure way to screw up Hotelling’s Rule is by messing around with the underlying property rights.

By threatening those property rights through the Emissions Trading Scheme review, the Government is bringing about some of the outcomes that it claims to want to avoid: a current tanking in ETS prices combined with a lot of forestry conversions.

The Government ought to be bulletproofing the Emissions Trading Scheme. Perhaps if the Government, and the climate commission, read a bit more Howard Hotelling, they’d be less likely to accidentally shoot holes in the thing.

The problem is hardly restricted to carbon forestry. 

EnergyNews reports that NZ now has less than a decade's worth of gas reserves. 

Why? Strong likelihood that any investment is effectively expropriated through regulatory changes. 

Consequence?

Carnegie says that electrification of transport and industry can’t continue without enough domestic gas supply.

“Large manufacturers will close, and there will be no energy source capable of firming up renewables in the depths of winter other than high-emissions coal.

“That will be our reality if we continue down this track.”