The ETS and its enemies

In the weekend papers [ungated], I despaired at sets of policies that work to undermine how the ETS works. 

Investment in decarbonisation should be driven by carbon price signals; instead, it's turning into subsidy-seeking. Using your own money for decarbonisation was looking more and more like a mug's game. 

The government threw carbon forestry into chaos with speculation around eroding all the underlying rights. 

And decisions on ETS unit supply threw further uncertainty into the mix. 

The Zero Carbon Act set the country with a target of net zero emissions by 2050. The Emissions Trading Scheme was designed to target net emissions.

But reviews of the role of carbon forestry, and of the role of carbon removals as compared to gross emissions reductions, have driven deep uncertainty about the property rights that underlie the scheme.

Earlier this month, carbon prices dropped from about $55 per tonne to $35 per tonne. Regulatory changes could particularly hit carbon credits generated by growing trees.

In CarbonNews, one carbon market participant reported, “We’ve been speaking to some very angry forestry people and some very confused emitters. Foresters don’t know if they can plant and emitters don’t know if they can use those units to offset after 2025.”

Carbon prices have since rebounded, but not because forestry issues have been resolved.

The High Court last week told the government to look back over last December’s decisions about ETS auction settings. Those decisions had resulted in the carbon price falling by almost 60%. They had also resulted in consecutive auctions of government-issued carbon credits this year not meeting the government’s reserve price.

And the next carbon credit auction will happen before the government is due to respond to the High Court.

If the government had wished to throw sand into the ETS’s gears, both to make the ETS work less well and to make everyone less responsive to the signals carbon prices send, it could hardly have done a better job.

A sufficiently advanced incompetence is indistinguishable from malice, but the former still seems the more likely explanation.

Let’s hope the government’s response to the High Court, and the final review on forestry, shows a bit more competence. Getting this right matters.

But things have moved quickly! Tuesday night, the government adopted the Climate Change Commission's advice on ETS auction settings from December. And carbon prices jumped. 

Let's hope they manage not to wreck carbon forestry though.