Forestry and the ETS

I got our submission in on the ETS review and forestry just under the wire last Friday. 

For those interested, it's here.

I really hate the precedent that the government is setting here. 

Farmers are mad about afforestation, and afforestation can have adverse consequences that have nothing to do with net emissions. But those can and should be dealt with by the parts of government best suited to dealing with each of them as they arise.

The alternative to sound Tinbergen-style policy is that we wind up in consultations about different ways of breaking the ETS every time changing carbon prices lead to changes in activities that have their own potential externalities. 

I go through a few examples:

2.12 Consider the perils of the alternative approach, which would require the ETS to reconsider which forms of carbon sequestration or gross emission reduction it might recognise or to what extent – because carbon prices encourage ‘too much’ of the activity resulting in other ancillary problems. A few simple hypothetical examples follow: 

2.12..1 Carbon sequestration through olivine transformation proves highly cost-effective, but olivine mining causes changes in land use and community concerns about heavy truck traffic. Rather than use consenting processes to mitigate externalities from mining or appropriate road-user charging and roading upgrades to deal with truck traffic, the Climate Commission is asked to pretend that this form of direct-air capture carbon sequestration does not sequester carbon – to reduce the incentive to engage in olivine mining. 

2.12..1.1 A new methane inhibitor for livestock proves highly cost-effective in reducing biogenic methane emissions. For sake of argument, let us imagine that this happens after biogenic methane emissions are brought fully into the ETS as CO2-e and are subject to the ETS cap – or are subject to their own methane trading system. The new methane inhibitor unfortunately increases nitrogen concentration in cattle urine. And because dairy farmers face lower methane charges with lower emissions, dairy farming becomes more profitable and there is an increase in dairy conversions. All of it puts increased pressure on overburdened water catchments. Rather than appropriately regulate water quality, the government asks the Climate Commission to put a thumb on the scales to discourage use of the methane inhibitor. 

2.12..1.2 A new type of cement is developed that produces vastly fewer emissions. The technology for producing the cement powder is owned by an overseas company who can easily deliver the powder to New Zealand; when used here, emissions from cement are trivially low. But because the overseas company will not licence the powder to large domestic incumbent cement producers and because it will outcompete domestically produced cement, the incumbent faces difficulty. The Climate Commission is asked to level the playing field by requiring surrender of NZU for use of the new cement as though it had the same emissions profile as existing cement – to avoid unemployment at community cement plants. A ‘just transition’ path is suggested that would allow the new cement to be treated fairly in twenty years’ time. 

2.12..1.3 A new direct-air carbon capture technology is developed. It can sequester carbon at a cost of $50/tonne and can scale infinitely. It could not only offset the entirety of New Zealand’s gross emissions, but also prior emissions if allowed to run at scale. The Climate Commission is asked not to recognise this new technology because, if it were allowed to generate NZU at $50/tonne, there would be weaker incentive to reduce gross emissions and New Zealand would not achieve the wholescale industrial, social, and economic transformation that some might otherwise desire. 

2.12..1.4 A high carbon price makes people wish to avoid housing that has high carbon cost and prefer apartments and townhouses near the city centre. However, cultural concerns are raised about the shift away from suburban living, with commensurate concern about potential reductions in family size and an aging population. A conservative government encourages the Commission to consider a higher NZU surrender requirement for electricity used in apartments as compared to electricity used in detached suburban homes to avoid this undesirable change in housing use. 

2.12..1.5 A rising price on biogenic methane emissions in agriculture, when those emissions finally face an emission price, results in reduced herd sizes and changes in rural land use. The Commission is asked to redo methane accounting to reduce the likelihood that emission pricing results in land use change, because of a view that emissions prices were not intended to result in land use changes. 

It is also interesting that the agricultural sector, which has been able to successfully evade pricing on biogenic methane for ages, is also lobbying for changes to the ETS that would sharply increase the marginal cost of reducing net emissions within the covered sector.