Thursday, 27 September 2018

Carbon emissions and the Taranaki ban

MBIE's advice on Labour's ban on Taranaki oil and gas exploration suggested that global emissions could go up.

Could that happen? It depends on what you think's going on in the rest of the world. 

Suppose that the whole world were under a binding emissions cap under a global cap and trade regime. If New Zealand produced less natural gas and some stuff that used to be produced with natural gas here instead were produced using coal in China, global emissions would not go up. There'd be a slight decrease in emission permit purchases in New Zealand and a somewhat larger increase in emission permit purchases in China. The price of permits would go up, some lower-valued things that otherwise emitted carbon would stop happening (with those permits then sold back into the system) or some production processes elsewhere would change to be a bit less carbon intensive. 

Under that regime, there is no increase in greenhouse gas emissions. But there could be an increase relative to a counterfactual path if you think that higher carbon prices make it harder to reduce the total cap.

The most efficient way of reducing global GHG emissions under a binding global emissions cap-and-trade system is buying and retiring credits, allowing the market to figure out the cheapest way of mitigating emissions. The Taranki ban instead forces a higher cost way of achieving mitigation, and that makes it harder to reduce global emissions by buying and retiring credits - each credit is now a bit more expensive.

But there is no global cap and trade system. 

If you think that there is no GHG abatement response in China if some production shifts from NZ to China, then you could have a net increase in emissions in replacing a natural gas process with a coal process. 

No response is rather unrealistic. But if we think that whatever a country is doing to abate emissions is responsive to the cost of abating emissions, then we might worry that the shift will have made it harder for China to reduce total emissions. And so they will abate by less than they otherwise would have. Total emissions would then go up, but not by the full amount that you would have expected on the naive no-response assumption. 

Bottom line: it seems plausible that net emissions wind up increasing as consequence, but I doubt that the magnitude is substantial. China has good reason for taking carbon emission costs seriously - they're projected to incur some of the higher costs of global emissions. 

The bigger problem is that it's just a dumb way of mitigating emissions. If you want lower emissions, make sure the ETS is working well. Since New Zealand's ETS is not linked to the international system, check where the price of carbon is lowest among places that have non-dodgy systems, then buy and retire credits from the place where doing that is cheapest. Global warming doesn't care whether you stop a ton of emissions from New Zealand or from somewhere else; it cares about the total reduction. Buying and retiring credits where it's cheapest to do so and where the system is credible lets you do the most good. Pushing "Carbon Neutral by 2035" or "Fully Renewable Electricity by 2050" are good ways of doing far less good than you otherwise could if abatement costs are lower in other places or in other sectors. 

It would have been nice if the MBIE paper had spelled more of this out, but I don't think they're wrong to worry that emissions could increase. Emissions increase if any cap in China is not currently binding, or if the path to a lower cap becomes more expensive there and consequently slower. 

1 comment:

  1. I love it when people pretend China is going to cut emissions in any real way.

    Even if the Chinese government were to get half serious on carbon, the internal corruption inside the system would ensure that nothing happened. A carbon credit system only works if people are honest about what they use, and it's child's play to work around. They already lie internally about pollution emissions to central government there, and nothing happens to the culprits.

    The only way the Chinese emissions go down is if their economy tanks. And the slack will be picked by other countries with zero interest in limiting their economic development because Europe says so (Vietnam, Indonesia, Bangladesh etc).

    It's all a big game. Lots of non-binding "agreements", which are clearly lies. Next they'll move to binding agreements, but in the future. Then they'll move to binding agreements but lying. By which time it'll be 2099. Too late, if you believe the alarmists.

    Meanwhile Ardern works to reduce the NZ economy to cut emissions, but flies around the world willy-nilly in contradiction to her supposed principles -- we have to take the hit, but she doesn't. That attitude is exactly what the Chinese Wii take -- you should take the hit, but we'll continue as before.