Thursday 23 January 2020

Good advice, if they'll take it

Treasury gets this absolutely right. You don't need feebate schemes for electric cars or emission standards for CO2, you just need carbon prices.
MoT employees worked hard to convince Treasury that there was a rationale for extensive intervention in the light vehicle market through the use of a feebate scheme and the imposition of an emissions standard, which almost every other country has. Treasury officials repeatedly argued that such policies could be costly and would have a limited impact on emissions.

Instead of market intervention, Treasury pointed to the Emissions Trading Scheme as the only necessary component for reducing light vehicle emissions to meet New Zealand's international obligations. In response to a request for comment, a Treasury spokesperson said, "The Treasury regularly provides economic advice on a range of topics, and government agencies regularly canvas a range of perspectives on their work".

Feebate's effect doubted

Treasury raised numerous concerns about the efficacy of the feebate scheme and ultimately recommended against introducing it, although they supported the vehicle emissions standard.

"We are not convinced by the need to intervene in the transport sector in the immediate term in the absence of a strong, predictable and durable carbon price. Measures such as those proposed run the risk of counteracting the price, particularly given their narrow focus," Treasury wrote in a draft comment on a Cabinet paper.

"The Treasury considers that a just transition is best achieved through a credible and predictable carbon price delivered by an effective ETS, supported by policies that remove barriers to cost-effective mitigation options. However, we consider the evidence pointing to barriers in cost-effective mitigation through the light vehicle fleet is mixed," another draft comment stated.
If the carbon price doubles, the carbon component of petrol prices will go up from about 7 cents per litre to about 14 cents per litre. People will adjust their purchases of durables like cars in line with their expectations about the ongoing cost of running them.

If you don't think that that makes them adjust 'enough', think again and think harder.

If whatever response comes of that change in carbon prices isn't sufficient to get aggregate emissions in line with NZ's commitments, then there's something not working in the ETS and the first-order problem is fixing the ETS because it'll be more than just transport that's messed up.

If the cap is binding and in line with our commitments, then you should weaken your priors about how much adjustment is 'enough' in any particular sector. You don't know and I don't know. That's the point of using prices to coordinate this - it lets adjustment happen where it's least costly for adjustment to happen. And if there isn't much adjustment in any particular sector despite rising carbon costs under a binding cap, then you should be considering that adjustment in that sector might be more expensive than you'd previously thought.
Treasury worried that "the cost of a feebate and higher ETS prices creates a 'double burden' for those who need to purchase larger vehicles (e.g., rural industries) while creating a 'double benefit' for those who are able to purchase smaller and electric vehicles (e.g., urban dwellers)".
It is so good to see Treasury giving down-the-line sound economic advice. Climate change is too important to leave to half-baked schemes. Doing the most good we can requires hard thinking about cost-effectiveness.

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