Friday 2 July 2021

Biofuels mandates

The government is taking submissions on its proposed biofuels mandate.

It's an interesting one.

From the consultation document:

Over the first three years, 2023–2025, the Sustainable Biofuels Mandate would reduce emissions by 1,342 kilotonnes. In 2025 annual transport emissions would reduce by over 4%.

They then provide a tallying of potential cost:

They're proposing to reduce GDP by $1,245 million over three years for a three-year cumulative emission reduction of 1,342 kilotonnes. 

There are a thousand kilos in a million. 

So the policy costs about $927 per tonne of reductions. 

The current ETS price is $43.

You could buy 20 tonnes at the next auction and shred them for less than the cost of a single tonne of reductions through this policy. 

Why is this even going out for consultation? Isn't this the kind of thing that, in academia, would get a giant desk reject? Like "Hey, this is just so stupid we don't want to waste the referees' time on it. It has no chance of being accepted for publication. It would insult the referees to ask them to provide comment. Who is the person in your team who thought this was a good idea to start with? It is just so obviously terrible that we want to pre-emptively desk-reject anything else coming from that person, so the editor doesn't even have to open the envelope next time. And we might want to give a warning to whoever gave them a grant to study this too."

We should at least give thanks that the consultation document put numbers on it. I wonder whether they will continue to do so. 

The consultation document grasps for a few straws:
The modelling shows the upper bound of the impact on GDP. In reality the impact is likely to be lower because the:
  • projections assume that there is no further technological progress. It is likely that the global long-term policy commitment to biofuels will lead to higher investment in cost-reducing biofuels research and technology
  • economic impact is highly dependent on the prices of biofuels and fossil fuels. The modelling’s sensitivity analysis shows that when biofuels are relatively less expensive, and/or fossil fuels are relatively more expensive the economic costs of the Sustainable Biofuels Mandate fall. Emissions reductions are also slightly higher
  • Sustainable Biofuels Mandate will protect future levels of GDP. Currently, key exporters like the food and fibre sector are concerned that their businesses will lose access to some international markets if we fail to take timely action to reduce emissions18
  • estimates do not include the potential positive impact on economic activity, and regional economic development, arising from any domestic biofuel production.
While there will be an economic cost, New Zealand has made a commitment to decarbonise and become a net zero emission economy. Moreover, stakeholders have suggested that after electrifying light vehicles, biofuels are likely to be the next lowest cost carbon mitigation opportunity for transport.

Sure. Costs could change such that biofuels become less terrible. But if that happens, the ETS will already encourage fuel companies to pick them up. The policy is a one-way bet on failure. The status quo gets us biofuels in the states of the world in which they pan out; the proposal then only ensures that we also get them when they're really stupid.

And if the government is worried about getting emissions down to maintain access to international markets, maybe, just maybe, it might make sense to cut the ETS cap more quickly, getting you twenty times as much emission reduction as a biofuels mandate would get you for the same amount of effort? 

Heck, they could just go out to the folks who hold stockpiled credits and offer them $50/tonne for them just to get them out of the system so the government doesn't have to account for them. That's way cheaper than a biofuels mandate. 

Markets can fail. There can be spots where policy can get to better outcomes than the ETS alone, if it's addressing some other real underlying market failure that isn't addressed by a carbon price. 

Apologists for a policy-heavy approach to mitigating emissions like to cast ETS proponents as having idealised views of how markets work.

As with the overall reliance on the ETS, however, detractors say the simplicity of this policy could be its greatest weakness.

"The thing about Eric and the New Zealand Initiative is that they take an extremely purist approach. Actually, the world demonstrably just doesn't work that way," Shaw says.

Diaz-Rainey says: "It seems theoretically very, very appealing. In a very clean and idealised world, that seems very appealing, but I just don't see it happening."

That ain't it, though I can see why they'd want to paint their critics as unrealistic idealists. 

It's rather that ETS proponents are realistic both about market failure and about government failure. Both will cause different sorts of problems. 

The political world throws up policies costing >20x as much as the current ETS price, and multiples of any estimates I've seen on the social cost of carbon. 

I think it takes an extremely purist and na├»ve view of political processes to want to rely on Ministerial and bureaucratic discretion to solve a problem as big as getting to net zero. 

And it seems crazy to think that you can maintain political support for net zero while hell-bent on pushing policies costing twenty times as much as necessary to get there, that have no in-built mechanism for compensating those bearing the cost. At least the ETS generates revenue for the government that can be given back to people right? Biofuels mandates don't do that. 

Anyway, Kate MacNamara asked me for comment on this thing

Eric Crampton, chief economist at the New Zealand Initiative, said cheaper ways to achieve the same level of emissions reductions would mean less harm for those who bear the costs.

"The numbers here [in the consultation document] suggest a sustainable biofuels mandate would reduce emissions by 1.342 megatonnes at a cost of $1245 million. When I pull out my calculator, that gives me a cost per tonne of $927. The ETS price is currently $43. So if the numbers presented in the report are correct, the Government could achieve more than 20 times as much emission reduction, at the same cost, by buying ETS credits and shredding them – at current prices. Simply reducing the [ETS] cap, without the biofuels mandate, would be better."

Crampton said that as total credits are reduced the scheme naturally abates emissions in the most cost effective way; this is because carbon emitters must bid at auction for credits that allow them to emit.

The Government, however, seems determined to target emissions reduction in transportation in particular, and remains concerned that New Zealand's uptake of electric and hybrid vehicles is too slow (the transport sector contributes some 21 per cent of gross domestic greenhouse gas emissions).

If you want to submit, the forms are here

You might suspect that nobody in the current government is listening to anybody about anything, but submitting on it may be cathartic. 

You might as well at least enjoy yourself while telling them what you think about it. 

And buckle up to be poorer in 2025 and thereafter, to no benefit to the climate because fuel is in the ETS anyway and the binding cap on net emissions is a binding cap on net emissions. 

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