Tuesday, 26 April 2022

Forestry and the ETS

This week's column over in Newsroom goes through some proposed changes to the Emissions Trading Scheme that would have it stop awarding carbon credits for carbon sequestered in permanent exotic forests, because of non-carbon concerns. 

The column is currently gated but should ungate tomorrow by removing the /pro from the URL. [Now ungated]

Obviously, the Tinbergen Rule applies. Use the ETS for carbon, and keep it as clean as you can. If there are other problems caused by exotic permanent forests, target those problems directly using their own instruments. 

My submission on it focused on the Tinbergen Rule.

But something else in here has been bugging me. 

For years, government has been pitching all kinds of programmes and regulations that simply cannot affect net emissions because they come up against the binding cap in the ETS. EV subsidies? They just free up credits for someone else to use. Coal boiler replacement subsidies? They just free up credits for someone else to use. Surtaxes on trucks that use a lot of fuel? They already paid their carbon bill. But if the surtax makes people shift to lower-emitting vehicles, that just frees up credits for someone else to use.

The usual response is that the government would take the opportunity to reduce the volume of credits issued in subsequent years, so the regulations do affect net emissions. And that could be true as far as it goes, but it would be more cost-effective just to reduce the cap without implementing the regulation. If the regulated sector is the most cost-effective spot for reductions, the higher ETS prices will find that out. If it isn't, we'll find more cost-effective ways of reducing emissions. 

But when it comes to exotic forests, the usual response gets flipped on its head. The same sorts who'll roll their eyes about the waterbed effect because of the opportunity to cut the cap faster will tell you that planting forests reduces the incentive to invest in lower-carbon processes because there are then too many ETS credits around at too low a price. But surely they'd have to see the opportunity for just cutting the cap faster right? 

If your basic model of the ETS is that governments can cut the cap faster in response to regs that reduce gross emissions, why wouldn't government also be able to cut the cap faster in response to forest plantings that reduce net emissions? Why can the cap be cut faster, to ensure that stupid EV subsidies wind up having an effect on net emissions, but can't be cut faster to ensure that forest planting helps drive faster net emission reduction? 

I prefer setting a total volume of credits that the government is prepared to issue between now and 2050, so the binding cap becomes even more binding. But nobody has set that yet. And if your big worry about tree-planting is that lower ETS prices mean that bad people with bad cars drive them more, because ETS credits are cheaper, then you could set that total volume while thinking about the likely volume of forestry credits that are likely to be generated right?

Is there any good reason why the ETS cap can be sensitive to regulations affecting to covered sector but can't be sensitive to forest planting?

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