Tuesday 10 May 2022

A starter for 8 on the ETS

Keiron Greenhalgh of Net-Zero Business Daily news asked for my wishlist for the Emissions Reduction Plan. 

I provided a starter-for-eight. 

In some ideal world, the ERP would:

  1. Redo the price cap mechanism. Rather than set a nominal price, the price cap would be based on the volume-weighted average price of carbon in the set of international carbon cap-and-trade markets that the Climate Commission and EPA consider to be credible. NZU issued at the price cap would be backed immediately by the purchase and retiring of credits from credible systems abroad, unless the government had more cost-effective ways of immediately backing credits. 
  2. Set the total volume of unbacked NZU that the government is prepared to issue from now to 2050, with all auctioned or allocated credits being drawn from that pool. That makes the ETS’s binding cap also intertemporally binding. 
  3. Remove the quantity restriction on backed NZU issued at the price cap. The volume will be self-limiting because if NZ ever bids up prices in international markets, the price cap just goes up. This mechanism ensures that NZ abatement efforts find something a lot closer to global first-bests in emission reductions. 
  4. Rather than ban permanent forests from the ETS, reduce the total volume of unbacked NZU that the government might put into the pool in (2). Carbon accounting has to be clean, and not make arbitrary decisions not to count some forms of sequestration just because the government doesn’t like other consequences. Other consequences should be dealt with using additional non-ETS tools directly targeted at the undesired effect.
  5. Commit to rigorous cost-per-tonne accounting for any measures taken outside of the ETS targeting GHG emissions. It is easy to inadvertently set policies costing 10x to 100x the going ETS price to mitigate emissions. We can’t afford to do that. The problem is too big. We’ll bankrupt ourselves trying to get to Net Zero if we pursue methods of getting there that either are offset by the binding cap on the ETS or are just spectacularly cost-ineffective.
  6. Take all of the NZU raised at by the government at ETS auction, plus any money the government earns at the price cap under the proposed mechanism (if the cap is an average price, and the government buys at the lowest price, every trade at the price cap makes money), plus any excess dividends that the government receives from its share in the electricity retailers whenever carbon prices are high and feed through into power prices, and announce a carbon dividend. Rebate all the government ETS revenues back to households and tell households that the money is there to help them to effect their own transition to a higher carbon-cost world. The dividend not only mitigates the medium-term distributional consequences of higher carbon prices, but also by doing so provides political insulation for the system against rising carbon prices.
  7. Forbid local councils against considering emissions covered by the ETS when making zoning and consenting decisions. The government’s housing supply agenda requires a lot of building that councils are very reluctant to allow. Government has set two substantial pieces of legislation removing council discretion to block housing, but carbon will be a new way of doing that – if government isn’t careful. Councils have a huge job in planning for adaptation, and in planning for the changes that will come in demand for services and infrastructure with rising ETS prices. It should not attempt to redo the work that the Climate Commission and the ETS are already doing. 
  8. Take up the Productivity Commission’s recommendation to revisit NZ’s rules around genetic engineering, which are currently blocking some of the most promising ways of reducing agricultural emissions. Set a sunset on all current rules around GE such that the existing system is simply abandoned if a new one is not put in place in the next three years. 
Kieron's piece focused on the ProdComm biotech aspect; figured I'd hoist the rest of it up here so it's all in one place. 

Obviously, agriculture also needs to face a carbon price. And that's coming too, one way or another. 

Update: I need to add a 9th item. 

9. Some people get very worked up about whether an emissions credit is surrendered within one carbon budget period or the next carbon budget period. It all seems ridiculous. The climate prefers, if anything, that emissions don't happen until later because CO2 accumulates. Stockpiled NZU are emissions deferred. It would be strictly worse if all of those units were used in the year in which they were purchased, rather than being held as hedge against future carbon costs, because there would then be more carbon in the atmosphere for longer. And so we hear calls for regulations that would actually impede the climate response in order to meet arbitrary year boundaries on credit surrender. Just stop this. Decide how many NZU the government is willing to issue between now and 2050, while remembering that there is a stockpile that can be surrendered along the way too. I don't care what the number is. Draw a straight-line from now to net zero, take the integral under the curve, call that the number. Or make it convex, concave, whatever. I do not care. Remember how I re-jigged the price cap? It'll mean we can't go too wrong. You get some fixed total. That's all that matters. Then drop all the arbitrary fixed-window budgets. If government releases credits to auction next year, or allocates them to industry, it draws from that fixed pool. Fix the Net Zero leg to be consistent with this. Better to fix the legislation to enable the ETS to work better than to thwart the ETS to be consistent with dumb features of the legislation. 

Oh, and a 10th item:

10. If an additional regulatory mechanism can be rigorously demonstrated to provide emission reductions at lower cost-per-tonne than the ETS price, and the numbers are all sound, then that's fine. Hell, that should be the gold-standard right? Don't do anything that costs more than doing stuff through the ETS, but if you find some strange case where the regulation would be more cost-effective, fill your boots! Just make sure that the numbers actually stack up and aren't complete nonsense like the numbers backing EV subsidies. You can't just wish-up benefits or assume away costs. Treasury would have to be crazy careful in vetting this stuff. Remember the analysis on the feebate scheme, and how hard it was for Treasury to try and knock back nonsense claims from the Ministry of Transport? 

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