Tuesday 17 May 2022

Cash for Clunkers with New Zealand Characteristics

Monday's column in the Stuff papers went through America's failed experiment with Cash for Clunkers, anticipating that the government was about to announce our own version. 

A snippet:

As an economic stimulus, it failed. Rather than encouraging a lot of new car purchases, the programme mainly subsidised purchases that would have happened anyway. Some households brought forward a new car purchase by a few months to get the subsidy; others had already planned on purchasing a car during that period.

In other words, it was a very expensive way of getting people to slightly change the timing of a new car purchase. It did not otherwise succeed as a stimulus – it had no effect on employment or other indicators.

And because it only really shifted the timing of new car purchases, it was not particularly effective as support for the car industry.

But it also failed as an environmental programme, unless cost really is no object. People did buy more fuel-efficient vehicles, but the programme was far less effective than a carbon tax in encouraging emission reductions. Every ton of carbon dioxide avoided cost between $106 and $335 in 2009 US dollars – or between $245 and $772 per tonne in current New Zealand dollars.

On a related topic, Tom Puller-Strecker has a bit of a whip-round on the waterbed effect; I'm quoted in it. As refresher: this is the effect where a regulation targeting things inside the ETS cap just frees up credits for others to purchase instead, so has no effect on net emissions.

I do better sending in emailed comments rather than bits on the phone that are transcribed correctly, but could have been worded better. Ah well. 

I wouldn't have viewed it as a 'concession' to say that if your basic model of the world is that future governments will renege on cutting the ETS cap in line with getting to Net Zero, then policies that cost more than the current ETS price could make sense. It's the main sane reason for preferring those measures. 

Similarly, Crampton says the best argument against the waterbed objection to emissions reductions measures that sit outside the ETS is “a political one”.

“If you believe that future governments will lack the commitment to maintain the reductions in the cap and you want to ‘lock things in now’ to force changes, then you would want to use regulatory moves even if they are far more costly than just working through the ETS.”

That sounds like an important concession?

It does.

But Crampton argues that a better option than “a bunch of clunky regulatory interventions” to shore up confidence in the ETS would be a bipartisan agreement on the total quantity of net emissions that the Government and Opposition would be willing to allow between now and 2050.

Arguably that might be a bit like setting a 5-year-old a total quota of screen time to see them through until they were 16.

Crampton also believes that if the Government followed the example of Canada and gave the money it received from selling carbon credits back to the public, then that would improve the popularity of the ETS and in turn might make people more confident its targets would stick.

Some Associate Prof of Finance at Otago has at me in the piece as well. 

It’s a heated debate.

Diaz-Rainey sees the waterbed argument against targeted emissions-reduction policies as “a way of trying to kick things into the long grass”, arguing that impressive cuts to emissions in the United Kingdom would not have been achieved through an emissions trading scheme alone.

Those who oppose such policies should take “a hard look at themselves”, he says.

“Given what's going on in the world and looking at what is happening again in Brisbane at the moment, it's scary. We really don't have time to play these games.”

Not fair, Crampton suggests.

“One of the biggest mistakes in Wellington is viewing that the degree to which one cares about something is best reflected in the amount of money you want to spend on it, or the amount of regulatory effort you want to put into it.

“That is a very poor measure of caring. The best measure of caring is effectiveness. Climate change is too big to try to approach it through radically inefficient measures,” he says.

This is basic maths. The government issues X credits. A policy reducing demand within the covered sector means fewer bids for credits from that sector, which means the next bidder in line gets them instead. 

And while government can decide to reduce the cap even more to offset that effect, it could do so even without the policies - which would be more cost-effective than using the policies unless there's a darned good reason to think that the specific policy abates emissions at lower cost than the going carbon price. 

Where government really likes running populist messes like Cash-for-Clunkers, or corporate welfare like paying companies to buy boilers that were already cost-effective for the company to buy on their own, there needs to be a decent bar for rigour in these things. 

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