Tuesday, September 2, 2014

Why Labour’s climate change policy will fail

Where to begin?  This is a complicated topic, and I can see that Labour has good intentions.  I have given up on the National Party.  If I hear Tim Groser (Minister for Climate Change Issues) say one more time that New Zealand is one of the few countries with a price on carbon then I am gonna scream.  New Zealand’s price on carbon is 11 cents per tonne for most of us, and some of us are rewarded for polluting.  Yes, that’s right, we pay people for emitting greenhouse gases.  We are an international pariah.  We have never led the pack, and we are one of the world’s worst polluters.  Labour’s policy, however well-meant, will make us even worse still.

Firstly, let’s examine the stats.  We increased our net greenhouse gas emissions by 111% since 1990.  Yes, we met our weak Kyoto commitment to get our net emissions between 2008 and 2012 to the level of our gross emissions in 1990.  Our gross emissions increased by 22%.  This all clear in Tim Groser’s report to the United Nations Framework Convention onClimate Change.  We received a fossil award in 2012 for our shabby performance. We are the fifth worst polluters per capita, at 18 tonnes of CO2-e/person.  We have never “led the pack” as Tim Groser asserts.  We are tail-end Charlies.  This is embarrassing and shameful.

So, how do we pay people to pollute?  All polluting industries except farming are required to submit credits each year to account for their pollution.  We give “trade exposed” polluting industries our domestic carbon credits, New Zealand Units (NZUs), equivalent to 90% of their pollution. It’s called “grandfathering”, and the idea is that they only need to find an extra 10% to cover all their pollution.  If they reduced their pollution by more than 10% then they could have some credits to sell to other polluters.  Sounds OK so far, doesn’t it?  It’s not OK.  Our current government has chosen, as a matter of policy, not to restrict imports of foreign carbon credits.  Have a look at the current price of credits in New Zealand on CommTrade.  See the “ERU” price at 11 cents (September 2nd)?  Those are “hot air” credits that represent no change in behaviour in response to climate change.  They are fraudulent, as detailed in my previous blogs.  Almost all surrenders to our credit registry from polluters in 2013 were ERUs.  Note that the NZU price is $4.35.  This means that “trade exposed” industries are gifted, by you and I, NZUs worth $4.35 for 90% of their pollution, and they can submit ERUs worth 11 cents to cover their pollution and make a $4.24 windfall for polluting.  This is worth millions of dollars to them and it’s one of the reasons why our Emissions Trading Scheme (ETS), the “heavy lifter” and central plank of our climate change policy according to Tim Groser, is an utter failure so far.  See my previous blogs for the other reasons the ETS is failing and also how we could fix it.

Labour’s policy would make things worse.  Farming currently emits roughly half of our annual greenhouse gas emissions of approximately 75 million tonnes of CO2-e, but its principal emissions are not covered by the ETS. Labour proposes to bring farming into the ETS as a “trade exposed” participant, with 90% grandfathering, and also require 50% of credit surrenders to be NZUs.  This means that the other 50% could be "hot air" ERUs, and farmers would get a reward for polluting of more than $150 million per year (the difference in price between their gifted NZUs and the ERUs they would be allowed to submit).

Our ETS could work, and I’ve set out how to make it work in previous blogs, but sadly Labour’s current policy will just make things worse.  Yeah, I let the Labour Party know about this when its policy first emerged.  It hasn’t responded.

UPDATE: Moana Mackey, Labour's Spokesperson on Climate Change, is going to talk with me about this.

Sunday, June 1, 2014

Initial thoughts on a carbon tax (cut)

The NZ Greens' carbon tax policy has plenty of merit, and with appropriate design could sweep away many of the Emissions Trading Scheme's (ETS's) worst features. Current government policy allows unrestricted imports of hot air credits which opens the door to speculators. In addition, "money for nothing" schemes undermine our NZU currency, such as gifts of NZ Units (NZUs) to polluting industries who can then surrender cheap hot air credits from former soviet countries with failed industrial economies and profit from the sale of NZUs. For the record, here's what those gifts to NZ Aluminium Smelters Ltd. represented between 2010 and 2012:

Year of allocation Number of credits
2010 210,421
2011 437,681
2012 301,244
3 year TOTAL 949,346

On today's prices this allocation is worth about $4.5 million if the company purchases ERUs for surrender to account for its pollution and immediately sells the grandfathered NZUs on the open market.  The number for all "trade exposed" polluting industries for those three years is a free gift, for doing nothing positive for the environment, of approximately $42 million.  Ironically, if NZ's agricultural sector had been included in the ETS with 90% grandfathering of NZUs as envisaged, then the National government's policies would have led to each farmer having a small fortune in this type of ERU rort. Add in all the ad hoc, but "fiscally neutral" gifts to forest companies, electricity generators and others that the government wished to either placate or encourage, and you see a scheme that is failing, with an ERU price of just a few cents and an NZU price of $3 to $5 that is insufficient to motivate changes in behaviour that would benefit the environment.

The National Party's flawed policies on climate change have allowed speculators to accumulate a mountain of NZUs in our carbon credit registry, and so there would have to be a transition to clear this backlog in order to avoid court cases. Only 1.5% of surrendered credits in 2013 were NZUs, while 82% were "hot air" ERUs. Most grandfathered NZUs must, therefore, be in our credit registry.  This transition period will probably reward speculators again, but it's better than persisting with a status quo that does nothing of value for the environment while enriching polluters and speculators.

I've long been an advocate for reform of the ETS, but a well-designed carbon tax could be at least as good, if not better. Taxation is probably more efficient than an ETS, with a well developed infrastructure in place to collect it.  The idea of a carbon tax cut is also great, with the potential to make the policy fiscally neutral for poor people, and you have to admire this clever intervention.  I also like the fact that all sectors are included, although the exemption of hill country farmers and different rates for some sectors is a potential problem (see the 2nd to last paragraph).  Treating sectors differently in the ETS has distorted the carbon market.  New Zealand is internationally renowned for dragging its feet on climate change mitigation, and a carbon tax could begin to restore our reputation.

The proposed tax rebate of $12.50/tonne of CO2-e may be barely enough to promote new tree planting.  Studies at the School of Forestry, University of Canterbury, suggest that $15/tonne is required in order to placate concerns about risks of carbon credit liabilities over long forest rotations.  A more stable price per tonne through taxation may reduce perceived risk, however, and so $12.50 may be just enough.

In order to run a fair tax/rebate system, we need to maintain a registry of carbon stocks stored in the landscape.  Forest storage could easily make NZ completely greenhouse gas neutral (see my earlier posts), and so it's important that fluctuations in storage are properly accounted for.  By extending this accounting to the entire landscape tax rebates could provide added incentive for new house construction and contribute to solving our housing crisis.

I am a little concerned that, just as we have an infrastructure to collect tax, some rich people also have very well designed schemes to avoid paying tax, and it may be a challenge to design a scheme that doesn't open up a few more tax loopholes.  In particular, it is unwise to have different tax rates for different sectors.  For instance, how many sheep are required in order for someone to qualify as a carbon-tax-exempt "hill country farmer"?

On balance, well done Greens, for injecting this idea into our political maelstrom.  Let's hope it bears fruit.

Friday, May 16, 2014

Tiny progress with our emissions trading scheme

Dear Hons Tim Groser & Jo Goodhew,

OK, this is an improvement. Well done. You have eliminated one of several ways that people make money with our emissions trading scheme (ETS) while doing nothing of value for the environment.
However, "money for nothing" will continue to undermine our ETS, with people receiving NZUs worth $3.95 each from the government for allowed emissions and then surrendering ERUs worth $0.17 each to cover their emissions. 82% of credits surrendered to cover NZ's greenhouse gas emissions in 2013 were ERUs. The low prices of imported "hot air" ERUs and CERs have lowered the price of NZUs to the point where our ETS is failing to change greenhouse gas emission or sequestration behaviour in NZ and we are not doing our fair share of climate change mitigation. Our ETS benefits speculators and nobody else.

Your policies are responsible for this situation.

In order to fix our ETS, I urge you to:

1) Disallow all imported carbon credits, particularly CERs and ERUs, within our ETS, and allow New Zealanders with CERS or ERUs to sell them back on the international market.
2) Stop grandfathering credits.
3) Cease random, "fiscally neutral" gifting from Government to selected companies and individuals.
4) Apply the ETS equally and fairly to all sectors, including agriculture.
5) Allow trading only between sequesterers and emitters (if you overpollute you pay someone else to clean up).
6) Manage our domestic NZU "currency" in a similar way to the Reserve Bank's management of our coinage. This could be achieved by setting reduction targets each year in response to NZU market conditions, requiring surrenders only for “over target” GHG emissions, and ensuring that annual targets stabilised the NZU price.

If you implemented these policies now, then I expect that our ETS would begin to be effective in 2-3 years time after the huge backlog of accumulated "money for nothing" NZUs in our carbon credit registry had worked its way out of the system.

Yours Sincerely,
Euan Mason


Sunday, April 13, 2014

New Zealand's Greenhouse Gas Inventory 1990-2012 and net position: A comment

"New Zealand's Greenhouse Gas Inventory 1990-2012 and net position" makes grim reading.  Our emissions per capita are the fifth highest in the world, and as the report notes, emissions from deforestation began to accelerate in 2011 and our overall emissions are not being reduced.  Deforestation resumed when we began to import large numbers of cheap, "hot air" credits in 2011.

We met our target for the first Kyoto commitment period between 2008 and 2012, but that was a very soft target; to set our net greenhouse gas (GHG) emissions to what our gross emissions were in 1990.  Had we been required to reduce our net emissions to 1990 net emissions or our gross emissions to 1990 gross emissions then we would have failed by a very large margin.  This is clear from the graphs presented in the Greenhouse Gas Inventory.

The report states that, "New Zealand has fewer low-cost options to reduce emissions compared with most other developed countries, with three-quarters of electricity generated from renewable energy, a growing and dispersed population, and around half of its emissions from agriculture.", but this statement is arguably false.  Other countries have taken more strides than we have to generate total energy from renewables, such as Sweden's 50% versus New Zealand's 35%. Moreover, with a relatively inexpensive programme of afforestation on marginal lands we could very much reduce our net emissions while solving erosion problems and reducing damage from floods.  In fact we easily could go much further and become completely GHG neutral for between 60 and 100 years by planting a further 9% of our land area in forest.  This could be done on marginal land; without destocking our farms.

We have withdrawn from Kyoto's second commitment period.  It is clear that had we remained in the Kyoto process then we would have failed to meet our future commitments, especially because harvesting of forests planted during the 1990s planting boom will see our net position sharply deteriorate during the 2020s.  In order to forestall this deterioration we need to have an effective ETS with New Zealand Unit (our domestic carbon credit, NZU) prices more in the $20 range (current range is ~ $3/credit).  The forestry sector has lost interest in the ETS because NZU prices are too low.

New Zealand's climate change response lacks policy settings that would make our Emissions Trading Scheme actually work. The current price of NZUs is just over $3. Imported Emission Reduction Unit (ERU, "Hot Air") credits are worth just 19 cents. 82% of surrendered credits in our ETS were "hot air" ERUs last year while less than 2% were NZUs.  New Zealand's emitters can surrender ERUs to "offset" their emissions, while hoarding or selling higher priced NZUs that we taxpayers have given them to account for "allowed emissions". Grandfathering of credits allows for 50% of energy-related emissions, and 90% of "trade-exposed" enterprises' emissions.  The latter includes companies such as Rio Tinto.  The net worth of grandfathered NZUs that are replaced by imported ERUs runs into many millions of dollars per year.  Forestry companies who have earned or have been gifted NZU's are able to pay off their liabilities with ERUs and make instant profits.  The scheme is currently dysfunctional because it is rife with people making money for nothing and with speculative hoarding of NZUs, thereby lowering credit prices to such an extent that we New Zealanders are not pulling our weight in global climate change mitigation.

What we need to do in order to fix our scheme is:

1) Stop all imports of credits.
2) Disallow ERUs within our ETS, and allow New Zealanders with ERUs to sell them back on the international market.
3) Stop grandfathering credits.
4) Cease random, "fiscally neutral" gifting from Government to selected companies and individuals.
5) Apply the ETS equally and fairly to all sectors, including agriculture.
6) Allow trading only between sequesterers and emitters (if you overpollute you pay someone else to clean up).
7) Manage our domestic NZU "currency" in a similar way to the Reserve Bank's management of our coinage.  This could be achieved by setting reduction targets each year in response to NZU market conditions, requiring surrenders only for “over target” GHG emissions, and ensuring that annual targets stabilised the NZU price at an effective level.

For more, fully referenced, peer-reviewed information about why New Zealand's ETS has failed, see http://euanmason.blogspot.co.nz/2013/12/why-our-emissions-trading-scheme-is.html

Thursday, March 13, 2014

Open letter to Hekia Parata (copied to Steven Joyce)

Dear Ms Parata,

I was an elected member of the University of Canterbury's Council for 3.5 years.  During that time my contribution to the governance of our university could not have been made by outsiders.  Others on the Council, all well-meaning, intelligent people, contributed hugely from their experience.  However, they lacked experience in doing research and teaching in a university, and were sometimes motivated to propose or support actions that would have undermined research and teaching.  It is essential that Council governance includes contributions from staff.

There appears to be a movement in some quarters to treat universities as if they were merely companies.  Universities are communities of scholars, and traditionally democratic ones.  This traditional model has produced the world's finest universities, such as Oxford and Cambridge.  It is remarkable that New Zealand, with only 4.5 million people, has four universities ranked by QS as among the top 300 in the world. Several critical factors have brought this about, and foremost among them has been a determination to build them as democratic communities of scholars.  Your bill threatens to reduce them from top-ranked universities to third rate companies, and will certainly reduce their reputations and rankings.  This is terrible for not only today's students, but all those who have received degrees from New Zealand's universities and who will see their degrees devalued by your bill.

I believe in democratic, independent tertiary education councils that represent local people and local communities. Your Education Amendment Bill takes away those community voices and so I ask you to withdraw it.

Yours sincerely,
Euan Mason

Tuesday, February 25, 2014

Sometimes it is sad and infuriating to be right about something

A carbon trader, who perhaps understandably wishes to remain anonymous, has confirmed that, as outlined with circumstantial evidence in my previous post, New Zealand is awash with hot air ERU carbon credits from the Ukraine, using a mechanism to monetise AAUs grandfathered to the Ukraine (in the Kyoto scheme) for doing nothing at all. These credits currently sell for about 25 cents in our scheme.

Not only that, he corroborated rumours that some forest owners are recycling ERUs and NZUs to make money. NZUs are currently worth around $3.40 in our scheme, and may increase in value once the supply of ERUs is shut off. An owner can get NZUs from C sequestration, then repay them with cheap ERUs, then get NZUs from the same forest, then repay them with ERUs, and so on and so on. These NZUs are mostly being hoarded in anticipation of a big payoff if prices rise. Shameful.

Also, reputedly some companies that have been "grandfathered" NZUs have surrendered ERUs to meet their commitments, and kept the free NZUs that you and I granted them to "soften" the blow of the NZ Emissions Trading Scheme, again in anticipation of a price rise.

These actions are the ultimate "Money for nothing" and are morally repugnant.

Hon Tim Groser, the Minister for Climate Change Issues, and ACT MP John Banks are the architects of this mess, probably through ignorance, although we tried to warn them not to allow unrestricted imports of credits into NZ.

Meanwhile New Zealand's emissions trading scheme remains an utter failure and our greenhouse gas emissions continue to rise. The scheme could be fixed, though - see my previous post.