Submitter: Professor Euan G. Mason
Profile: Euan Mason is a Professor at
the New Zealand School of Forestry, University of Canterbury, where he teaches
silviculture, statistics, modelling, and research methodology. His research interests include forest growth
and yield modelling, tree physiology, and silviculture. He has published numerous peer-reviewed articles
relating to climate change and forestry, and has been employed by government
ministries and political parties to advise them on climate change issues from
time to time. He is a New Zealand
citizen, born in Invercargill. He was educated
at universities in New Zealand and the United States of America.
Symptoms of ETS failure
New Zealand
has so far failed to live up to the spirit of its obligations to other
countries to reduce net greenhouse gas (GHG) emissions. This
position is not morally defensible.
Claiming to contribute to global GHG mitigation efforts while
implementing policies that only pretend to do so would be considered unethical
in all ethical systems. This is obviously true with Kantian ethics, and also
ethics of care. Some might make an
argument that our duplicity might be defensible in a utilitarian ethical
framework, but the small financial benefits that would accrue to New Zealand
would be far outweighed by the wider harm such behaviour would do, particularly
when it was discovered. All people
contribute to climate change, and none can be exempt from contributing to a
solution without endangering global efforts to solve the problem. New Zealand is also vigorous in its efforts
to contribute to global climate change negotiations, and duplicity undermines
our credibility.
Our climate
change policies are failing (Mason, 2013). New Zealand’s greenhouse gas
emissions per capita are fifth highest in the world at approximately 18 tonnes
of CO2-e (source: NZ Ministry for the Environment). Our gross greenhouse gas emissions grew by
22% between 1990 and 2011 (source: UNFCCC), and our net emissions (gross
emissions minus sequestration by forests) grew by almost 100% during the same
period (Source: NZ Ministry for the Environment, although sources differ substantially
on this estimate). We met our Kyoto
obligations during the first commitment period only because we agreed to get
our net
emissions between 2008 and 2012 down to the level of our gross emissions in 1990.
Meeting even this soft target was a close run thing, and was only possible
because large areas of new forest planted during the 1990s sequestered enormous
amounts of CO2 during that period.
We are widely recognised as poor climate change mitigation performers
internationally, having been awarded “fossil” awards for this poor performance
in 2012 and 2015. The commentary
associated with our 2012 award was:
“New
Zealand has demonstrated exceptional blindness to scientific and political
realities.”
and,
“While
New Zealand may have helped drown the talks for another year, New Zealand's
small and vulnerable Pacific neighbours should take heart that they have not
been forgotten - New Zealand intends to drown them too.”
It is
particularly galling that our government apparently plans to use environmentally
worthless hot air credits to meet our 2020 target to reduce emissions in 2020
to 5% below 1990 levels. It is unclear whether the target is gross to gross,
net to net, or net to gross emissions, but the latter is likely, making this
yet another very soft target. Even this
soft target will be met with credits that represent no environmental gain
rather than real mitigation activities, and our net greenhouse gas emissions
will continue to rise.
If we
continue to behave in this way, we shall cement our reputation as an
international pariah on climate change. It
is only a matter of time before other countries devise ways to punish us for
our misbehaviour.
The ETS has
failed because policies have ensured that the price of New Zealand Carbon Units
(NZUs) is too low, and because sectors are treated unequally in the ETS. Figure
1 shows the spot price of NZUs since 2009.
Figure 1 –
Spot prices for New Zealand Units (Source: CommTrade)
Bogus “Hot air” credits
The price of
domestic carbon credits, NZUs, dropped substantially late in 2011 when New
Zealand began to import cheap “hot air” credits (ERUs) from eastern Europe (Mason, 2013) that represented no real
environmental gain (Figures 2 and 3) (Alessi and Fujiwara, 2011). The price of these bogus, imported credits
was as low as $0.17, and many New Zealand greenhouse gas (GHG) emitters bought
and surrendered them instead of NZUs in order to meet their obligations. Clearly such prices provide no incentive to
reduce GHG emissions or to plant trees in order to sequester CO2. Manley (2016) has modelled likely responses
of the forestry sector to varying NZU prices, and even current NZU prices close
to $10 would lead to minimal new planting.
Last year
the New Zealand government outlawed the surrendering of imported credits, and
this has led to a modest increase in the price of NZUs (Figure 1). However, that was not the only flaw in ETS
policy.
Figure 2 –
Transition in types of carbon credits surrendered under ETS regulations from
2010 to 2011. Fixed=fixed price offer,
AAU=international Kyoto assigned amount units, NZUf=NZUs generated by forest
sequestration, NZUo=other sources of NZUs (usually grandfathered to emitters),
RMU=removal units, CER=certified emission reduction units from developing
countries, ERU=”Emission reduction” units (hot air from Eastern Europe)
(Source: Ministry for the Environment)
Figure 3 – Volumes
of different types of carbon credit surrenders from emitters under ETS
regulations in 2013 (Source: Ministry for the Environment). ERUs were almost
all hot air from Eastern Europe. Note also the lack of NZU surrenders, which
led to a giant hoard of thin air NZUs in our registry that had been gifted to
companies for “allowed emissions” of GHGs.
Agriculture and a fragmented, sector by
sector approach
New Zealand
has taken a fragmented approach to emissions trading that has greatly reduced the
ETS’s effectiveness. In particular, agriculture, which contributes almost half
our national GHG emissions has no surrender requirement and therefore no
incentive to undertake any mitigation activities. The excuse used for this
exception is that “agriculture has no mitigation options” (Hon. Tim Groser, on
several occasions), but that statement is false.
At least two
very effective mitigation options are available to the agricultural
sector. Nitrous oxide emissions comprise
a large minority of agricultural GHGs, and these can be significantly reduced
by more efficient use of fertiliser. In
addition, plenty of erosion prone land currently under grass could be planted
in trees without significant reductions in livestock numbers on our farms. With an effective ETS, many farmers would
then earn money from their mitigation activities. They currently have no
incentive to undertake either of these mitigation options.
The New
Zealand School of Forestry at the University of Canterbury has mapped
approximately 1.3 million hectares of erosion-prone land currently covered by
low vegetation that is not of significant ecological value in New Zealand. Based on an assessment of likely productivity
of this land, we have estimated that extremely large reductions in net GHG
emissions could be achieved by planting this land with a modest planting
programme of 50,000 ha/annum for the next 26 years (Figure 4). New Zealand’s
gross GHG emissions are approximately 80 million tonnes of CO2-e,
and as the Figure shows, even with this small amount of land afforested (New
Zealand’s land area is 27 million ha), our nation could be completely GHG
neutral during some years.
Currently much
of this land is owned by farmers, and we anticipate that farmers would profit
from afforesting only erosion-prone portions of their land, but they need an
incentive to do so.
Note that
according to Manley’s (2016) analysis a 50,000 ha/annum
planting programme would require an NZU price of approximately $50. However, with a lower price of $20/NZU we
could see 20,000/annum afforested which would greatly assist us in meeting our
international obligations. Note also
that at a price of roughly $35/NZU, a “plant and leave” option (Figure 4)
becomes much more likely.
Figure 4 –
Projected rates of carbon sequestration per annum from planting 50,000 ha/year
for the next 26 years, with a variety of species and management options on
erosion-prone land in New Zealand. Year zero is the year when planting 50,000
ha/annum begins.
We
anticipate that radiata pine planted and left on most of this land would
eventually revert to native forest, so long as local seed sources were
available (Forbes et al., 2015a; Forbes et al., 2015b; Forbes et al., 2016).
Mason & Morgenroth’s study of carbon forestry potential on erosion-prone
land has been described more fully at:
http://euanmason.blogspot.co.nz/2016/04/potential-for-carbon-forestry-on-highly.html
Afforesting
erosion-prone land (Figure 5) confers other benefits; less loss of topsoil, and
also lower siltation of more valuable, flat land downstream during major storms
(Marden and Rowan, 1993).
Figure 5 –
Erosion-prone farmland that would be protected if forest was re-established on
it
Clearly the
agricultural sector could make a large contribution to mitigating its own GHG
emissions, but it has no incentive to do so with current ETS policies.
Hill-country farming would become more profitable if farmers were encouraged to
engage in carbon forestry on their eroding lands, and competition for land
between carbon forestry and farming is unbalanced while agricultural greenhouse
gas emissions remain unpenalised.
Recommendation: Agriculture should be
brought into the ETS immediately, and all sectors should be treated equally in
the scheme
Bringing
agriculture into the scheme would not solve the ETS’s problems on its own.
There are several other issues that need to be sorted out.
Grandfathering of credits
We can make
rapid progress at mitigating climate change by adopting the simple principle
that those who emit GHGs should either sequester them or pay other people to
sequester them. This principle has been
undermined by ETS policies.
The
government has engaged in a practice labelled “grandfathering”, where polluters
are given credits for “allowed emissions” up to a portion of their actual
emissions and then they have to surrender credits for 100% of their emissions. Grandfathered credits represent no cleaning
of the atmosphere and flood the credit market with credits that are at least
50% as bogus as “hot air” credits from Eastern Europe (Mason, 2013). They also impose awkward administrative
difficulties, requiring people to assess “additionality” of climate change
responses, and such judgements can at time appear rather arbitrary and costly (Valatin, 2012).
The Kyoto process
also adopted grandfathering and it has encouraged people to think irrationally
about what it means to be “GHG neutral”.
For instance, “Greencarbon”, a company devoted to measuring and
brokering carbon credits, runs a New Zealand website (http://www.greencarbon.co.nz/certification-overview/step-3--purchase-carbon-credits, accessed on November 29th
2012). A quote from that website is as
follows:
“A wind
farm provides electricity from wind, a plentiful renewable source. Carbon
Credits are awarded for the carbon emissions that have been avoided as compared
with electricity generation by burning fossil fuels.
The Te
Apiti Wind Farm by Meridian Energy is located in the lower North
Island of New Zealand. It is a 90MW wind farm made up of 55 Vestas 1.65MW wind
turbines. The wind speeds at the site are on average 9.3 m/s giving an annual
output of over 325 GWh. The wind farm reduces GHG emissions by
approximately 203,125 tCO2e/year....
.... In
order to be able to promote your business as 'Carbon Neutral', and earn the
label of 'Green Carbon: Carbon Neutral Certified', you must first
Measure your carbon footprint, Reduce your emissions where possible, and then
purchase and retire the correct amount of carbon credits.”
These quotes are
typical of those engaging in carbon trading.
The idea is that we can claim “GHG neutrality” or “carbon neutrality” by
purchasing carbon credits to offset our emissions, but purchase of credits
derived from lowering pollution below the level of a free allocation
(essentially a kind of domestic emission reduction unit) does not confer GHG
neutrality. This can easily be seen by
using the example above. Suppose an
energy company generated enough domestic ERUs through wind power generation to
reduce its GHG emissions to exactly half of its free allocation of credits (In
the NZ ETS, some companies get an allocation of free NZUs that means they are
allowed to pollute without penalty up to a certain level). It could then use the credits it generated to
account for its remaining emissions and claim to be GHG neutral even though it
was still emitting 50% of its original allowed GHG pollution. This kind of
irrationality arises from the Kyoto concept that we need only reduce emissions
down to our level of gifted credits, and below that level we can sell credits
that have been “grandfathered” to us as “allowed” emissions. The energy company could be said to have
reached some kind of target if it reduced its GHG emissions to 50% of its
allowed pollution, but it is irrational to reward it with sellable credits that
people can use to claim “GHG neutrality”. Unfortunately this irrationality has
contributed to the undermining of New Zealand’s emissions trading scheme. Only credits derived from sequestering GHGs
in sinks can be sensibly used to confer GHG neutrality on purchasers’
activities, and these credits are an important key to changing the way we live
and solving the problem of climate change.
Grandfathering
of credits for allowed emissions also contributes to inflation of our carbon
credit currency. Credits created from
thin air and grandfathered for allowed emissions increase the number of bogus credits
in circulation, and although they theoretically should be surrendered to
government, effects of any slop in emission/sequestration measurement, or any
schemes such as arbitrage with imported credits are amplified by these
excessive numbers of credits.
Recommendation: Grandfathering should be
stopped. Instead, polluters should
be required to surrender credits only for emissions beyond their allowed levels
of pollution within any given time period.
Credits as a commodity
Carbon
credits are a currency that should be used to secure the least-cost way of
meeting our climate change mitigation targets.
If it is cheaper or more expensive to pollute and then clean the
atmosphere by sequestration than to reduce pollution, then credit prices will
reflect this. Unfortunately much carbon trading has been speculative and some
people have seen carbon trading as a means to make money by doing nothing of
value. They simply clip the ticket and
extract value as credits pass through their hands. This means that relative values of
sequestration versus pollution reduction are improperly valued by the currency,
leading to poor market outcomes. At an
extreme, an individual could amass a large proportion of credits and
effectively control marginal prices by selling only a few at a time. This would result in volatility which is a
disincentive for long-term sequestration activities such as forestry because it
increases people’s perceptions of risk.
Speculators profit from price volatility, whereas a stable credit price
will promote long-term investments in sequestration.
Recommendation: The credit market should be
structured to maintain a stable credit price so as to promote long-term
sequestration activities. This means, as
much as possible, removing middle-men and allowing transactions only between polluters
and sequesterers.
Random gifting
From time to
time the government has randomly gifted “thin air” credits, that represent no
environmental gain, to entities or people whom they wish to encourage or
mollify. These credits represent no
cleaning of the atmosphere and are of no greater value than Eastern European
“hot air credits”. Such gifts are very
tempting for a government because they enable a “reward” to be delivered
without any immediate impact on government accounts. Gifts include allocations of credits to a
power company for building a wind farm (the reward for a wind farm is power
generation that requires no credit surrenders, hence these credits were a
double payment), or an allocation of many millions of credits to pre-1990
forest owners to partially account for losses in land value (suffered when they
were forbidden to generate sequestration credits but were required to surrender
credits for emission of carbon stored in trees when land use changed). In this latter case any compensation should
have been in cash, but a more rational approach would have been to treat all
forest equally irrespective of the date of forest establishment. Gifting thin air credits floods the ETS with
credits that represent no environmental gain and so contributes to credit
currency inflation.
Recommendation: Random gifting by
government should be illegal.
Managing the price of New Zealand Units
Currently
the most effective sequestration activity is new forest establishment, a long
term investment which requires a stable credit price. Perceptions of risks of future credit price
increases dissuade people from establishing carbon forests. This is because, quite rightly, when trees
are harvested carbon foresters need to surrender credits to account for losses
of carbon storage. Policies that stabilise credit prices will greatly improve
the ETS as a tool for meeting our international obligations because
sequestration investments will be seen as less risky.
We should
arrange for independent management of the value of our NZU currency just as our
independent Reserve Bank carefully manages the integrity of our dollar
currency, except that instead of using the official cash rate, an independent
agency would foster the integrity of NZUs by managing percentages of emissions
for which credit surrenders would be required. An annual five per cent decline
in our net emissions, for instance, would see New Zealand GHG neutral within 20
years. The agency’s job would be to meet such a target by manipulating
percentages of emissions for which credits are required across all sectors on
an annual basis. Just like the Reserve Bank, the agency would have to use clear
and open processes to ensure minimal surprises.
Moreover, oversight by such an agency would reduce the likelihood of ad hoc political interference in the
ETS. Credit price stability would vastly improve the effectiveness of the ETS.
Recommendation: Require credit surrenders
only for emissions above allowed caps, and have an independent agency such as
the Reserve Bank held responsible for setting yearly caps to stabilise the
credit price at a level that sets us on target to meet our international
commitments.
Dealing with the hoard of credits in our
registry
ETS policies
allowed many emitters to receive grandfathered, thin air NZUs from the
government to cover portions of their emissions (up to 90% in the case of
“trade exposed” industries), and their natural reaction has been to hoard NZUs
and surrender hot air credits instead (Figure 3). Hoarding has led to a giant mountain of more
than 140 million NZUs in the registry that emitters can use to continue to emit
GHGs, an amount equivalent to roughly four years of surrender obligations with
current policies. This hoard threatens to undermine the ETS at least until
early in the 2020s. There are a number of ways that we might deal with this
problem:
1. The
majority of credits in the hoard were grandfathered to companies for “allowed”
emissions, and then those companies chose to buy and surrender hot air credits
from the Ukraine or Russia because they were cheaper than NZUs. This violated
the spirit of “grandfathering”, and so one solution is to forcibly buy back the
NZUs at a price that is only slightly larger than the purchase value of the hot
air credits that replaced them (to allow for a reasonable return on purchase
price). Each credit has a pedigree and
so it should be feasible to apply this solution fairly. That way the original intent of
grandfathering will have been met.
2. The
Reserve Bank or other ETS controlling agency could greatly increase the levels
of emission reductions that are required in order to deplete the hoard more
rapidly. This option runs the risk of price volatility because it will take
some time for the agency to learn to stabilise the credit price. It also runs
the risk of unfairly penalising those who did not engage in hot air credit
substitution.
3. We could
do nothing about the hoard, but this means that we’ll further delay action just
prior to a decade when our national net emissions are predicted to increase
markedly due to harvesting of forests planted during the 1990s.
Recommendation: The government should buy
back NZUs that were grandfathered and then substituted by hot air credits at
prices that reflect the purchase price of hot air credits.
Making a change to a carbon tax
It has been
suggested that we might abandon the ETS and instead operate a tax on greenhouse
gas emissions. I am all for anything
that solves the problem, but I do not believe that this is a viable solution
while simple changes to the ETS can be made that will make the carbon market
work properly. My reasons are:
1) The ETS
has been carefully designed and many people have participated in it. These people will be unfairly penalised if we
abandon the ETS. In order to make the change some kind of buy back of NZUs or a
temporary substitution of NZUs for tax would be required. This would increase the likelihood of gaming
and it is hard to see how the change might be made fairly.
2) The
infrastructure for the ETS is already in place, and a carbon tax would take a
very long time to be firstly politically agreed upon and secondly
designed. This would further delay our
national response to climate change. Substantial numbers of voters dislike tax,
and it is hard to see this proposal being politically feasible in a short time
frame.
3) Tax money
would accrue to government rather than to sequesterers who were cleaning the
atmosphere of pollutants. This means that the principle of finding a least-cost
solution would be violated. Moreover,
even if carbon tax receipts were tagged for use by sequesterers, there is a
long history of tagged taxation being appropriated into consolidated government
accounts and used for other purposes.
The most glaring example of the latter was the appropriation of
superannuation contributions by the Muldoon government.
Summary
In summary,
we have failed so far to respond fairly to climate change and we are rightly
regarded as a pariah nation. Our
emissions trading scheme can be made to work properly if we:
•Stop
grandfathering credits
•Have no
random gifting of NZUs from Government to industry
•Apply the
ETS equally to all sectors
•Allow
trading only between sequesterers and emitters
–If you overpollute you pay someone else to
clean up
•Buy back grandfathered
NZUs that were replaced by hot air credits
•Manage our
domestic credits as a currency rather than as a commodity
–Set reduction targets each year that
stabilise the NZU price and allow us to meet international commitments
–Require surrenders only for “over target”
greenhouse gas emissions
–Plan to gradually reduce our NZU price as
the world solves the climate change problem
Euan G Mason
Professor
University
of Canterbury
References
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