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.


Robin Johnson's Economics Web Page said...

Good point Euan. I had not realised that 90% free allocation to agriculture (even with 50% compulsory use of NZUs) just gives agriculture the option to profit from arbitrage. Labour are being disingenuous in saying their policy can provide an effective price on GHG emissions. There's no 'fix' to the NZETS except shutting out the international hot air units and adopting a GHG cap.
I predict you will get a "can't let the perfect be the enemy of the expedient" lecture from Moana Mackey!

Euan Mason said...

Hi Robin,

Yes, after talking with Moana Mackey it seems that there is much that is expedient about Labour's policy, but she is also clearly committed to getting the policy right and having NZ contribute to the solution, which is good to hear. The 50% NZU requirement was originally intended to allow links with the European and (now defunct) Australian schemes. I read that Europe may buckle and allow eastern European hot air, and so this clearly needs reconsideration.

One valid point she raised is that after May ERUs may not be allowed in our scheme. I agree, but the prospect of auctioning NZUs after May makes me shudder - it's basically the equivalent of printing excess money and driving inflation in our NZU currency. Labour's policy is silent on this.