Monday, February 10, 2020

Open letter to Hon James Shaw, minister for climate change issues

Dear Hon James Shaw,

Yesterday I presented to the Parliamentary Select Committee on the Emissions Trading Scheme amendment bill. I pointed out that the Kyoto process has failed to halt a continuing rise in anthropogenic emissions, and that our ETS has so far failed to arrest a continuing rise in New Zealand’s emissions.

The common element in these failures is the creation of fraudulent credits that have no environmental credibility and cannot confer GHG neutrality on polluters who purchase them.  For details, please see

The response from committee members was to apparently acknowledge the validity of my argument, for which I’m grateful, but also to invoke a “leakage” argument in defence of plans to continue manufacturing and allocating fraudulent credits to polluters. 

The leakage argument is barely better than the “we are too small to matter” argument. Essentially it says, “We cannot afford to have an effective ETS because nobody else does”. Clearly if all nations adopt this argument, then the problem of anthropogenic climate change will not be solved. 

Moreover, do we have an ETS in order to simply appear to be making progress towards our GHG neutrality by 2050 target, or to really, truly get to our 2050 target? As outlined in my submissions, we can get to our target if we wish, but if we adopt an ETS structure that encourages investment in polluting enterprises for the sake of short term expediency then we are choosing not to meet out target.

Kind regards,
Euan Mason

Monday, January 13, 2020

Submission on the Climate Change Response Emissions Trading Reform amendment bill

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 and a book chapter 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.


Our greenhouse emissions trading scheme (ETS), and almost all others internationally, are based on deeply flawed logic and so it is unsurprising that humans are failing to address the problem of climate change. An alternative, logical approach is available that would allow us to effectively plan to meet emissions reduction targets in the most efficient ways that people can devise. Unfortunately proposed amendments to our ETS in this bill will not fix its underlying problems. Much more radical changes are required if we wish to meet our emissions reduction targets. This submission outlines why cap and trade schemes are failing and proposes an alternative approach that has far more environmental integrity.


In previous submissions I outlined New Zealand’s emissions and the failure of our ETS to make any substantial difference to our greenhouse gas (GHG) emissions. Our net emissions increased by 54 % between 1990 and 2016, with agricultural and the energy sectors contributing 49% and 40% of emissions respectively (MfE, 2018). Our gross GHG emissions are approximately 80 million tonnes of CO2-e. Clearly our emissions trading scheme (ETS) has failed so far, and so we need to change it. The climate change amendment (zero carbon) bill may result in positive change along with additional mechanisms for New Zealand’s climate change response.

The ETS was touted as a “cap and trade” scheme, where a cap on allowed emissions is supposed to be gradually reduced over time, and emitters are “grandfathered” carbon credits, called “New Zealand Emission Units” (NZUs) for their allowed pollution which they either submit each year or, if they reduce their pollution below the cap, they can sell. The price of NZUs dropped substantially late in 2011 when New Zealanders began to import cheap “hot air” credits (ERUs) from eastern Europe (Mason, 2013) that represented no real environmental gain (Alessi & 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.  In 2015 the New Zealand government outlawed the surrendering of imported credits, and this has led to a modest increase in the price of NZUs.  However, that was not the only flaw in ETS policy, and some of those other flaws are outlined in this submission.

The case for New Zealand taking action

Few of us are equipped to understand global climate models, and so we rely on the integrity of the world’s climate modellers. I have yet to hear any convincing argument that their integrity is suspect or that their reasoning is flawed, but I am no expert on climate change models, and so I write this under the assumption that we have an urgent problem with anthropogenic emissions of greenhouse gases, particularly CO2, CH4 and N2O. Generally, on a 100 year time horizon, CH4 is considered to be about 24 times more potent as a greenhouse gas than CO2 and N2O is rated as 298 times more potent than CO2. If we use a 20 year time horizon, CH4 is about 84 times more potent than CO2.

Some people argue that because New Zealand has a small population we should not take action because reducing our emissions will have minimal physical impact. The fallacy in this argument is of course that any population of 4.5 million people could make the same claim, yet we all contribute to the problem. Moreover, most groups of 4.5 million people around the world emit less CO2-e (CO2 equivalents) than New Zealand does. A third reason why this claim is silly is that our example may speak far more loudly and have a bigger impact on behaviours of other countries than our proportion of global population.

Agriculture and a fragmented, sector by sector approach

To translate our international commitments into domestic action, we have created an emissions trading scheme (ETS) that is meant to be a cap and trade scheme, but it does not operate like a cap and trade scheme and its design has so far led to failure.

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 credit surrender requirement and therefore no incentive to undertake any mitigation activities. The bill proposes to bring agriculture into the scheme, which is good, but also to delay any price on agricultural emissions until 2025 when only a tiny fraction of agricultural emissions will not attract a free allocation of fraudulent credits (see below), which is too little, too late, and too ineffective.

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 activities.

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 policies, and very little incentive with the proposed amendments. Hill-country farming would become more profitable if farmers were encouraged to engage in carbon forestry on land that is relatively unproductive for agriculture, and competition for land between carbon forestry and farming is unbalanced while agricultural greenhouse gas emissions attract virtually no penalty.

Methane is about 84 times worse than carbon dioxide as a greenhouse gas, but it has a much shorter life in the atmosphere. Currently the international community prefers to handle this by adopting a 100 year time frame and reducing the relative effects of methane accordingly. Until such time as we can convince the international community to change its approach to methane pollution we should retain the current international accounting scheme for it.

Recommendation: Agriculture should be brought into the ETS immediately, and all sectors should be treated equally in the scheme. All GHGs should be treated the same under 100 year estimates of CO2-e.

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.

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 fraudulent 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 should be that wind power 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.

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. Kyoto has the same problem. Almost all countries are meeting their Kyoto commitments, and yet anthropogenic greenhouse gas emissions continue unabated.

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 some of their emissions.  The extent of grandfathering has reduced recently, but “trade-exposed” industries still receive credits for up to 90% of their emissions, and some others receive credits for 60% of their emissions. Agriculture will receive grandfathered credits for almost all its emissions under the proposed amendments. Grandfathered credits represent no cleaning of the atmosphere and flood the credit market with credits that are as bogus as fraudulent “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).

Irrationality of grandfathered versus forest-based credits

In a well-functioning emissions trading scheme, polluters would have to submit credits in order to be allowed to pollute, and they would purchase credits from those who cleaned up their pollution.  So if the cost of cleaning was higher than the cost of reducing pollution in the first place then they'd choose to reduce emissions. Either way the atmosphere would not receive any more GHGs and purchasers of carbon credits could rightly call themselves "greenhouse gas neutral".

However, that's not what's happening.  If a polluter reduces their pollution below the cap then they can sell grandfathered credits. They also assert that purchasers of their credits can claim to be "greenhouse gas neutral". They are wrong.

There are many ways to explain why they are wrong.  You could use stories, mathematics, graphs or even children's blocks. Let's use the latter.

Blocks below represent levels of greenhouse gas in the atmosphere and levels planned to be emitted by two polluters.

Figure 1

Then polluter 2 opts to no longer pollute and has grandfathered carbon credits for sale. Polluter 1 purchases those credits and is allowed to pollute. The result is more greenhouse gas in the atmosphere, as shown below.  Polluter 1 clearly cannot claim to be "greenhouse gas neutral".

Figure 2

So, what kinds of credits can confer greenhouse gas neutrality on a purchaser? Let's reach for the blocks again.  In this case, we have the atmosphere, a potential polluter and someone who will take greenhouse gas from the atmosphere (maybe using new trees, a scrubber, or perhaps by seeding the ocean with iron to promote plankton); a sequesterer.

Figure 3

The sequesterer receives carbon credits for removing greenhouse gasses from the atmosphere. They are purchased by the polluter, who then goes ahead and pollutes, but the amount of pollution is exactly equal to the amount of sequestration and so the result is shown below:

Figure 4

Clearly, the atmosphere gains no new greenhouse gas and the polluter can now claim to be greenhouse gas neutral.

It is generally much cheaper to do nothing than to extract greenhouse gasses from the atmosphere. If we allow people to sell carbon credits for simply reducing outputs of greenhouse gas, we effectively pay them for nothing, and it takes much longer for emissions trading schemes to work because few will engage in activities that extract greenhouse gasses from the atmosphere.

A further problem with forestry in cap and trade schemes

Cap and trade schemes are meant to work by limiting the availability of credits to a known volume, but each credit earned by forestry potentially adds to the level of the cap. One could argue that the cap applies to “net” rather than “gross” GHG emissions, and so forest-based credits could be considered to be “net cap neutral”, but this begs the question of how to deal with the fundamental difference between forest-based credits and fraudulent credits manufactured from thin air by government, as outlined above.  Our current scheme is essentially irrational with respect to forest-based credits.

Recommendation: Grandfathering of carbon credits should be abolished, and people should be liable for credits only to the extent that they fail to meet their emission reduction targets (see below).

Some solutions

There are a couple of ways to deal with this irrationality.

Option 1

Exclude forest-based credits from the ETS and find other ways to encourage new forest establishment, such as greatly expanded forestry encouragement grants. This option would probably be unpopular with forest owners already engaged in earning NZUs.

Option 2

Abandon the idea of a cap and trade scheme, and redesign the scheme so that polluters who purchase NZUs are truly GHG neutral.  This might be achieved if we:

       a) Stop grandfathering credits
       b) Have no random gifting of NZUs from Government to industry
       c) Apply the ETS equally to all sectors
       d) Set emission reduction targets each year that stabilise the NZU price and allow us to be on track to meet our international commitments
       e) Require credit surrenders each year only for “over target” greenhouse gas emissions
       f) Allow trading only between sequesterers and emitters
o   If you overpollute you pay someone else to clean up
       g) Manage our domestic credits as a currency rather than as a commodity
       h) Plan to gradually reduce our NZU price as the world solves the climate change problem

In this way the “target” emission % of existing emissions becomes the cap, and reducing the % gradually would see us meet our national targets in a planned fashion. Unlike a normal cap and trade scheme, no fraudulent “thin air” credits are given to polluters, and so real credits retain their value.

The second option would be unpopular with carbon credit traders, but they contribute very little to solving the problem of climate change.

Note that had the Kyoto Protocol adopted a similar scheme to the one outlined above, then there would have been no fraudulent credits for New Zealanders to import.

Some other ETS issues

Auctioning of credits

Auctioning credits made out of thin air that represent no environmental gain (see above), will undermine forest-based credits that do represent environmental gain. We are setting ourselves up to have two kinds of credits:

         1) Credits earned by sequestering GHGs from the atmosphere; and
         2) Fraudulent credits that represent no environmental gain and which can be made from thin air at the whim of government.

By treating these two kinds of credits as a common currency we shall undermine efforts to create credits that really have environmental integrity, because it is far cheaper to manufacture credits out of thin air and governments are extremely prone to persuasion by lobbyists.

International credits

International credit schemes vary hugely and have many of the same irrationalities as our old ETS. So far allowing international credits in our scheme has been catastrophic, and I have little confidence in our collective ability to distinguish between bona fide and fraudulent credits.  We should not allow international credits in our domestic scheme.

The case for using forests as a short-term mitigation option

The government has initiated a “one billion tree” programme to jump start the planting of new forests in New Zealand. New forests are sinks for CO2, while old forests are reservoirs or even sources of CO2 emission. The means that establishing new forests can only be a temporary solution to climate change. The rationale for New Zealand’s ambition to plant new forests is therefore to create sinks which would fill a gap in our carbon accounts during the middle part of this century (assuming we wish to keep our commitment to GHG neutrality by 2050) while we simultaneously adapt our economy to reduce gross GHG emissions.

The gap in our accounts

In March 2017 Vivid Economics published a report commissioned by a cross-party group of parliamentarians outlining alternatives for New Zealand’s responses to climate change (Vivid Economics, 2017). Several pathways to GHG neutrality were outlined in the paper, but the most feasible one, called the “innovative scenario”, would get us to GHG neutrality by 2080 at the earliest unless forests were used to fill a large gap in net GHG emissions. Evison & Mason (in prep) have identified a way to fill this gap using forests as temporary sinks.  The gap is shown in grey in Figure  5 below. GHG emission/year in millions of tonnes are on the y-axis and years are on the x-axis. The blue line shows the innovative track of gross emissions, extended to 2080, and the orange line is our desired pathway.

Figure 5

The area under the grey line represents 1432 Mt of CO2-e.

Using an estate simulator, a tree planting programme was designed that filled this gap, using approximately 1.75 million ha (for reference, the area of New Zealand is approximately 27 million ha). It involved establishing radiata pine, 75% of which was assumed to be harvested periodically and 25% was permanent carbon forest. The area was planted over a span of 28 years. The Figure below shows the estimated impact of programme.

Figure 6 – Sequestration impact of planting 1.75 M ha of radiata pine forest over 28 years

In Figure 6, the red line shows the gap in our accounts, while the black line is the sequestration of CO2 by the new forest.

By contrast, if the 500,000 ha of new forest under the “billion trees” programme was established in radiata pine, the sequestration effect is estimated to be as shown in Figure 7 on the next page. Clearly 500,000 ha of new trees would not be enough to fill the gap and new initiatives are required. As shown in Figure 8 on the next page, planting 50% of the new area in native forest and 50% in radiata pine forest would not be as effective.

Figure 7 - Sequestration impact of 500,000 ha of new radiata pine forest over 10 years

Figure 8 – Sequestration impact of planting 250,000 of pine and 250,000 ha of native forest over 10 years
The case for exotic tree species

Many imported species grow and sequester CO2 much more rapidly than native species within the time frames required to meet our target. Radiata pine has been chosen as an example for the following reasons (although other species such as dryland eucalypts might do the job equally well or even better in some cases):

   1) It grows rapidly and sequesters C at a much higher rate than native species. Between 2008 and 2012, our national carbon accounts indicate that radiata pine planted after 1990 sequestered at an average rate of 34 tonnes of CO2-e/ha/year, and rates might be even higher with silvicultural regimes aimed at maximising value from sequestered carbon credits. By contrast, estimated rates of sequestration for native species are often below 10 tonnes of CO2-e/ha/year during the years following forest establishment (Scott et al., 2000; Trotter et al., 2005), and the slower development of young native stands would mean that they would take longer to begin any effective sequestration. In older indigenous stand higher rates have been reported on some sites, but not near the rates typical of radiata pine. To be fair, studies of native forest sequestration are uncommon, but we can also get an idea of relative sequestration rates by comparing the more numerous reports of growth rates of stems of various species (Pardy, Bergin, & Kimberley, 1992; Silvester & McGowan, 1999), and native species typically take 3-4 times longer to reach equivalent volumes of radiata pine plantations at harvest.
          2) We are experts at producing seedlings for exotic species and they are cheap.  
                 3) Radiata pine will grow on a wide range of sites and we understand how to establish it on diverse sites, despite its sensitivity to shade and frost. 
          4) Radiata pine is not a high country wilding risk (Ledgard, 2008).  It is very intolerant of both shade and frost, and would only seed naturally on moist lowland areas where adjacent land was not intensively grazed (which is a rare condition in New Zealand). Our wilding species are commonly other, more hardy imports, such a P. contorta, P. ponderosa, P. nigra and Douglas fir. These wilding risk species should be avoided in carbon forests.
          5) On warm, moist sites (either medium or high productivity categories), it would act as a nurse crop for native forest, and the C reservoirs we establish would ultimately change to become native forest so long as seed sources were available in the local vicinity (Figure 9). Understoreys of native vegetation are common in plantations on such sites (Brockerhoff, Ecroyd, Leckie, & Kimberley, 2003; Ogden, Braggins, Stretton, & Anderson, 1997). This issue has been much studied by a PhD graduate from the School of forestry named Adam Forbes (Forbes, Norton, & Carswell, 2015a, 2015b, 2016). In order for native forest to regenerate under pines local native seed sources are essential.
S       6) Studies suggest that radiata pine will continue to sequester carbon for up to 100 years on some sites (Woollons & Manley, 2012), but we have assumed 60 in this analysis.  This means that the forests would remain as sinks for some considerable time.

Figure 9 - Forest biomass dynamics after introducing the exotic pine species Pinus radiata to the native species pool. Dynamics are modeled for a site near Christchurch, New Zealand. Species aboveground biomass is cumulative. "Kunzea and Leptospermum" include the early colonizing species K. ericoides and L. scoparium. "Others" include the species Griselinia lit- toralis, Pittosporum eugenioides, Aristotelia serrata, Elaeocarpus hookerianus, Fuchsia ex- corticata, Nothofagus fusca, and N. solandri var. solandri Figure from Hall (2001).

Recommendation: New Zealand policy should encourage the establishment of radiata pine and other selected exotic species as permanent carbon forests, with the proviso that for every 10 ha of exotic species, 1 ha of local native stands are either identified or established to act as seed sources for the gradual succession to native forest as carbon reservoirs.

Price ceiling

According to Manley’s (2016) analysis a 50,000 ha/annum new forest planting programme (anticipated in the “one billion tree” programme) would require an NZU price of approximately $50. Moreover, radiata pine planted and left on erosion-prone land would stabilise the land  (Marden & Rowan, 1993), and would eventually revert to native forest, so long as local seed sources were available (Forbes et al., 2015a, 2015b, 2016), but this requires a credit price of at least $35 according to Manley. Setting a price ceiling on “thin air” credits manufactured by government and that have no environmental credibility, would reduce the likelihood that afforestation would contribute to climate change mitigation.

Forest “averaging”

As we have adopted the “averaging” proposal for forestry, then to be consistent those who own pre-1990 forests should be liable for only the “average” C content of their production forests when they change land use.  This would eventually remove the requirement for two categories of forest land under the ETS.

Look-up tables for forest sequestration of GHGs

Current lookup tables are pessimistic for many exotic species while being optimistic for the years immediately following planting of native species. This is misleading people about the viability of meeting our international commitments by planting slow-growing native species. The tables should be consistent across species.

Harvested wood products

The benefits of storing carbon in wood products should be equitably shared between growers of forests and users of wood products, so that people are encouraged to use wood instead of GHG-intensive alternatives.

Euan G Mason
University of Canterbury