Tuesday, September 14, 2021

Submission on the proposed industrial allocations review in New Zealand's emissions trading scheme, 2021

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 chapter in a textbook 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.


Industrial allocations (IAs) to prevent “leakage” are problematic. Not only do they undermine incentives to prevent pollution in Aotearoa, but they open the door to gaming our emissions trading scheme (ETS). They also rely on an argument that is barely better than the “we are too small to matter” argument.

Undermining incentives

When we allocate an IA to a greenhouse gas emitter, we are allowing pollution to occur in Aotearoa for fear that it might otherwise occur somewhere else. This runs counter to our stated goal of preventing greenhouse pollution in Aotearoa. Employing IAs means we are much less likely to meet our climate change targets, partly because a greenhouse gas polluter is allowed to add to our emissions, but also because the entire ETS is seen to be unfair and arbitrary. IAs make a mockery of the process. We can all clearly see that if we are economically important enough or can afford to make a “convincing” case to government officials then we do not have to contribute to the process. Other participants will believe that they are carrying an unfair burden in the ETS, and they will be right in that belief. The heaviest burden will fall on smaller enterprises who cannot afford to devote time to making a special case to the crown. This undermines the whole scheme.


The most blatant example of gaming with IAs occurred when enterprises received NZUs as IAs and then purchased cheap, fraudulent credits to submit for their “allowed” pollution instead of the allocated NZUs. The difference in price between NZUs and imported credits meant that they were essentially paid millions of dollars for being polluters. While the crown may argue that imported credits are no longer acceptable in the ETS, the real lesson from this incident is that any arbitrary complication in our ETS rules opens the door for gaming that undermines the process. IAs are an unnecessary, arbitrary complication.

The argument

The “we’re too small to matter” argument says that greenhouse gas polluters should be allowed to pollute in Aotearoa because Aotearoa contributes such a tiny proportion of global GHG pollution that our stopping pollution will not solve the problem. It is a facile argument, because any group of 5 million people anywhere in the world could make the same claim, and then the climate change problem would remain unsolved. We all need to contribute.

The argument for IAs is similar. It says that we cannot stop emissions-intensive and trade-exposed industries (EITEs) from emitting greenhouse gasses for fear that they might emit somewhere else. This is a facile argument. If all countries adopt this rationale then all emissions-intensive and trade-exposed industries would be allowed to pollute everywhere, and the problem would not be solved. We all need to contribute, and we need to trust that other countries will limit pollution from EITEs along with us. If they do not, then their greenhouse gas accounts will suffer and they will deserve the criticism and ultimately sanctions that the rest of the world will inflict on them.

Some EITEs argue that if they operated elsewhere then they would pollute more in those other places, or that if they ceased operating here then this might enable dirtier operators to continue polluting elsewhere. They may support this argument with a study of greenhouse gas pollution from their operations in Aotearoa compared to those from operations overseas. However, overseas studies do not always agree with their assessments. Moreover, effectively excluding them from the ETS by using IAs provides absolutely no incentive for them to become less emissions-intensive. Furthermore, this argument is based on an assumption that other countries will not provide incentives for these industries to reduce emissions, when in fact they are very likely to do so.  Do we really wish to become a haven for emissions-intensive industries?


The crown should immediately cease all IAs to EITEs, and instead work towards ensuring equity for, and commitment from ETS participants. This will do far more to enable Aotearoa to meet its climate change commitments than any tinkering with a problematic, unfair, and ultimately counterproductive ETS complication.