The government’s recent package of changes to the Emissions Trading Scheme (ETS) hasn’t impressed New Zealand’s leading scientists.
‘Thin air’ carbon credits with no environmental credibility will be given to polluters and also auctioned, notes University of Canterbury School of Forestry Professor Euan Mason.
“The carbon price will be suppressed and the notion of ‘greenhouse gas neutrality’ will be undermined,” he believes.
“How could you recommend to anyone to participate in New Zealand’s emissions trading scheme when the supply of bogus credits is infinitely variable?
“This is the nail in the coffin of our ETS.”
Motu Economic and Public Policy Research Policy Fellow Catherine Leining shares Mason’s concerns.
“Policy uncertainty is a powerful deterrent for efficient low-emission investment.
“Since late 2012, the NZ ETS market has had no certainty on long-term unit supply and domestic emission prices – or on how quickly New Zealand will head towards net zero domestic emissions.”
She says the government’s four significant changes to the NZ ETS will make it a “more useful tool” for helping to meet New Zealand’s emission reduction targets under the Paris Agreement.
“This package signals the mechanisms that the government will use to manage future supply and prices in the NZ ETS in alignment with New Zealand’s targets.
“It does not tell us what unit prices will be.
“The mechanisms have potential to shift New Zealand onto a low-emission pathway, but only if they are implemented well.”
Decisions needed
The current uncertainty for low-emission investors will continue until further decisions are made, Leining warns.
“At this time, the government has chosen not to implement a price floor, which would have offered a minimum return on low-emission investment and served as a price safeguard against interactions between the NZ ETS and other policies.”
Motu Economic and Public Policy Research looked at this element in a recent paper (AsiaPacific Infrastructure May 31, 2017) and she believes it would be worth reconsidering.
“Over 2021-2030, New Zealand faces a projected target gap of 220 Mt CO2eq,” Leining observes.
“The stated intention is to meet this through domestic emission reductions, forestry and purchase of international emission reductions (which at present can only be done by government and whose availability and cost are uncertain).
“Furthermore, NZ ETS participants have a sizeable bank of NZUs which will be honoured by the government.
“The government has not signalled how the cost of bridging this target gap will be allocated across ETS sectors, non-ETS sectors and New Zealand taxpayers.
“The government did affirm that current free allocation to industrial producers will remain unchanged through 2020 and biological emissions from agriculture will remain outside the NZ ETS for the foreseeable future.”
In an ETS, prices are set by long-term expectations of supply, Leining explains.
If the market expects future prices to rise significantly in line with New Zealand’s target, then there is a possibility participants will choose to bank NZUs for a future where they will have more value, and meet their obligations using the $25 fixed-price option instead.
“This poses a fiscal risk to government.
“The government’s decisions represent a crucial signalling of the direction of travel for the NZ ETS, but the ultimate effectiveness will depend on the details of implementation.”
Broad direction
University of Otago Associate Professor of Finance Dr Ivan Diaz-Rainey is slightly more conciliatory in his assessment of the proposed changes.
“The announced package provides broad brush direction of travel for changes to strengthen NZ ETS post-2020.
“The detail will come later following further work in 2018, thereby pushing much of the critical detail beyond the upcoming election.
“As we all know, the devil can be in the detail but it has to be said that that the in-principle decisions announced are to be welcomed.”
Diaz-Rainey believes the changes address many of the concerns about the scheme.
These include the need for auctioning to provide a stronger signal and to help manage the potential financial risks to the government that arise from the fact that there is hard target from the Paris agreement and an NZ ETS that is an intensity system (i.e. no hard cap).
“There is going to be a limit on importation post 2020, which is also welcome but the detail and level still need to be worked out.
“The government is also signalling that the $25 ceiling may need to be raised and managed over time.”
All the detail for the prior points are to be made joined up, managed and delivered in a manner that do not provide surprises to the market through a five-year rolling planning cycle.
The planning cycle will formalise the ability to make changes as circumstances change and is designed to provide more certainty on unit supply.
“This builds in market design flexibility in a relatively predictable way.
“Again, this is welcome in principle – it will be interesting to see more detail of how this will all work.
Cause for concern
On the less positive side he makes two points: firstly, agriculture was not part of the review but remains the elephant in the room.
“Secondly, it is completely understandable that further work is needed on the detail of the proposals announced and if this is all pretty much wrapped up in 2018 then this will give business enough time to plan for the post 2020 arrangements.
“But if it is not wrapped up by 2018 and it drags on well beyond then we are in danger of making changes that do not allow for enough planning as we approach 2021.
“It should be doable to work out the core of the detail in 2018 if there is no major political change in the Beehive after the election.
“Whether political realities allow for it is another matter.”
Meanwhile, Dr Adrian Macey, senior associate, Institute for Governance and Policy Studies, Victoria University of Wellington, highlights the future limitation on use of international markets.
“Something that has run counter to the doctrine that has prevailed so far that it does not matter where emissions reductions are made.
“But this was leading to potentially unsustainable consequences – notably the prospect of spending billions of dollars offshore with no benefit to the New Zealand economy or its own transition to low carbon.
“And it had already led to the introduction of a huge amount of ‘hot air’ into the NZ ETS through purchasing of dubious credits from Ukraine and elsewhere.
“Linked to that is the signal that government envisages intervening to ensure the New Zealand carbon price is aligned with our climate change targets.”
Previously the doctrine was that the ‘international price of carbon’ would be appropriate in NZ.
“So the potential is there for major change in design.
“These longer term implications are accompanied by a reassurance that until around 2020 it’s business as usual and no ETS participants should expect major change.”
Macey believes that the cabinet paper was “unnecessarily” redacted to suppress the reasons why it’s hard to link the New Zealand ETS with others under its present rules.
“Our inclusion of forestry is a major one; the lack of a domestic target with the resulting complete openness to international markets is another and also which countries New Zealand is engaging with over possible linking – this can be via ETS schemes or through an offset mechanism.”
Absent is an emphasis on the New Zealand long-term transition – it’s still on ‘targets’, Macey notes.
“That’s the focus of the Productivity Commission’s work but it would have been useful to state in this context.
“There’s a commitment to consult widely with stakeholders over future changes.”
