Emissions detail lost in the fog
Govt statement fails to provide clarity on many of the big questions
Into the fog of uncertainty shrouding the future of the Emissions Trading Scheme, Climate Change Minister Paula Bennett has blown the gentlest of puffs. Most of the long-awaited outcomes announced on Wednesday, flowing from the Government’s review of the ETS, are decisions in principle, bereft of numbers and with vague timeframes about when essential implementation details will be forthcoming.
No changes to the demand side of the carbon market are proposed.
That means the majority of New Zealand’s greenhouse gas emissions will continue to be exempt from a carbon price — in particular, the emissions of methane and nitrous oxide from pastoral farming (nearly half the national total). That entrenches the de facto subsidy to farmers that gets capitalised into land prices, so that someone selling a farm gets a higher tax-free capital gain while the buyer gets a larger mortgage.
The Government also plans no change, until at least the end of 2020, to the free allocation of units which exempts 90 per cent of emissions from emissionsintensive, trade-exposed plants like the Glenbrook steel works and the Tiwai Point aluminium smelter from a carbon price.
Unless policy changes, between them, those carveouts from the ETS would mop up 93 per cent of New Zealand’s “carbon budget” for the 2020s: the amount we are allowed under the Paris accord – just under 600 million tonnes.
The trouble is that the Government estimates that under current policy settings, the country’s gross emissions will be 37 per cent, or 220m million tonnes, higher than that.
That excess will have to be covered either by credits generated by some large and rapid expansion of the forest estate – unlikely, as it is currently shrinking and forests are set to flip from being a net sink to a net source of emissions – or bought from the rest of the world – except that at the moment there are no obvious places to buy them.
On the supply side of the ETS, the main source of supply is currently the backlog of banked New Zealand units which were crowded out of the market in the years when emitters were allowed unfettered access to the international Kyoto markets and able to meet their obligations with cheap, environmentally dubious imported credits. That ended two years ago.
But the liquidity provided by the backlog of banked units is uncertain, as many of those who hold them also have future surrender obligations under the scheme and might opt to just leave them in the bottom drawer.
So the Government has decided in principle to introduce auctioning of NZUs by 2021.
It will set out the limits on how many units it will offer for auction on a rolling five-years-ahead basis.
But at this stage there is no indication of what those numbers might be. It will be informed, we are told, by work the Government has commissioned from the Productivity Commission on how to meet the 2030 target it signed up to in Paris.
With only 7 per cent of the national carbon budget not committed to exempting farmers and the smokestack sector, the supply of units available for the Government to auction would be increasingly constrained as the 2020s go on, unless more can be issued which are backed by internationally credible units it buys offshore.
It also proposes at some stage, and to some as-yet-unspecified limit, to reopen the ETS to imported units from some still mysterious sources offshore, subject to yet-to-be-determined procedures for ensuring their environmental integrity.
That is uncertainty to the power of four.
A recent study from the Motu think tank about how the ETS might be rendered fit for purpose is very clear that the status quo of no access to international units will continue to be the case for the foreseeable future.
While the Paris accord allows for the establishment of a new centralised international carbon market, that will take years to negotiate, especially as the largest emitting nations have indicated they do not intend to use international trading to meet their commitments.
Meanwhile, developing countries which were one source of international units under Kyoto’s Clean Development Mechanism now have their own commitments to meet.
The alternative of bilateral linkages with other emissions trading schemes is a bad idea, even if willing partners could be found, as New Zealand would inevitably be a price taker in a market designed to meets someone else’s climate goals. It would be comparable to adopting some other country’s currency and monetary policy.
The other in-principle decision announced by the Government is to work on a mechanism for developing an alternative price ceiling to the fixed $25 a tonne in place now.
There is no mention of a price floor, however, which might have helped restore confidence in the forestry sector.
Instead, we are told, “more work needs to be done in the area of forestry accounting and operational improvements to reduce complexity for forestry participants and increase the efficiency of the ETS. A package of options will be developed next year with input from the Climate Change Forestry Reference Group.”
That is hardly going to have people beating a path to the nurseries with orders for seedlings. But it is typical of the “more work needs to be done but, rest assured, stakeholders will be consulted” flavour of this week’s announcements.
So where do they leave a business trying to get a handle on its future carbon risk? Largely in the dark. There is still no clarity about what the balance of supply and demand in the ETS market will look like. That makes price discovery a bit hard.
Nor is there any assurance that it will deliver on the entire point of an ETS, which is to generate a carbon price high enough and reliably expected to keep rising, so as to affect decisions on land use, on business capital expenditure and on consumer purchases in a way that reduces, ultimately to zero, emissions of greenhouse gases from these islands.