Government advised to cut the carbon credits it issues
The Climate Change Commission has recommended the Government slash the number of carbon credits it issues, to force polluters to eat faster into their existing stockpile of credits.
Climate Change Commissioner Rod Carr advised the Government its advice would reduce the risk that New Zealand missed its emissions reduction goals.
But it could have the side-effect of reducing the amount of money the Government raises through the Emissions Trading Scheme (ETS) from auctioning credits, and which it has earmarked to help pay for tax cuts.
Salt Funds director Paul Harrison said reducing the flow of carbon credits could also be expected to push up their price, the cost of which is ultimately borne by consumers.
The Treasury forecast in December that the Government could expect to net $3.5 billion from the sale of carbon credits between this year and 2028.
But Carr said ETS auctions should not be regarded as “a reliable source of income for government”.
Harrison said the advice to reduce the flow of credits was something of a surprise and put the Government in “an interesting position”, given its intention to use auction proceeds for tax cuts.
The last time the previous government ignored the commission’s advice, “the carbon-credit price tanked and they ended up in court”, he noted.
Salt manages an NZX-listed fund that allows investors to buy and sell carbon credits on the secondary market.
The ETS is designed to encourage people and businesses to reduce carbon emissions by requiring polluters buy and then relinquish a carbon credit for each tonne of carbon emissions they release into the atmosphere.
The commission’s recommendations would reduce the number of new carbon credits that would be auctioned by the Government between now and 2028 by about 20 million units, from the previously planned number of almost 54 million, to just under 34 million.
Carbon credits were trading at a price of just over $70 each yesterday morning.
Carr said alongside having too many units already in circulation, uncertainty around the Government's priorities was having an impact on market and investor confidence in the ETS.
“This is also increasing the risk that the Government will not achieve its emissions reduction goals,” he said. “The Government has choices available now that will bring opportunities that benefit New Zealanders and help avoid the worst consequences of a late response to climate change.”
Carr said that fewer than half of the country’s emissions were covered by the scheme.
Climate Change Commission chief executive Jo Hendy said the surplus of carbon credits that had been allowed to build up was “one of the most pressing issues” confronting the ETS.
“This presents risks to the ability of the ETS to support the country to meet its emissions reduction goals, particularly the goals for later this decade and into the 2030s.”
Green Party climate change spokesperson James Shaw noted the Government had signalled that it wanted to lean more heavily on the ETS to achieve emissions reductions and make less use of other levers.
“Inevitably, this leads to the conclusion that there will need to be much, much tighter ETS unit supply and, presumably, a correspondingly higher carbon price to achieve the same outcome and hit our emissions reductions targets,” he said.
“The Climate Change Commission should be empowered to directly set unit supply in the Emissions Trading Scheme, in line with emissions budgets.”
Labour climate change spokesperson Megan Woods said the Government needed to move quickly to “ensure the ETS is aligned with our emissions budgets and international obligations”.
The advice foreshadowed lower than expected ETS auction revenue “which is a problem for the Government if the intention is to use the money from auction proceeds for tax cuts,” she said.
“Emissions pricing is an important tool, but true decarbonisation can only be achieved through measures like improving public transport, incentivising EV uptake, increasing energy efficiency and supporting clean-tech industries.
“So far all National has done is cancel programmes that would make a difference,” she said.
Climate Change Minister Simon Watts said the Government would now consider the commission’s advice, which addresses ETS settings for the period between 2025 and 2029 and is the commission's third such annual report.
Public consultations on its recommendations will happen in the first half of the year, with proposals finalised by October.