The Ministry for the Environment says it will review the Emissions Trading Scheme (ETS) to find ways to incentivize businesses to reduce emissions, rather than just offset them.
ANZ economist Susan Kilsby said the review would be welcomed by those who feel the current system incentivises land to be planted in exotic trees rather than tackling the underlying issue of pollution.
However, it could also create significant disruption in the carbon markets at a time when confidence in the system was already low.
Last week the quarterly auction of carbon units failed to clear a confidential reverse price and secondary market prices have been trending down since December.
The Government has asked the Ministry for the Environment to assess if settings could be changed to give businesses a stronger incentive to transition away from fossil fuels.
A cabinet paper presented by Climate Change Minister James Shaw said the ETS would deliver considerable net emissions reductions, mainly through sequestration from forests, but not significantly reduce total emissions.
“This risks delaying meaningful decarbonisation in New Zealand and a successful and just transition to a low-emissions economy,” he said.
Net emissions targets can be met by reducing emissions at their sources, or by removing them from the atmosphere elsewhere — better known as offsets.
The review, now approved by cabinet, will look for ways to incentivise cutting actual emissions and put less emphasis on offsetting them.
Kilsby said the review was clear that trees will continue to play an important role in emissions reductions but that there also needs to be greater efforts to reduce emissions.
Cheapest may not be best
The economic theory underpinning the ETS is that it allows businesses and consumers to make their own decisions about how and whether to reduce emissions based on costs.
This allows the economy to naturally plot the lowest-cost path to achieving climate change targets — at least in theory.
In New Zealand, one of the cheapest ways to lower emissions is through forestry which receives a capital return from selling emissions units. A lot of money has been invested in buying lower-quality farm land and planting it with pine trees.
Between 410,000 and 670,000 hectares of new forests are forecast to be created by 2035, due to the ETS, which will remove between 121 and 169 metric tonnes of carbon across 15 years.
Other types of emission reductions – as opposed to offsets — incentivised by the scheme, often have higher costs than removals through forestry.
Shaw’s cabinet paper said opportunities to reduce emissions in the transport, industry, industrial processes, and waste sectors are often less responsive to carbon pricing.
These reductions might require large capital investments, be harder to scale than pine forests, and carry more risk for external investors.
What this means is that instead of creating less carbon emissions, businesses are paying investors to buy up rural land and cover it in pine trees.
This successfully reduces net emissions but damages rural communities, increases the risk of wildfires, threatens native biodiversity, and may not permanently remove and store carbon.
“Failing to constrain forestry in the NZ ETS would risk meaningful decarbonisation before 2050,” the cabinet paper said.
Rein in the trees
And so, the Ministry for the Environment has been tasked with finding ways to limit the amount of emissions units coming from exotic forestry and encourage real reductions.
This could potentially drive the carbon price higher and come with costs to the economy, government, households, and communities.
The Climate Change Commission has previously said a higher carbon price would mean slightly slower economic growth and higher electricity and fuel prices. However, these impacts should lessen over time as the economy transitioned to lower-carbon alternatives.
The review has been opposed by those who would prefer the ETS to operate as a free-market solution to climate change.
For example, small-government lobby group The Taxpayers’ Union said the prioritisation of reducing gross carbon emissions over net emissions was “illogical and ill-informed”.
“The Emissions Trading Scheme is the most effective way to reduce net carbon emissions. It ensures that net emissions reduce over time while doing so in the most efficient way possible and at least cost to taxpayers. But it must be allowed to do its job,” it said in a statement.
The government's Emissions Reduction Plan says putting a price on carbon price will not be enough to meet NZ’s climate goals due to market barriers and failures, and other measures are required where pricing was slow to respond.
43 Comments
Hey Ministry.
Helpful interest.co readers (in this thread) have found a way to reduce NZs carbon footprint by 61MT CO2 eq per annum (nearly 80% of our national, annual emissions).
All you (the Government) have to do is ban fizzy drink plastic bottles and start carbon accounting based on global carbon footprint reductions as opposed to national emissions reduction.
Unintended consequences could arise from banning fizzy drink plastic bottles - more glass and ali cans will be the likely outcome
Unless you want to also ban fizzy drinks -and whats a fizzy drink - champagne included
But definitely change the accounting base
and what if we ban planting pine trees for carbon credits - or only allow them to be a percentage of a block - so no more monoculture - or reduce the payout for pines and pay more for natives even though the carbon sequestration would be greater - it could be done as an environmental credit
Plenty of options to improve the scheme if we think bigger picture for appropriate land types
Yes, agree that
more glass and ali cans will be the likely outcome
Hence, at the same time the govt would need to introduce a return deposit scheme for glass and aluminum - and of course then monitor whether the level of virgin glass and aluminum containers manufactured decreases over time (i.e., that people are responding to the deposit scheme incentive).
Glad you agree the accounting base needs to change. For me, it's all about providing incentives (and regulation where necessary) to change our local consumption habits.
The UN FCCC framework completely ignores this as it is based around an offsets regime, as opposed to a behavioural regime.
Much of what Gratt proposes is more use of the stick and insufficient carrot and that's a principle problem for NZ and much of the west. Try talking to people in the industry then implement what is practical. Politician and Bureacrats know nothing and understand less.
Between 410,000 and 670,000 hectares of new forests are forecast to be created by 2035, due to the ETS, which will remove between 121 and 169 metric tonnes of carbon across 15 years.
I think that is meant to say: between 121 and 169 metric tons for EACH of those hectares across 15 years.
I found it odd that the carbon auction had a price floor of around $30, but an undisclosed reserve price somewhere well above that figure... so what is the point of a price floor if it can never be met?
Shaw was barking up the wrong tree - intended - the ETS could never, repeat NEVER work.
Key and English were equally incorrect; they saw it as yet another way to 'make money.
The problem is one of physics and chemistry - not, repeat NOT one of finance.
There are not enough above-ground acres to sequester the below-ground carbon when it's dug up and burnt to provide energy. So the move to reducing the burn, is correct. Even more so, because fossil resources are leaving us anyway.
But that means less being done, meaning less forward bets being underwritten, so the debt ponzi is in terminal trouble. We need to reconfigure society:
The ETS has always been a mess financially allowing overseas speculators in and the Nats big end of town.
What's been done with the money its earned for the govt. Put into the general pot? Not aware of Labour crowing about the scheme.
Climate Change Response Act 2002, New Zealand greenhouse gas emissions trading scheme, Part 4: added, on 26 September 2008, by section 50 of the Climate Change Response (Emissions Trading) Amendment Act 2008 (2008 No 85).
The ETS is a Labour thing. Don't know what the Nats did to it in the intervening period. It seems JS and Labour thought it could be refined instead of throwing it out. It putts some agricultural land to poor use. I'm sure there are others who could pick a lot more holes in it than I can.
"When a measure becomes a target, it ceases to be a good measure.” - Goodhart's law.
In other words, when we set one specific goal, people will tend to optimize for that objective regardless of the consequences. This leads to problems when we neglect other equally important aspects of a situation.
The most frustrating thing about this is the rank political BS surrounding it. "A cabinet paper presented by Climate Change Minister James Shaw said the ETS would deliver considerable net emissions reductions, mainly through sequestration from forests, but not significantly reduce total emissions." Based on what exactly? This is a presumption on the psychological theory that if you increase the cost of a resource, you reduce it's use. The problem with this is that within this area it is so obviously a flawed assumption that it could never work and the evidence of that was clear well before the ETS was ever devised.
The use fossil fuels and the production of GHGs are so fundamental to the type of economic structure and models that we have in NZ, and across the planet, that increasing the cost, when there is NO alternative to them, especially for ordinary people will not reduce the production, only lessen people's ability to afford alternatives if any come along. Frankly I cannot believe the belief politicians, who consider themselves to be smart, have in such rank BS, and their gullibility to vested interests lobbying.
This year, China installed more solar than coal power. The cost of renewable energy is dropping fast. I would say the superpower that doesn't adapt will be the one that doesn't last. The argument that we shouldn't do anything till everyone else does will probably be the one that superpower goes down with.
that increasing the cost, when there is NO alternative to them
Increasing the cost will result in demand destruction, ie curtailment of discretionary activity. That broadly means a lower standard of living. As fossil fuels deplete, prices will rise, forcing this behaviour change anyway.
It will also driver increases in efficiency of using energy, as well as drive change to minimise energy use - what if all household cleaners in supermarkets were instead sold as powder that you mix up with your own water at home, thus reducing the weight and volume of products moved around the country on fossil fuel trucks making deliveries to supermarkets?
what if all household cleaners in supermarkets were instead sold as powder that you mix up with your own water at home, thus reducing the weight and volume of products moved around the country on fossil fuel trucks making deliveries to supermarkets?
Yes, great point, but I doubt such weight and volume product re-design efficiencies will happen without regulation. Manufacturers have no incentive to re-formulate and re-educate the market on this sort of product and consumer behavioural change. These days, convenience is hard-wired in our consumer behaviour.
Which is why this product (220g);
sells in such lower volumes than this product (1kg);
https://www.newworld.co.nz/shop/product/5010418_ea_000nw?name=simply-strawberry-yoghurt
I agree with Kate above, but the lowered standard of living, especially the curtailment of discretionary activity will just further increase the equity gaps, as those at the bottom lose the ability to do some things while the better off continue to flaunt it. It occurs today already through the profligate lifestyles of the rich and famous. How will do think that will go down when even just minor stuff is no longer affordable?
But the biggest thing still not being discussed is population size. None of this will occur unless there is a coherent plan to reduce the population.
Given that birth rates are already low in most of the developed world, how do you plan to further reduce population? I'd argue population is fixing itself, there is just a very long lag to the process. In the meantime we have to focus on changing our consumption habits and land use.
"This is a presumption on the psychological theory that if you increase the cost of a resource, you reduce it's use."
Not true. Thanks to the 'Cap' part of the Cap & Trade scheme, the number of permits is capped and falls over the years. Net emissions will fall so long as successive Governments hold their nerve and reduce the cap. Emissions above the cap simply won't occur - if a company can't acquire a permit they cannot emit.
Sorry MFD it is true. The caps on the available emissions units though is an added element which further reduces the resource available. This in part will increase the cost per unit. The reduction in the level of the resource - if it forces companies to curtail emission is great, but what if it doesn't and they jsut ignore the limits? In the meantime our entire economic structure is built on the premise of the availability of fossil fuels, and the need to farm animals (GHGs like methane), and NO alternatives are being made at affordable levels.
Companies will have to report their emissions and meet them with emissions permits, either purchased in the auctions or in the secondary market. Failure to do this will attract a penalty fee.
The large companies responsible for the vast majority of our emissions are already doing this work - they've been measuring their carbon emissions for years. I am confident they will fall in line and obey the law, or the Government can just increase the consequences until they do so. I see that proposed regulations will allow fining of individuals involved as well as the companies.
Most smaller companies, I expect the emissions are already accounted for by their suppliers. E.g., I don't have to account for burning petrol or using electricity because the energy companies have already accounted for that and I've paid for the carbon credits as part of the purchase price.
Note that no company will be forced to curtail emissions. The economy as a whole will be forced to curtail emissions, and the carbon market will ensure that the least expensive emission-lowering changes will occur first. As the cap falls, prices will rise and more behaviour will be changed.
The key risk in all of this is the Government taking their foot off the pedal.
The large companies responsible for the vast majority of our emissions are already doing this work - they've been measuring their carbon emissions for years. I am confident they will fall in line and obey the law
Yeah, of course they will because most of the big end of town is subsidised by the Government!
They are called 'energy-intensive and trade-exposed' industries' (EITEs) and we (the taxpayer) give them FREE credits;
The ETS is an absolute joke - it needs to be scrapped.
Put a tax on carbon and follow a climate pragmatism approach to adaptation.
Yes, the subsidy is unfortunate. Are they able to sell excess credits? If so, the incentive remains the same for them as other participants - they can burn their coal and carry on, or sell their credits and reduce their emissions.
In what way do you think a carbon tax is an improvement? Not intending to attack, just curious on how other people think about this. I quite like the cap & trade as it puts a price on carbon, just like a carbon tax would, but rather than the Government having to decide a price of carbon that would achieve the emissions they have pledged to achieve, they just adjust the cap and let the market set the appropriate price.
Any criticism of the current approach would be on not being aggressive enough with the cap, and on wasting time around the edges doing things like the electric vehicle subsidy which does reduce emissions at all (as any saved emissions will just be redistributed by the cap & trade scheme). There may be reasons to subsidise some vehicles (especially e-bikes), but claiming it is to reduce carbon emissions is dishonest.
The ETS is the tool of regulation, and has been put into legislation.
The Government has taken the decision that the market is best placed to decide where emissions are best cut, using a price signal - the Government simply decides the magnitude of cuts we need to make. Do you think the Government would be better at deciding on which industry should be targeted at what point? Sounds needlessly bureaucratic and almost certain to be a more expensive way to make the same cuts.
A carbon tax, like Goods & Services Tax (GST) is easy to administer and unable to be avoided. It could be introduced incrementally and reviewed annually to determine whether behaviours change. It adds to the general tax take, just as GST does, and it's not as if we don't need to broaden the tax base. So a win-win on that score.
As many electricity users are on fixed rates - the use of coal when hydro lakes supply is low would force the wider industry to look at/support alternatives. Similarly, Fonterra would look to reduce its coal use as well. The aluminum smelter is already run on hydro. Not sure about all the other EITEs that get subsidised by way of FREE credits under the ETS.
And where transport is concerned, it might see a lot more long-haul cargo sent via rail.
Frankly, I can't think of anything against it - anyone else?
PS - My understanding of Fonterra's coal powered plant use is mainly for drying. Others will know more than me! But if that is the case - perhaps it would shift Fonterra's focus from low-value, high volume milk powder export - to more high-value, low volume products. After all - it is the latter that require innovation through science. Think of the extra money to spend on R&D instead of energy to dry.
I am not convinced. The cap & trade is not particularly complex to administer - hold a few auctions and let the users figure out their positions. A carbon tax would presumably need just as much bureaucracy on the part of companies to account for their emissions.
Both a carbon tax and the C&T scheme add to the tax take - currently the government produces permits from thin air and sells them. It's not clear to me a tax would raise more, assuming the big emitters are weaned off their free permits.
The C&T scheme is already impacting the electricity market - Genesis are scrambling to get away from coal as the cost of generation has doubled thanks to the required carbon permits. Similarly, the dairy companies are moving towards electrification.
Again, I don't see the benefits of a carbon tax in preference to C&T? Both put a price on carbon and therefore drive down emissions, a carbon tax just looks like a less flexible way to achieve the same thing.
To a large degree I will concede your point Kate, but I still suggest that simply legislating to set limits on GHGs/Carbon would be more effective with significant consequences for breaches. I can also see the argument that a CT to some extents actually does that in a progressive way.
MFD/Kate - The EU is proposing an individual co2 emission tax on individuals who exceed 3 Tons of co2 PA against a current estimated figure of 10 Tons and payment at 45 Euros Per Ton. This is bound to be well received and all EU citizens queuing up to pay their tax as a matter of personal responsibility and pride in no longer travelling on holiday/sports etc and reducing their heating in winter and enjoying sitting with a blanket and hot water bottle watching TV in the dark. There is no limit to how low the EU (Evil Union) will stoop and El Presidente Micron of France may soon join Marie Antoinette in a hot place and wonder why he didn't understand her lesson.
Can anybody tell me anything specific and measurable in New Zealand where the ETS has done anything to reduce our carbon emissions other than encouraging the dubious value of planting of pine trees. If so what are the measurements?
The Chinese refused to have anything to do with it and stated that it was a distraction from taking concrete and meaningful measures. I don't often, but in this case I agree with them. I view it as an excuse to do nothing real or meaningful.
You got it in one - it's had nil effect on reducing gross emissions (they have risen since its introduction). And as far as net emissions go it's had the effect of making foresters wealthier - both with the credits collected and the Government subsidies given to them via the Billion Trees programme for further plantings of radiata pine.
The ETS is a transistional measure for decarbonisation to occur in the next 50 years but despite Kyoto/Paris and other climate talkfests little is being done in practice to reduce emissions other than sequestration using trees which is but a part of the solution, time to stop quacking and start doing but the current Beehive Blunderers are incapable of doing anything of actual value so a radical new Govt of doers is required but unlikely to occur - Ba Ba Ba said the voters.
The ETS will work if it’s allowed to work but no one lets it because no one wants to change behaviour or take the financial hit or both.
A carbon tax or laws telling people what they can do then leads to claims of big brother control, as well witnessed even now on other topics and with comments here and doesn’t work as communism has proven.
Until everyone decides we need to reduce waste and emissions not much will happen. The carbon price is causing large changes in burning coal ie stopping it. It gets much harder with petrol etc. Forests have a role to play but we can’t plant our way out of this - we need to have limits on this but who do you stop? Iwi, farmers, small NZ investors? Not easy.
Native is needed for long term very hard emissions but even then the offset is so low so we need over 1 million ha plus of that. Whose land do you use? Who pays?
We have kicked the can down the road for so long our options are fast disappearing - there is a huge disconnect between the reality of what we need to do and perception and understanding. We are now down to simple number reductions required (getting bigger) versus our ability and unwillingness to do this. It’s simple maths as we squabble as the boat fills with water and no one wants to bail as I’ve done my share or I don’t want to bail they can.
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