When cutting emissions cuts no ice
Published in Insights, The New Zealand Initiative’s newsletter, 11 December 2020
As that great philosopher Homer Simpson once said, “Just because I don’t care doesn’t mean I don’t understand.”
For climate policy debates, it is a bit different. Most people do care about cutting carbon emissions, but they still do not understand how it works.
This is particularly true about New Zealand’s Emissions Trading Scheme, the ETS.
Introduced under the Clark government, the ETS is an ingenious way of reducing emissions.
As the then climate change minister David Parker said in Parliament, “it is the right thing to do and it makes basic economic sense.” That was in 2007, and Parker was right.
Still, 13 years later, the public and many politicians do not yet grasp the basic logic of the ETS’s operations.
Such ignorance has a price. New Zealand is pursuing expensive climate policies that do not reduce any emissions.
The ETS is a “cap-and-trade” scheme. That means there is a “cap” determining the total emissions. And then there is “trade” of emission certificates between polluters.
Through the cap-and-trade approach, emissions can be cut where it costs less to reduce emissions. Genius.
But because there is a cap, the total emissions amount is fixed. Once the cap is set, that will be the final emissions outcome. No regulation, tax or subsidy introduced later can logically have any further emissions effect.
This feature of cap-and-trade schemes has been known to economists for decades. The UN’s Intergovernmental Panel on Climate Change acknowledged it in its last major report.
To understand why, imagine the government paid subsidies to some polluters to renew their equipment and make it more efficient. The result will free up their emissions certificates. But these certificates will now go somewhere else. The total emissions do not change.
In this example, the government would have spent money on a subsidy while the emissions reduction is precisely zero.
Sounds crazy? Yes, but that is what is happening.
Through programmes like the Clean Powered Public Service Fund, the Low Emission Vehicles Contestable Fund or the Sustainability Contestable Fund for schools, the government pays for emissions reductions which yield no positive environmental results.
Successive climate ministers from David Parker to James Shaw have designed a sophisticated ETS for New Zealand. Yet bizarrely, the Government behaves as if the ETS did not exist.
If we care for effective emissions reductions, we need to understand how the ETS works. Otherwise, we will fail both the environment and the economy.