Former Economics Editor of the NZ Herald

Brian Fallow: Living beyond our carbon budget

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We've promised to cut carbon emissions, but all the options face problems
Illustration / Anna Crichton
Illustration / Anna Crichton

Next Friday, the Paris Agreement on climate change will enter into force, having achieved the critical mass of ratification much sooner than expected.

For the 2020s, New Zealand will be bound by a carbon budget of 611 million tonnes of carbon dioxide equivalent.

The trouble is, on our present course and speed, projected emissions will be some 235 million tonnes, or 38 per cent, more than that.

Before considering how that overshoot is to be dealt with, it is worth noting how the Government plans to "spend" that carbon budget.

More than two-thirds of it is in effect allocated to pastoral farming, whose emissions of methane and nitrous oxide are expected to top 400 million tonnes over the 2020s and which will continue to be exempt from a carbon price under the terms of reference of the review of the emissions trading scheme which is now under way.

Another 65 million tonnes of the carbon budget will be expended, at least under current policy settings, on providing a high degree of protection to emissions-intensive trade-exposed enterprises like the Glenbrook steel works and the Marsden Point oil refinery.

Unlike pastoral farming, they face a carbon price for at least some of their emissions, however, and therefore have some incentive to reduce them if they can.

The challenges posed by the agricultural gases, nearly half the national total, are traversed in a report released last week by the Parliamentary Commissioner for the Environment.

But the consequences of giving that sector a free ride is that the entire burden of adjustment falls on the rest of the economy.

So what is to be done about those 235 million excess tonnes?

There are three options: reduce emissions, offset them by an expanded forest estate, or import carbon credits representing emissions reductions somewhere else in the world.

All three present problems.

We have no real idea what the elasticity or responsiveness of emissions to a carbon price is in the New Zealand context.

We have had a carbon pricing mechanism in the form of the ETS for several years, but for most of that time it has delivered an imperceptibly low price to the minority of the country's emission exposed to it.

It is the Government's responsibility to ensure New Zealand meets its international obligation, at lowest cost.

True, with the scheme now closed to international units and with the buy one, get one free concession being phased out over the next couple of years, the carbon price has rebounded to something like what was envisaged when the ETS was set up.

But how much difference that will make remains to be seen. Officials estimate that the impact of removing the two-for-one provision will, at the current carbon price of $19 a tonne, cost the average family about $1 a week - better than nothing but not much.

The impact on capital expanditure decisions by businesses ought to be greater, however.

The second option, forestry offsets, is also hard to quantify.

Forecasts that officials produced for New Zealand's second biennial report under the United Nations Framework Convention on Climate Change last December took a much more bullish view of the prospects for forestry in the 2020s than they had two years earlier, when it was considered forests would flip from being a net sink to a net source of emissions.

The more recent report, if taken at face value, would imply that forests could offset as much as 70 per cent of the excess 235 million of gross emissions over the 2020s.

But there are a lot of moving parts in any such calculation. Many factors affect decisions about when to plant and when to harvest pine trees. So the margin of forecast error around such projections is wide.

And there is a lot of "once bitten, twice shy" in the submissions from the forestry sector to the ETS review.

As for the third option - importing carbon - the uncertainty levels around that are close to 100 per cent.

New Zealand's pledge under the Paris Agreement is conditional on unrestricted access to global carbon markets that enable trading of a wide variety of units which meet reasonable standards of environmental integrity and are proof against double counting.

So there is a scramble on to set up an international carbon market meeting those standards, guided by the gruesome example of the Kyoto system of how badly wrong that can go.

The fact that New Zealand will have to import carbon from the rest of the world does not, however, mean that that obligation should devolved from the Government to emitters with obligations under the domestic ETS.

It is the Government's responsibility to ensure New Zealand meets its international obligation, at lowest cost.

But the purpose of the ETS is different. It is to set the economy on a decarbonising path. A path towards zero net emissions from these islands, hopefully within the lifetimes of most of the people who already inhabit them.

That is a tall order.

We have just had years when the ETS delivered nothing but compliance costs, to no environmental or economic benefit.

The problem was not the dubious environmental value of Ukrainian emissions reduction units, with which emitters were able to fill their boots.

It was that there was a glut of them.

And excess supply leading to a price crash is a risk for any offshore scheme we might link to or participate in, especially as most of the major emitters, including China, the United States, the European Union and Japan, have indicated they do not expect to use international trading in meeting their obligations under the Paris Agreement.

The object of the ETS is not to mitigate fiscal risk. It is to mitigate climate change.

If there are concerns about liquidity or upside price risk, there are other mechanisms for dealing with that, like auctioning and a price cap.

Yet the Government has indicated the question is not whether to reopen the ETS to international units but when and on what terms.

Given our experience, that is folly.

At the moment the ETS is like a bird sanctuary which has at last been rendered predator-free.

We should not be thinking about when and how to reintroduce the rats and stoats.

- NZ Herald

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Former Economics Editor of the NZ Herald

Brian Fallow is a former economics editor for the New Zealand Herald. A Southlander happily transplanted to Wellington, he has been a journalist since 1984 and has covered the economy and related areas of public policy for the Herald since 1995. Why the economy? Because it is where we all live and because the forces at work in it can really mess up people's lives if we are not careful.

Read more by Brian Fallow

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