Possible adjustments to the Emissions Trading Scheme aren’t much, but at least they’d be a start

Under its current settings, the Government admits, the Emissions Trading Scheme has made virtually no difference to business investment decisions.

And with an impact, until very recently, of a fraction of a cent on prices at the pump, it probably doesn't affect households very much either.

Now, people have until next Friday to make submissions on whether to get rid of one of the (many) features that have stultified the scheme.

It is the "transitional" measure introduced in 2009, before the Emissions Trading Scheme (ETS) applied to any sector apart from forestry, under which emitters with obligations under the scheme only have to surrender to the Government carbon units for half of the emissions they would otherwise be accountable for.


So an oil company, for example, only has to surrender units for every other tonne of emissions that the fuel it sells will give rise to when burned.

Buy one, get one free.

As it reviews the ETS, the Government has flagged that provision as one it might drop, perhaps as early as this year.

The documents the Government has released don't quantify the effects, in terms of cents a litre at the pump, but it is possible to deduce them from Ministry of Business, Innovation and Employment data on the composition of petrol prices.

During the first year after the scheme began in earnest in mid-2010, the carbon price was around $20 a tonne.

MBIE reckons it added between 2c and 2.4c a litre to the retail price of regular petrol.

Without the policy of buy one, get one free it would have been 4c to 5c a litre.

So it looks as though $10 on the carbon price would add a bit over 2c a litre at the pump.

New Zealand units are trading around $9.30, now emitters no longer have access to the environmentally worthless Kyoto units they could import for a few cents a tonne, and now that it looks as though the Government might be inching towards measures that would render the ETS fit for purpose.

But 2c a litre is a pretty small impact compared with the gyrations of international crude oil prices and the exchange rate.

Economic modelling the Government commissioned from the NZ Institute of Economic Research concluded that at a carbon price of $25 a tonne, scrapping the half-obligation would reduce New Zealand's gross domestic product in 2020 by one-tenth of 1 per cent.

That is the equivalent of losing about eight hours' economic output that year. It is not going to bring the economy to its knees.

The flipside is that it would also have a pretty small impact on emissions, shaving about half a million tonnes of CO2 equivalent off national emissions, projected to be around 83 million tonnes by then - a reduction of just 0.6 per cent.

About two-fifths of that reduction in emissions would be from fossil-fuel-based electricity generation and about another quarter from road transport. The NZIER modelling does not incorporate any disruptive technological change, not least because a four-year time horizon is too short for that to have much impact even if it happens.

In short, the modelling suggests the economic costs of scrapping buy one, get one free are modest and the environmental gains are in the better-than-nothing zone.

Nevertheless, the discussion document also seeks feedback on how the costs could be managed. Perhaps the half-obligation could be phased out?

And what should happen to the other "transitional" measure of a price ceiling of $25 a tonne (at which firms can opt to pay the Government that amount in cash rather than surrendering units)? So far it has never been binding. The Government wants to know if should be retained, or even lowered.

The NZIER modelling found that if the price cap were removed, the carbon price climbed to $50 and buy one, get one free was gone as well, the impact on GDP in 2020 would be two-tenths of 1 per cent, and emissions would be 1 million tonnes or 1.1 per cent lower than under the status quo.

Gross emissions, that is.

It does not take into account the impact on forestry. The CO2 taken up by trees while they grow means an expanding forest estate reduces the country's net emissions.

It is hard to quantify the effect of carbon prices on plantation forestry. Decisions on whether to plant a forest, or replant one after harvest, depend on many other factors as well, like expected log prices and the relative attractiveness of other land uses.

It is a shame that the sector that could do more than any other to reduce, at least for a few decades, New Zealand's net impact on the climate has been jerked around egregiously by policymakers, so that confidence in the stability of policy settings must be at a low ebb.

But even with those caveats in mind, Professor Bruce Manley of Canterbury University's school of forestry broadly endorses as credible projections from the Ministry of Primary Industries about the afforestation effects of different carbon price levels.

MPI estimates that with carbon prices between $12.50 and $25, we could see around 15,000ha a year of afforestation over the next 15 years.

As part of his deforestation intentions survey last year, Manley asked respondents about the carbon price necessary to trigger afforestation. "The consensus is that carbon prices would need to be at least $12 to $15 a New Zealand unit for material levels of afforestation to occur."

As for deforestation, or the switching of land out of forestry after harvest, "there would be limited conversion. Once carbon reached $15 per NZU and it would effectively stop with a carbon price of $20."

It is going to take a lot more than scrapping buy one, get one free to rehabilitate the ETS from the induced coma it has been in - not dead but not doing very much either.

It would only nibble at the gap between business-as-usual emissions and the 2030 target New Zealand kind-of committed to at the Paris climate conference.

But it would be a start.