Recent announcements about the Auckland Council’s climate policy and the Government’s partnership with New Zealand Steel have people talking about climate policy.
Should we rely on a single tool like the Emissions Trading Scheme (ETS), or is there room for multiple overlapping policies?
The “leave it to the ETS” argument is that bespoke policies can never work because the ETS is a “cap and trade” system.
Therefore, so the argument goes, a policy that reduces emissions in one area merely frees up units that will be available to someone else.
The chair of the New Zealand Initiative, Roger Partridge, recently commented in an opinion piece (“Auckland Council should ditch emissions reduction policy”, NZ Herald, May 30) that council policies which reduce transport emissions are “pointless” and simply involve “re-arranging the deckchairs”.
Champions of this view would like to see the end of pro-climate policies across transport, housing, industry, energy and the rest of the economy covered by the ETS. If this argument were correct, then it would have important policy implications.
However, the argument is patently wrong. It is based on four misunderstandings of the ETS and of how climate policy works in the real world.
The first reason it is wrong is that, by its design, there is not actually a fixed “cap” on emissions in New Zealand’s ETS. The number of additional units to be released is only set for a few years ahead, and this quantity has some flexibility in light of our progress to date.
While unit settings must be in accordance with our emissions targets, they need not strictly accord if the minister is satisfied that a discrepancy is justified, based on matters like our emissions trajectory and the impact of projected emissions prices on households and the economy.
By bending the emissions curve downward, initiatives like the NZ Steel deal and the council’s reduction plans can be effective because they allow the Government to reduce unit supply without the price going too high. The flexible approach can therefore support increasing ambition over time.
But it also creates risk, as the Government may be tempted to prioritise limiting price increases over climate ambition.
For example, in response to cost-of-living concerns, Cabinet last December rejected the advice of the Commission and the Minister of Climate Change, and instead made an additional 35 million units available over the next five years at a low price.
Lawyers for Climate Action NZ Inc is challenging the legality of this decision in the High Court. If this is successful, it will help bring the unit settings back in line with our climate targets, but a successful outcome will not by itself create a hard cap in the ETS.
An alternative would be to hardwire into legislation the total number of additional units that would be consistent with each five-year emissions budget, our Paris Agreement targets, and in total for the 2050 net-zero target.
However, it is not clear whether it would be politically feasible to have an ETS which fixed unit supply for all time to levels consistent with limiting warming to 1.5C, and allowed prices to go as high as necessary to achieve this.
In any case, this is not the ETS we have.
The second point is that in a well-designed policy package, ETS settings already take other co-existing policies into account.
Each five-yearly Emissions Reduction Plan lays out the intended policy mix. It is only if extra actions or policies above and beyond those in the ERP are introduced that a further adjustment to ETS unit volumes might be required.
This also works in the opposite direction: if non-ETS policies were deleted, the ETS would need to be strengthened to drive a larger share of the reductions.
Third, the ETS currently has multiple flaws which undermine its ability to be a one-stop solution.
The problems include: our emissions targets failing to align with limiting warming to 1.5C; the ETS covering less than half our emissions; millions of free units allocated to industry each year; a stockpile of units that dwarfs the number of units expected to be surrendered in any given year; and the inclusion of forestry, which has encouraged pine plantations instead of discouraging the burning of fossil fuels.
These would all have to be addressed for the ETS to be our primary policy measure.
In the meantime, alternative policies may be the only pragmatic way to achieve near-term emissions targets.
Finally, even if our ETS did consist of textbook-perfect fixed caps, well-designed packages of additional policies can improve overall efficiency and reduce costs.
A price incentive like the ETS can help guide consumers and businesses towards low-carbon options, but other interventions (regulations, financing, subsidies, public investment) are important where complexity and cognitive biases might otherwise get in the way, and where targeted investment now leads to lower costs in the long term.
As the Intergovernmental Panel on Climate Change (IPCC) has noted, both theoretical and empirical analysis support the argument that single policy instruments are not sufficient.
The need for policy mixes is also accepted by the commission, other governments, and international expert organisations such as the OECD and World Bank.
Failing to halve global emissions by 2030 moves us towards a future that looks increasingly uncertain for the next generation.
And yet, lobbyists are telling us that climate policies are pointless.
It is telling that some of the groups arguing for an ETS-only approach also oppose the Commission’s recommendations to reform the ETS so it could actually control emissions more effectively.
While outright climate change denial is increasingly rare, climate response delay is increasingly common.
One form of delay is “all talk, no action” - that is, making a lot of noise about climate solutions that are not actually solutions.
Championing an ETS-only approach, even when our existing ETS is too compromised to deliver the goods, is a textbook example of climate delay.
Saying that we should “leave it to the ETS” is a dangerous argument if it convinces the Government, a council or anyone else, to abdicate their responsibility and not take steps to reduce emissions.
The Auckland Council, like all of us, must prioritise doing what it can to reduce emissions and fight climate change.
- Dr James Every-Palmer KC is a fellow of the Law and Economics Association of New Zealand and a board member of Lawyers for Climate Action NZ, Dr Sebastian Gehricke is co-director of the Climate and Energy Finance Group at the University of Otago, Dr David Hall is Climate Policy Director at Toha and Adjunct Lecturer at AUT University’s School of Social Sciences & Public Policy, Dr Christina Hood is head of climate policy consultancy Compass Climate, and Professor Robert McLachlan is a Professor in Applied Mathematics in the School of Mathematical and Computational Sciences at Massey University.