Carbon price plummet costs taxpayers $500 million

Crown accounts are further in deficit thanks to a lower carbon price. Photo / NZME

The Government’s decision to prevent the carbon price from rising in line with market expectations is costing taxpayers half a billion dollars.

As at the end of February, the Crown accounts were $486 million more in the red than forecast by the Treasury in December due to the carbon price plummeting.

Cabinet late-last year rejected Climate Change Commission advice, supported by Climate Change Minister James Shaw, to change Emissions Trading Scheme (ETS) settings to enable the carbon price to rise more than it had in the past.

Cabinet feared allowing the carbon price to rise to a level that more effectively disincentivised emissions would further exacerbate the cost of living crisis.

Treasury advised it that a carbon price of $120 per unit would increase residential electricity prices by between 2.88 and 5 per cent and increase commercial and industrial electricity prices by as much as 7.49 per cent.

Nonetheless, Cabinet’s surprise decision to prevent the carbon price from rising saw it fall from $85 in December to a low point of around $53, before rising a little to $59 at the time of writing.

The gyration is primarily concerning because it risks eroding trust and confidence in the ETS – an important tool relied upon to incentivise companies to lower their emissions.

But it also affects the Crown accounts.

The Crown gets revenue when participants in the ETS surrender units to settle obligations that arise from their emissions the previous year.

If the unit price is low, the Crown gets less revenue.

In the eight months to February, it had received $724m, or 29 per cent, less than expected in the Treasury’s half-year update released in December.

Because the Crown also incurs an expense when it allocates units to some industries, including forestry, the lower carbon price meant it spent $238m, or 16 per cent, less than expected.

The net effect was that the price fall adversely affected the operating balance before gains and losses (OBEGAL) by $486m.

This is a material sum of money, given the OBEGAL was $3.2 billion in deficit in February.

The Crown accounts for March are likely to show an even greater variance between what the Treasury forecast in December, and what actually happened, because the carbon price continued to fall from $67 at the end of February.

Finance Minister Grant Robertson said some volatility in the carbon price was always expected, but he was seeking advice on what the fall meant for the ETS as a whole.

He didn’t regret Cabinet’s decision to not change the scheme’s settings in line with the Climate Change Commission’s advice, as expected.

“Our job is to make sure that we have a just and fair transition to the lower emissions economy we need,” Robertson said.

“The carbon price rising at an unfettered rate would have a massive impact on New Zealanders and would in many ways potentially undermine what we’re trying to achieve.”

The Treasury and Ministry for the Environment, in their Climate Economic and Fiscal Assessment, released last week, highlighted the extent to which varying carbon prices could impact the Crown accounts.

They concluded a relatively low price could produce unit surrender revenue of $6.9b and an allocation expense of $3.4b in the three years to 2026, while a relatively high price could result in surrender revenue of $18.1b and an allocation expense of $9.0b.