Draft: 19 Feb 2016
ENVIRONMENT AND CONSERVATION ORGANISATIONS OF NZ INC.
Level 2, 126 Vivian St, Wellington, New Zealand
PO Box 11-057, Wellington
Email: Website: 64-4-385-7545
17 February 2016
Ministry for the Environment,
PO Box 10362,
Wellington 6143
Email:
ECO Submission on ETS Trading Scheme Review 2015/16: priority issues as defined by MfE
Introduction
Who we are
The Environment and Conservation Organisations of NZ (ECO) is the national alliance of 50 or so groups with a concern for the environment. ECO has been involved in issues of energy and land-use policy since its formation in 1971-2.
We have been concerned at the greenhouse effect and have been active on climate change and related matters since the mid 1980s. Cath Wallace, ECO vice-chair Policy and an economist, was a co-author of a 1989 paper to the Ministry for the Environment on the use of economic instruments to control greenhouse gas emissions. That paper was requested of three Victoria University economists and it was all so urgent that they were given three weeks to research and deliver it to MfE. It strikes us as rather sad that the Ministry has not yet achieved an effective price for carbon, and that the ETS has been so hollowed out by exemptions, concessions and outright pandering to vested interests, that it has been ineffective.
This submission has been prepared by members of the ECO Climate Change working group and the ECO Executive. It is in line with ECO Policy, see below.
Contact informationPLEASE REMOVE FROM ANY PUBLIC VERSION of this SUBMISSION
Name / Cath WallaceOrganisation
(if applicable) / Environment and Conservation Organisations of NZ Inc
Address / C/o ECO as per letterhead.
Telephone / 021 891 994 (Cath Wallace), ECO 04 385 7545.
Email / and
The Review of the ETS
We note that the Ministry for the Environment makes the following points about the submission deadlines and content.
The ETS Trading Scheme Review
The deadline for submissions on the following two “priority issues” is 19 February 2016 (the reason for this deadline is because these issues may be candidates for legislative change in 2016):
moving to full surrender obligations
managing the costs of moving to full surrender obligations.
The deadline for submissions on other aspects of the ETS is 30 April 2016. We expect to make further comments on these matters.
Caveat: ECO has not had the opportunity to closely examine the technical documents that were provided shortly before the deadline for submissions – due to other commitments including the Eye of the Storm conference on climate change and the Pacific. As discussed at the (helpful and engaged) meeting with the Ministry for the Environment and ENGOs and academics, we hope to review these and send through any further comments within 1-2 weeks.
ECO’s Submissions
Reduction targets
ECO supports New Zealand adopting a 40 percent cut in greenhouse gas emissions by 2020 over 1990 levels and a zero net emissions by 2050. We should aim to be carbon-neutral by 2050, and implement other policies which allow and encourage this decision path. We list some below in this section, and more at the end of this submission.
New Zealand’s Paris agreement commitments (INDCs that now are NDCs) are inadequate and should be significantly strengthened. A clear pathway to achieve them should be introduced.
In the post Paris agreement world with over 400ppm of CO2e, the time for free riding by New Zealand and by agriculture and other sectors within New Zealand is over.
At its August 2015 AGM, ECO’s member bodies resolved the following[1]:
Climate protection, greenhouse gas emissions reduction and New Zealand Commitments
a)ECO urges the New Zealand government and local authorities to raise their ambition in relation to greenhouse gas emission reductions, and to set meaningful and 3-yearly staged targets for such reduction, such that our net greenhouse gas emissions reduce by 10% of our 1990 emissions baseline every three years to zero by 2050 ;
b)To EITHER:
i) set a meaningful carbon charge on all human induced greenhouse gas emissions in New Zealand
OR
ii) to remove greenhouse gas emissions exemptions and concessions under the Emissions Trading Scheme and to control any conversion of international units into NZ approved units.
c)To develop and implement a multi-strand transition plan and measures to move the New Zealand economy to a low carbon future.
d)Include a strategy to ensure that no new coal mines are opened in New Zealand and that existing ones are phased out by 2030 with suitable measures to cushion the loss of related employment for workers and for affected communities within a transition plan to a low carbon economy.
Actions and Mechanisms
To retrieve a shred of credibility, we must take urgent serious action to make large cuts in our greenhouse gas emissions. We are profoundly concerned at the meagre targets that the NZ government presented to Paris, the sleight of hand of the New Zealand use of the 2005 baseline instead of the 1990 baseline, and the lack of effective mechanisms to reduce New Zealand emissions. We regard this as due not to lack of options but to lack of political will and pressure from vested interests.
In the context of this, we would welcome a full and proper review and upwards revision of New Zealand’s emission reduction targets, of the ETS, of other price mechanisms for carbon, and the suite of other regulatory and policy measures that could and should be deployed to rapidly reduce New Zealand’s emissions.
The ETS is not our first choice for a mechanism for pricing carbon, a carbon charge is. One reason for this is that distributional issues are less contentious if all pay. Many of our member groups consider the ETS should be scrapped others will tolerate it if it changed to becomes effective. We are well aware it has been largely ineffective at reducing emissions but has allowed the picking of the pockets of taxpayers (current and future) while polluters have not had to face their costs. Thus our comments below should be read as designed to contribute to the review and revision of the ETS, but to also urge a fuller review of policy instruments and settings.
In the case of the ETS and to a lesser extent of any policy measure, one of the main problems is that there is a huge incentive for emitters to invest in lobbying and political pressure and in capture of regulators to achieve Special Interest Effect benefits to themselves at the expense of the public and the environment.
Wider Issues, goals, institutions.
ECO considers that critical wider issues for New Zealand to achieve rapid and effective emissions reductions are:
1)cross-party support and political will if any NZ climate change mitigation regime is to be effective;
2)the need for New Zealand to adopt a Carbon Budgeting framework to guide NZ’s transition to a low emission economy by 2050 (and the associated reduction in emissions); and
3)a key objective of Government policy designed to effect a transition to a low emission economy by 2050 must be to ensure that sufficient investment of the right kind takes place across the economy at the right time so that our current high-emission infrastructure, plant, equipment and processes (including farming systems and urban systems) are replaced in a timely manner by low-emission alternatives. a
4)That fairness to the future and to the environment demands urgent and active measures as accompaniments to any carbon price and that reduction targets are set, met and reported on with milestones to 2050.
N.B. The questions numbered 1 - 8 below are the questions asked in the online submission form regarding the “priority issues”. We expect to make further submissions on the “other issues” prior to the next deadline.
Drivers for the Review
The Discussion Document states that the Government sees four key drivers for reviewing the NZ ETS:
improving performance of the NZ ETS against its objectives
preparing for a more carbon-constrained future
increasing certainty about future policy settings
managing banked emissions units.
1. Do you agree with the drivers for the Review?
We think the drivers are insufficient, but yes, as far as they go.(See response to Q2 below)
2. What other factors should the Government be considering in this NZ ETS review?
2.1. The objectives of the NZ ETS Review
The current objectives of the NZ ETS – to help reduce NZ’s emissions below business-as-usual and to help NZ meet its international obligations - are too vague and imprecise. These are no longer appropriate for the necessary response to climate change, to safeguard NZ’s economic wellbeing over the next three or four decades, nor to protect New Zealand’s biodiversity and ecosystems and New Zealand’s credibility in the world.
a)The most important challenge now facing NZ is climate destabilization. To respond to this we need to make an orderly transition to a low-emissions economy. To do this, we need a programme of effective action with triennial binding reduction targets, so that we have zero net emissions by 2050. We need to do this while keeping the true costs to society as low as is consistent with achieving this goal. Thereafter, we need to have negative net emissions.
It is becoming clearer that this is the path being followed by most of our major trading partners and competitors. Failure by us to do so is likely to carry with it major economic risks. These are risks of loss of competitiveness, trade barriers and other penalties from any Carbon Club that is established, losses from stranded assets and loss of reputation in markets and in international relations.
The failure to act earlier than now means we will never be able to adjust as cheaply as we may have done when the carbon tax was first proposed by Minister Pete Hodgson c2006. Any further delays will cement in further the misguided high carbon path we are following now, with the environmental, human and economic costs that accompany that path.
The focus of the NZ ETS needs to be on helping us to enhance and maintain our natural heritage and capital, social capital, economic assets and competitiveness in the longer term (rather than just protecting our current competitiveness in the short term). This longer term focus will reduce the risk of us facing trade barriers in the longer term because we are still a high-emissions economy.
The objectives of the NZ ETS should be recast along the lines of: “to help NZ make an orderly transition to a zero net emissions economy by 2050 while keeping the costs to society as low as possible consistent with this goal.
2. A Carbon Budgeting framework
To achieve a low-emissions economy meeting triennial staged three yearly targets with zero emissions by 2050 while keeping costs to society as low as possible will require careful, comprehensive and inclusive planning.
A key objective of Government policy designed to effect a transition to a low emission economy by 2050 must be to ensure that sufficient investment of the right kind takes place across the economy at the right time. This is so that our current high-emission infrastructure, plant, equipment and processes (including farming systems and urban systems) are replaced in a timely manner by low-emission alternatives. This planning would be hugely assisted by the adoption by NZ of a Carbon Budgeting framework. ECO also suggests a range of other measures at the end of this document.
Responsibility for a carbon budgeting framework should not rest with the Government of the day, it should be given to an independent Climate Commission charged with reporting its findings and recommendations to the Government, Parliament and the public.
3. A credible, indicative, significant, rising price path for carbon in NZ
One tool that the Government can use to help achieve the transition to a low-emissions economy is a significant and rising price for carbon.
Such a price path that is substantial and rising, may be achieved by either a carbon charge, or a market price for carbon. Such a price path is a key determinant of a shift from investment in emissions-intensive plant, processes and infrastructure to investment in low-emissions plant, processes and infrastructure.
A very low price will create very little shift (as has been clearly demonstrated over recent years) but higher prices (provided the market and investors believe these will be sustained) will help create the necessary shifts. A significant carbon price will also result in increased afforestation and carbon sequestration (again, provided that the market believes that the price will be maintained). The NZ ETS has been purpose-built for this job – the Government needs to now unleash it and let it work, or to replace it with a significant and rising carbon charge.
Microeconomic analysis
Microeconomic analysis with a supply curve for emissions reductions (aka the marginal cost of emissions reductions units) and a demand curve for these (aka the marginal benefit curve of emissions reductions) can be used to analyse the reaction of markets to a price of carbon.
Regulators can either set the quantity of emissions permitted (a genuine cap) and allow the market to find its own price, or the government can set the price in the form of a carbon charge, and allow the market to determine the quantity emitted in the light of the price penalties, so that marginal abatement cost = the marginal benefits of abatement determines the market clearing quantity.
The adjustments in behavior will be determined by a number of variables, but it is clear that there will be both reduction in demand for polluting activities as the price of carbon rises, and there will be substitution to less polluting activities.
So far the functioning of the ETS has been disabled by the exemptions of agriculture, the 2:1 subsidy, provisions until 2015 for the import of low cost and dodgy Ukrainian hot-air international credits and other problems. The exchange of international unitsfor NZUs has meant that the supply of credits has been largely unconstrained, meaning that the quantity cap has not in fact applied in practice. Taxpayers have subsidised the exchange and the price signal has been suppressed.
For well-tuned policy, the price elasticities of demand and supply of units, and lying behind this, the elasticities and substitution behavior of land users, especially between diary and forestry.
There is little information in the MfE and NZEIR papers on land use changes with variations in the price of dairy and the price for forestry products. Given that these prices have changed significantly and in many cases in degrees that make carbon price changes look insignificant, there is a natural experiment that should provide data for analyses of these price-driven substitution and other effects.
ECO asks that land use price sensitivities and empirical data and its analysisbe provided to the public and the engaged policy community. We need data on land use switching and the Price Elasticities of Demand (PED) and Price Elasticities of Supply (PES) for each product price be presented, since this will inform the policy community as to how any carbon price will affect decision makers, other things being unchanged (ceteris paribus).
We recognise that Prof Manley’s report does consider some of these sensitivities in relation to forestry, but the late release of this report and its confined scope – to forestry only – means that we can have only a partial grasp of this issue.
Even so, as Manley explains, afforestation and deforestation are sensitive to carbon prices over $15/NZU and to Land Expectation Value (p2, 8).
A significant carbon price
NZ ETS units are now trading below $10 which, given the current ‘one unit-for-two tonnes’ arrangement, indicates a carbon price of less than $5/tonne. That is not a significant price in terms of achieving the required emissions reductions, the needed investment shifts, or increased afforestation, described above. Changes of fuel prices in 2015-16 have been of a much greater magnitude than projected C prices so could be used as proxies to study behaviour.
We agree that one important element of finding the right incentives to reduce emissions and to establish a significant carbon price in NZ is to abolish the current 1-for-2 arrangement. But that only addresses one relatively small part of the problem of poor design and operation of the ETS.
At least twice as important is the near complete exemption for methane emissions and N02 emissions from agriculture. Those are about half of the NZ GHG emissions, and in providing exemptions, loads double the burden on to others in the economy to meet any emission reduction targets. Most of those extra costs are thus dumped on to taxpayers, who are not in a position to respond to that extra burden by any behavior change – apart from getting grumpy with the unfairness of it all and losing any confidence they may retain in the government.
Failure to provide any incentive to shift to lower-emissions farming means that long-term and expensive assets associated with dairy farming, will lead to high costs and misdirected investment in dairy farming. There is good evidence (E.g. from Alison Dewes and others on low-input and impact farming systems in dairying) that lower input, less intense farming, especially dairy farming, can provide good livelihoods and profits with fewer emissions and less impact on other aspects of the environment. Dairy farmers do respond to price signals and they do switch land use. The recent drop in the dairy prices has resulted in a drop of dairy cattle numbers by over 3% and production by 5%.