Why the proposed policies for getting to net zero emissions are the worst option.

This post is about what is the best way for New Zealand to achieve its stated goal of net zero emissions by 2050.

It is not about whether temperatures are rising (they are).

It is not about whether greenhouse gas emissions are principally responsible (they are, but there is some doubt over the strength of the relationship)

It is not about whether we should have a target of net zero by 2050 (highly debatable, and depends on if big emitters reduce emissions).

It is purely about having had Parliament vote for a target of net zero by 2050, what is the best way to get there. By best way, I mean the way that has the lowest economic cost of New Zealand families and businesses.

There are broadly three paths you can choose:

1. An Emissions Trading Scheme
2. No ETS, and lots and lots of policies for every sector of the economy
3. An ETS and lots and lots of policies for every sector of the economy

In my opinion, they are in order of desirability. The best option is an ETS. The worst option is an ETS and policies. The middle option would be no ETS. I’ll explain why.

ETS

The detail of an Emissions Trading Scheme can be very complex. But the principle is very simple. Another name for them is a cap and trade scheme.

You require people to purchase “credits” for any significant emissions of greenhouse gases. You cap the number of credits and reduce that cap over time.

In 2018 NZ had 56 Mt of CO2 equivalent. By 2050 it needs to be zero. So you reduce the cap by 1.75 Mt a year. As you reduce the cap the price goes up.

They key aspect is the trade. By allowing businesses to trade, it means that each and every business (and household) can make a decision about how best to respond to the increasing cost of emitting greenhouse gases.

Individual businesses will make decisions on issues such as whether or not to use electric cars, to travel by plane as often. Individual households will also decide on when it becomes economic to get an electric car, to insulate their house to reduce higher power bills etc.

The benefit of the ETS is certainty and flexibility. If you set a cap and have it reduce, then you will be on track to meet your target, so long as it includes all sectors. But you don’t have the Government deciding for every business and household how they meet that target.

By say 2035 I would expect the cost of petrol to be very high due to the ETS. The majority of New Zealanders will probably be purchasing electric cars. But if a family decides they still want to use a petrol car (say because they only have one car in the household and do shift work and don’t have time to charge an e-car) then they can still use a petrol car – they will just be paying more for it, and elsewhere in the economy someone else will reduce emissions because there is a cap.

The current ETS is not massively effective because politicians have wanted to shelter businesses and households from costs so you have issues around initial free credits, whether all sectors are in, can you trade internationally etc. But these can be changed. A comprehensive ETS with a continually reducing cap will reach net zero, and do so in a way which lets individual businesses and households decide what to do.

Non-ETS Policies

If for some reason a country doesn’t want to have an ETS, then an alternative is to have scores of policies to reduce emissions. In every sector the Government will decide what should be done. It will ban petrol car imports. It will ban coal burners. It will ban natural gas exploration. It will mandate a reduction in dairy cow numbers. It will require every source of electricity to be non-emitting etc etc.

These will reduce emissions. But not as well as an ETS. Sometimes they may even increase them, due to unforeseen consequences. If you ban natural gas, then coal imports go up. If you ban petrol car imports from a certain date, there might be a huge increase in car imports just prior to then.

Another problem with sector policies is it has the Government deciding centrally for everyone.

Also the cost of reducing emissions can be far far higher with pick and mix policies than an ETS. One estimate is that the cost of reducing a tonne of emissions under the ETS is $38 while some non-ETS policies will have a cost of $1,500 per tonne of reduction.

So a pick and mix of policies will reduce emissions in the absence of an ETS. It will cost more, have less flexibility and less certainty of hitting your target, but it will have some impact.

ETS and non-ETS policies

This is by far the worst option, and not even close. If you have an ETS with a reducing cap, then by definition all these other policies will not reduce emissions any further – not by one gram. If you ban petrol cars, then suddenly there is a surplus of credits and other sectors will emit more as there are more credits available.

Doing an ETS and non-ETS policies means you will not reduce any emissions beyond what the ETS is capped at, but you will impose much higher costs on the economy and remove choice and flexibility from businesses and households.

Sadly this is what both the Government and the Climate Change Commission is saying what we should do.

Politicians like to be able to announce policies so it looks like they are doing something. Just having a well functioning ETS that reduces emissions doesn’t get you into the media every week. But the reality is all these announcements will not reduce emissions any further than the cap in the ETS.

Now again this is not a debate about the temperature, the science or even the target. It is purely about how best to meet the target Parliament has agreed.

A properly functioning ETS is the equivalent of going hard and going early. It will achieve greater reductions at an earlier stage and for less cost.

This is what the the Government should commit to. Everything else is basically window dressing.

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