First, a bit of background.
New Zealand’s carbon price is set through the Emissions Trading Scheme. People who sequester carbon dioxide are awarded carbon credits – so far, by planting trees. Emitting greenhouse gases, if you are not a farm animal, requires surrendering credits. For example, whenever you fuel up your car, the petrol company will have purchased and surrendered a small fraction of a carbon credit for every litre.
Those are not the only credits in the market.
Every year, the government awards carbon credits to businesses, without charge, if it has good reason to worry that global emissions would be higher if it did not provide those industrial allocations. It does the world no good if a relatively low-emitting New Zealand factory shuts shop and production shifts instead to a country without any carbon charge.
And, every year, the government puts some carbon credits up for auction. If bids for those carbon credits do not reach the government’s reserve price, no credits are sold. Instead, those credits get added to the next auction. At the end of the year, unsold credits are simply deleted.
So when a government carbon credit auction ‘fails’, the country’s future net emissions go down. None of those additional credits are backed by any carbon sequestration. Credits that are not released cannot be used. It’s a strange definition of failure.
New Zealand’s net emissions, outside of agriculture, are then defined by the number of carbon credits that the government will create between now and 2050 – plus older such credits that have not been used yet. After 2050, net zero means new credits will have to be generated by sequestering carbon.
The number of carbon credits that the government will auction and allocate over the next few years is already set. But that number for future years is not pinned down nearly as tightly.
The government sets emissions budgets over five-year periods running through 2035, with another through 2040 under assessment. Those budgets help set the number of carbon credits that will be auctioned or allocated in future years. The number of issued carbon credits have also been required to align with the government’s commitments under the Paris Agreement.
Earlier this month, the government suggested pulling the pin linking the ETS to the government’s Paris commitment.
The problem isn’t the de-linking from Paris per se. But the government has not proposed anything to provide that extra layer of accountability in case future governments want to create a lot more carbon credits.
If you think that future governments will be tempted to create more carbon credits if carbon prices are high, investing in lower-carbon technologies, or in carbon sequestration, carries more political risk. One external check against that risk has been lifted.
The government has options for restoring that kind of check.
It recently announced a new Nationally Determined Contribution for the next Paris round. It could link the number of carbon credits to that new Paris commitment.
I have liked a different option.
The government could legislate the maximum number of ‘from thin air’ units that governments could auction or allocate between now and 2050. That number, plus similar units that have already been printed but not used, would be New Zealand’s future contribution to global emissions. Well, apart from emissions from farm animals.
If the number were legislated, those holding carbon credits could sue the government if it broke the deal by releasing more of them. It would be akin to securities fraud. That adds credibility.
At the same time, the government could be allowed to buy carbon credits from overseas markets, but only from markets that the Climate Commission considers credible.
Whenever carbon prices here are higher than average prices in those credible overseas markets, the government could make money by buying credits abroad to ‘back’ additional units it could sell here. Emissions here would be matched with reductions elsewhere. The number of ‘from thin air’ carbon credits and net emissions would be credible, and the domestic carbon price would not exceed prices in other credible markets.
There are surely also other options for more durably anchoring the number of carbon credits the government will auction or allocate over the coming decades.
A government that wants an ETS-led approach to emission reductions has to make sure that the ETS remains credible through 2050 and beyond. Otherwise, future governments will be tempted to use regulations to cut emissions instead. Compared to a robust and credible ETS, regulatory approaches will cost the country far more while doing far less to reduce net emissions. A thousand inefficient micromanaging rules would take the place of a simple carbon price.
There are many options for fixing the problem. The government should choose one.
Dr Eric Crampton is Chief Economist at the New Zealand Initiative. This article was first published HERE
Those are not the only credits in the market.
Every year, the government awards carbon credits to businesses, without charge, if it has good reason to worry that global emissions would be higher if it did not provide those industrial allocations. It does the world no good if a relatively low-emitting New Zealand factory shuts shop and production shifts instead to a country without any carbon charge.
And, every year, the government puts some carbon credits up for auction. If bids for those carbon credits do not reach the government’s reserve price, no credits are sold. Instead, those credits get added to the next auction. At the end of the year, unsold credits are simply deleted.
So when a government carbon credit auction ‘fails’, the country’s future net emissions go down. None of those additional credits are backed by any carbon sequestration. Credits that are not released cannot be used. It’s a strange definition of failure.
New Zealand’s net emissions, outside of agriculture, are then defined by the number of carbon credits that the government will create between now and 2050 – plus older such credits that have not been used yet. After 2050, net zero means new credits will have to be generated by sequestering carbon.
The number of carbon credits that the government will auction and allocate over the next few years is already set. But that number for future years is not pinned down nearly as tightly.
The government sets emissions budgets over five-year periods running through 2035, with another through 2040 under assessment. Those budgets help set the number of carbon credits that will be auctioned or allocated in future years. The number of issued carbon credits have also been required to align with the government’s commitments under the Paris Agreement.
Earlier this month, the government suggested pulling the pin linking the ETS to the government’s Paris commitment.
The problem isn’t the de-linking from Paris per se. But the government has not proposed anything to provide that extra layer of accountability in case future governments want to create a lot more carbon credits.
If you think that future governments will be tempted to create more carbon credits if carbon prices are high, investing in lower-carbon technologies, or in carbon sequestration, carries more political risk. One external check against that risk has been lifted.
The government has options for restoring that kind of check.
It recently announced a new Nationally Determined Contribution for the next Paris round. It could link the number of carbon credits to that new Paris commitment.
I have liked a different option.
The government could legislate the maximum number of ‘from thin air’ units that governments could auction or allocate between now and 2050. That number, plus similar units that have already been printed but not used, would be New Zealand’s future contribution to global emissions. Well, apart from emissions from farm animals.
If the number were legislated, those holding carbon credits could sue the government if it broke the deal by releasing more of them. It would be akin to securities fraud. That adds credibility.
At the same time, the government could be allowed to buy carbon credits from overseas markets, but only from markets that the Climate Commission considers credible.
Whenever carbon prices here are higher than average prices in those credible overseas markets, the government could make money by buying credits abroad to ‘back’ additional units it could sell here. Emissions here would be matched with reductions elsewhere. The number of ‘from thin air’ carbon credits and net emissions would be credible, and the domestic carbon price would not exceed prices in other credible markets.
There are surely also other options for more durably anchoring the number of carbon credits the government will auction or allocate over the coming decades.
A government that wants an ETS-led approach to emission reductions has to make sure that the ETS remains credible through 2050 and beyond. Otherwise, future governments will be tempted to use regulations to cut emissions instead. Compared to a robust and credible ETS, regulatory approaches will cost the country far more while doing far less to reduce net emissions. A thousand inefficient micromanaging rules would take the place of a simple carbon price.
There are many options for fixing the problem. The government should choose one.
Dr Eric Crampton is Chief Economist at the New Zealand Initiative. This article was first published HERE
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