Isn’t it time to admit the Emissions Trading Scheme will never work?

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This article argues that the ETS won’t work and the time has come to explore other methods of reducing emissions, like Tradable Energy Quotas (TEQs) instead.

The New Zealand Emissions Trading Scheme is a tool to help the country meet its domestic and international climate change targets. Our ETS has been in operation since 2008. The theory is that if you make polluters pay for their right to emit greenhouse gases and that price rises, firms will change their practices and reduce their emissions.

Fifteen years and many twists and turns later it looks as though several key proponents are finally admitting it may not work.

The scheme works like this: Government decides how many tonnes of carbon dioxide equivalents our country can emit this year. Then polluters buy their permits to pollute from the Government. The unit is the NZU. Buy one NZU and you can emit 1 tonne of carbon dioxide equivalents.

New Zealand started considering ETS before the turn of the century and 25 years later is still not working. We will certainly not reach our emissions target at current rates.

In 1990 our gross emissions were 65 million tonnes of carbon dioxide equivalent and in 2021 they were 76.8 million tonnes, a rise of 19%. And yes, you read that right. We have been too dependent on planting trees.

The ETS finally came into effect in 2008 but the price of NZUs remained stubbornly low due to a combination of factors and government policy. So up till 2020 the price didn’t rise above $35. After fixing up some other problems the Climate Commission managed to persuade government to put a cap on the number of units up for auction, thus causing the price of carbon to rise as far as $88 in November 2022.

Government rejects Climate Commission’s advice

Government had consulted Treasury who warned that the price of petrol would rise and so would electricity. And price rises would be worse for business and industry.

So late in 2022 Cabinet rejected the Climate Commission’s advice to change settings to allow the price of the ETS units to rise, citing the cost-of-living crisis.

That caused the carbon price to plummet, and in March the ETS auction failed for the first time, as buyers did not bid high enough to trigger the release of units. The price of NZUs fell from its peak of nearly $90 to $59. And predictably the second auction failed in June, 2023.

Then on 19 June the government announced a review of the ETS with an 82-page document on the Ministry for the Environment website, giving four options for tweaking the system yet again.

In April 2023 the Commission advised government again to change the Emissions Trading Scheme (ETS) settings to enable the carbon price to rise. They warned otherwise the ETS might fail.

So how could the Emissions Trading Scheme succeed?

 In April 2018 the Productivity Commission produced a 500 page report that concluded by warning that if New Zealand was to meet its climate 2050 net zero target, the price of our NZUs would need to rise to between $150-$250. Now that would certainly be noticed in the petrol price, so much so that low-income families would be excluded from energy. Many essential workers like cleaners and supermarket workers would be affected.

Unlike tobacco or alcohol, where price increases discourage use, raising petrol prices through the ETS may not lead to significant emission reductions, as the country’s reliance on fossil fuels remains high.

Exemptions and distortions of the ETS

The ETS does not apply to our agriculture industry, responsible for about half our emissions. Farmers have managed to wriggle out of the ETS for decades. Dairy and meat get a free ride.

As if this weren’t enough, it also exempts 90% of the emissions in a sector called Emissions Intensive Trade Exposed (EITE) The top four beneficiaries in order are NZ Steel (Australian owned), NZ Aluminium Smelters (an Anglo Australian multinational company), Methanex (Canadian owned) and Fletchers Golden Bay Cement.

So only 45% of our emissions are covered by the ETS.

Few understand the Emissions Trading Scheme

ETS is hard to understand and few mention it in daily conversation. I don’t know about you, but no one I know has ever complained that their petrol is too dear because of the ETS. ETS still doesn’t affect the average driver. Even at $85 for an NZU, the ETS component of a litre of petrol was just 18 cents.

Its complexity has become the scheme’s defining feature. In 2020 economist Dr Geoff Bertram described it, the ETS is “characterised by complexity, obscurity, openness to rent-seekers, and ineffectiveness”. He also called it “a dog’s breakfast”.

John Key once described it as hideously complicated.

Only the bravest of journalists dare tackle the topic. Charlie Mitchell of Stuff calls it “Kafkaesque” and says there are few other words that adequately explain the nightmarish complexity of the Emissions Trading Scheme (ETS). “It is surely one of the worst public policy disasters in this country’s recent history.”

Finlay McDonald of The Conversation wrote in 2010, “It is so opaque and complex we are obliged to believe experts. Only those with a vested interest or a job in the bureaucracy administering it can even claim to understand it.”

The politics of price-based schemes

Rising energy prices, including petrol, can have negative consequences, particularly for low-income families, making price-based schemes like ETS or carbon taxes politically risky. So it’s essential to understand the politics. It is one thing to put up the price of tobacco to discourage use and quite another to raise the price of energy. Energy is universally needed.

93% of our goods are delivered in diesel powered trucks for goodness sake. We know what happens when the price of diesel increases – inflation. And it hits the poor more than the rich.

It astonishes me that campaigners still seem to completely misunderstand the politics of rising energy prices. There is so much energy and effort invested in trying desperately to make the ETS work that people now seem more determined than ever. Like a fly trying harder and harder to get through a window pane, they just keeping trying and hoping.

We don’t mind if junior bureaucrats and scientists are politically naïve but when it comes to politicians, senior bureacrats and seasoned campaigners it is inexcusable.

More and more people doubting effectiveness of ETS

One of the earliest critics of ETS was Dr Geoff Bertram, an economist at the Victoria University of Wellington who co-authored a 2010 book about the ETS. In it he says the subsidies are “massive” and function as “bare-faced distortions to the market”.

Our biggest expert on ETS is Catherine Leining of Motu. She was the lead author of a paper on its history.

“Formal design of the NZ ETS began in early 2007, following the government’s decision in December 2005 to abandon the carbon tax proposed in 2002 and extensive public consultation on alternative mitigation policies. The decision by Cabinet in August 2007 to proceed with designing an ETS built on more than a decade of domestic consideration of emissions trading, as well as preparatory work to implement the proposed carbon tax in the energy and industrial sectors. After further public consultation on the proposed framework and legislative deliberation with public submissions, the NZ ETS passed into law in September 2008 (Leining and Kerr 2016).

By 2017 she was writing “to date the system has had no substantial impact on domestic emissions or business decisions. The causes for this are specific and well-understood. “

Leining is now a Climate Commissioner and is now less enthusiastic, calling the ETS a blunt instrument. When the cap was finally introduced in 2021, she wrote,

“Even with further improvements, the ETS – acting alone – will not be capable of delivering a successful low emissions future. It incentivises emission reductions when doing so is profitable – regardless of other consequences to society, the economy and the environment.

Also It will not help educate people about reducing emissions, provide technical support, overcome high up-front costs for new technologies or override entrenched habits and social norms.”

She now wants a clever combination of policies.

And at Question Time in Parliament on 30 May, the Minister of Energy said much the same, that ETS will not work by itself.

The Minister of Climate Change James Shaw told Newsroom’s Marc Daalder in June 2020, “There is no chance. No chance – zilch – that you’ll do it just with the ETS. And I think that’s a significant shift in thinking.”

No, the ETS will not work, just as other price-based schemes like carbon taxes won’t work to reduce fossil fuel use. To persist is to resemble a fly trying desperately to fly through a window pane. Stubborn people who should know better must step back, pause and think. Despite 25 years of investment in this scheme, it is time to eat humble pie and admit it.

Time for a transition to TEQs

Yes, it is time for a strategic change. And that change could be to Tradable Energy Quotas (TEQs)  These are legally tradable electronic rations and the scheme is well worth reading

But why, you may ask are you suggesting we ration fossil fuel energy which produces carbon dioxide? Doesn’t this omit all our agricultural emissions? Well no. As a country we are still 68% dependent on fossil fuels. And fossil fuels are essential in the manufacture of urea, superphosphate etc. So our agriculture industry largely depends fossil fuels. Fossil fuels are then used at every point along the food chain.

Individuals driving age and over are first given an annual supply of TEQs and their TEQs are topped up weekly. But businesses, organisations and governments will have to buy their TEQs, the price being set by a weekly tender.

Low energy users can sell their TEQs to the registrar and high energy users can buy extra TEQs from the registrar. All such transactions take place at the prevailing national price—like topping up a mobile phone or travel smartcard, there is no haggling required. This ability to trade TEQs allows for a variety of energy use demand. The total Energy Budget for fossil fuels declines steadily over time.

1 TEQ is defined as one ‘carbon unit’ – corresponding to the quantity of fuel or electrical energy that produces 1 kg of carbon dioxide over its life cycle (not only from its final combustion, but also from the combustion of the other fuels used in bringing that fuel to market)

It is only when you buy coal, petrol, diesel,  natural gas or electricity that you need to surrender TEQs. The number of occasions on which individuals actually purchase energy is quite limited—perhaps eight times a year for utilities, although it could rise to some thirty times a year for individuals with cars—and most TEQs transactions are done by card and direct debit. No carbon labelling is required.

Different fossil fuels have different emission profiles, so they are each given a carbon rating. One unit of coal diesel, petrol, gas will produce different amounts of carbon dioxide so will involve the surrender of different quantities of TEQs.

TEQs is a scheme that builds in incentives to all pull together in the same direction, a scheme that is not dependent on government punishments but on our own intrinsic motivation, intelligence and creativity, a scheme that truly takes us to low emissions and less fossil fuel dependence. Unlike ETS the signal that it is being successful is a low price for TEQs, not high. Unlike ETS it is in everyone’s interest to keep the price of TEQs low.

It will have a significant effect on agricultural emissions too because fossil fuels are involved all along the food chain and the manufacturers of urea and superphosphate will have to purchase TEQs and build the price of those TEQs into their fertilisers.

It is summarised on https://www.flemingpolicy.org.uk/teqs and there is an excellent FAQ section.

The 60 page All Party Parliamentary Report Jan 2011 is at https://www.flemingpolicycentre.org.uk/APPGOPO_TEQs.pdf

Further information is on our DANZ website at https://www.degrowth.nz/blog/teq

David Fleming’s description of TEQs in his book Lean Logic is free online. I recommend spending time reading and digesting this alternative.

The actual transition from ETS to TEQs is, we acknowledge, very challenging. But this is a change from an ineffective, regressive scheme to an effective, progressive scheme. We can do it.