Test before you leap

Matt Burgess
Insights Newsletter
28 June, 2019

If politics makes it hard to change a policy after it is announced, then testing policies before they are announced has potentially huge benefits.

Testing is particularly important in climate change policy as policies vary enormously in performance, and governments have a particularly hard time in backing away from environmental policies that do not work.

Simply avoiding counterproductive policies like 100% renewable electricity, for example, could double the performance of New Zealand’s emissions efforts.

If we are to get anywhere near our emissions targets, policies must be effective, fixed or killed. That includes the Emissions Trading Scheme.

I presented on these issues to the Electricity Retailers’ Association last week and was asked a very fair question: what is the evidence for the cost-effectiveness of carbon pricing through cap-and-trade systems?

The evidence to date is encouraging, though not yet overwhelming.

A 2015 journal article reviewed seven cap-and-trade systems covering various pollutants, including carbon dioxide, beginning with a 1982 scheme to reduce lead in gasoline.

Where the data allowed schemes to be assessed, cap-and-trade was found to achieve 15% to 90% cost savings compared with other regulation.

A 2018 article in Climate Policy cited studies suggesting the European ETS reduced emissions by between 2.5% and 13.8% across its three phases relative to estimates of a no-ETS baseline. Of course, tighter and more comprehensive caps could do more.

Other evidence, including summaries from the Intergovernmental Panel on Climate Change, are broadly favourable.

But the real world can make things hard to test. After the Global Financial Crisis in 2008, emissions in many countries fell, and carbon prices collapsed. Where emissions fell below regulated caps, cap-and-trade systems were no longer constraining emissions so their effectiveness could not be tested.

Global carbon prices have since recovered. New Zealand’s effective carbon price has trebled since 2016. New evidence will soon follow.

The bigger test for cap-and-trade is to discover how high the political ceiling for carbon pricing goes, and how to shift its long run position. That’s where permanent institutions like a Climate Change Commission can play a useful role.

A more immediate question is how the government will respond to a report by its Interim Climate Change Committee, which has spent the last year testing the government’s 100% renewables policy.

If media reports on that report are true, we may reap an environmental and economic windfall just by having that policy take a leap.

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