The Acid Test

Dr Eric Crampton
Insights Newsletter
14 September, 2018

Nutrient load is too high in too many New Zealand lakes and rivers. Cleaning up the mess featured prominently in last year’s election. Getting the job done requires looking at what works.

On that front, New Zealand has learned from America’s abolition of acid rain.

During the 1980s, sulphur dioxide emissions from American electricity generation plants made rain acidic, with damage to lakes building up over time.

The Acid Rain Programme aimed to reduce emissions to half of their 1980 levels but the best way of cutting sulphur dioxide emissions was far from obvious.

Different power plants had different opportunities and costs in cutting emissions: shifting to better quality coal, installing smokestack scrubbers to remove sulphur dioxide, or even shutting down. It would have been impossible for officials in Washington DC to prescribe what was really best for any one of them.

Rather than requiring each plant to halve its emissions, or prescribing types of coal or scrubbers, the government left those decisions to each generator. It set a cap on the total amount of sulphur dioxide that could be emitted, issued emission permits, and let them trade. A plant could emit as much sulphur dioxide as it wanted, so long as it had the permits to do it, and total emissions could not exceed the cap.

It worked. Acid rain ended. And because each power plant was able to find the solution that worked best for them, trading saved between $200 milllion and $500 million per year when compared to the cost of reducing emissions under blanket regulations.

New Zealand’s nutrient problems in lakes and rivers have some similar characteristics. And New Zealand has learned from the American experience.

Nutrient emissions around Lake Taupo are now managed within a cap and trade system. Total emissions within the catchment are capped, activities producing emissions require consent, and consent-holders can trade their allotment with others.

Motu’s evaluation shows the scheme to be generally successful. Different farmers face different circumstances; the trading scheme encourages emission reduction by those farms most able to do so.

There remains room for improvement. Trading is bespoke and costly, with trades requiring complicated approvals. Farmers often wish to sell their consent only for a few years rather than permanently, requiring different lease arrangements in the absence of futures markets.

Improving the system is well worthwhile as more catchments hit against environmental constraints.

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