Strengthening Emissions Trading Scheme would reduce emissions at less cost

Dr Eric Crampton
The Dominion Post
29 June, 2020

We all know the analogy about barring gates after the horse has bolted from the barn. It speaks to the futility of doing something too late solve a problem.

What about when policies triple-padlock the gate only after the horse is safely in the pen? That brings its own special kind of costly futility, one that is harder to see until the next time the horse is due for a ride but the padlock key is nowhere to be found.

Last week, Parliament repealed Section 104E of the Resource Management Act. The section prohibited councils from considering the climate change effects of their consenting decisions. But because the measure follows the Zero Carbon Act placing a binding cap on emissions in the Emissions Trading Scheme, it’s a bit like locking a gate after the horse is already in the pen.

Let’s walk it through.

Until recently, the Emissions Trading Scheme (ETS) put a price on carbon emissions but did not really have any hard cap on New Zealand’s total net emissions. Cap and trade systems work differently without a cap on net emissions, and our system, until recently, capped emission prices instead of emission quantities. At the price cap, the system worked more like a carbon tax. Every emission within the system carried a charge, but net emissions increased if you or I decided to drive more. If you drove a bit less, or aimed for a zero-carbon lifestyle, net carbon emissions could go down a bit.

Without a binding quantity cap on the ETS, a lot of other regulatory measures could reduce net carbon emissions. In most cases, those regulations would be a pretty poor way of reducing emissions: you could do a lot more good in emission reduction at a lot less cost by just strengthening the ETS. But the measures would have at least some effect. If a local council required changes in an RMA consent to reduce carbon emissions, those reductions might have been costly and imposed an awful lot more delay in getting new subdivisions consented to help fix the housing shortage. But, in the absence of an emissions cap, New Zealand’s net emissions would be lower.

But the Zero Carbon Act brings a binding cap on New Zealand’s net emissions. That changes how the ETS works because now every tonne of carbon not emitted is a tonne of carbon available for someone else to emit.

Shifting to a zero-carbon lifestyle reduces demand for the carbon credits embodied in everything we purchase, from electricity to petrol, and from glass bottles to aluminium cans. That slightly lowers the price of the credits while freeing them up for someone else to purchase and use instead.

Or, going the other way, trading in a Nissan Leaf for the 1969 Buick Skylark I drove in grad school (24 litres of petrol per hundred kilometres) would mean buying a lot of carbon credits every time it is filled up, and a tank sure would not get you from Auckland to Wellington without a stop or two. But it would be bidding those carbon credits away from someone else since there is a limited supply. Every tonne of carbon pouring out of one tailpipe is a tonne not coming from someone else’s car, or out of a smokestack at Huntley, or somewhere else entirely. Or, perhaps, that carbon credit purchase instead paid for someone to plant a few trees.

And so, we are adding padlocks to the pen after the horses are safely home. Now that the ETS comes with a binding cap, council consideration of carbon emissions in consenting cannot really affect New Zealand’s net emissions. If a new subdivision means more driving and more electricity use, every tonne of associated carbon must be bid away from some other use. If the council tells developers every house must meet costly standards for energy efficiency, the home’s buyers will have a higher upfront cost and lower ongoing electricity costs. But net emissions will not change. The household’s lower demand for carbon credits just frees up credits to be used elsewhere.

But each padlock is costly. Consenting processes are already slow enough and councils are hardly well positioned to assess the carbon effects of anything. Consultants providing climate impact assessments may do well, but it won’t help New Zealand’s net emissions where those emissions are already covered under the ETS.

Rather than attempt to assess the greenhouse gas emissions of every local activity, councils could make life a lot simpler for themselves by adding one line to their consenting documents. If applicants confirm every consented activity is covered by the ETS, then the horse is in the pen. No further council padlocks are needed.

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