Government boost on emissions must be transparent
Basil Sharp is Emeritus Professor of Economics and former Director of The Energy Centre, University of Auckland Business School
The official emissions reduction plan gives companies and vehicle owners a choice: pay for their emissions or take advantage of decarbonisation incentives. No one knows yet in which direction they will go.
The government’s emissions reduction plan was unveiled last week, but before we get into the details, let’s briefly summarize the issue.
First, New Zealand signed a commitment to the Paris Agreement to reduce greenhouse gas emissions associated with production and consumption. Economics qualifies emissions as externalities (meaning that they are the result of industrial or commercial activities that have an impact on others not involved in their production) and offers two solutions, taxation or tradable rights .
We now have the Emissions Trading System (ETS), which is a tradable rights-based mechanism that has recently been capped. Not all sectors are in the ETS, agriculture being the exception. Today there is a price associated with the right to emit CO2 and the trading units are called NZ emission units.
A distinctive feature of the benefits associated with the cost of actions aimed at limiting greenhouse gases is non-exclusive. For example, a New Zealand company investing in low-emission heating bears the cost, while the benefit of the investment is shared by the global community. There are commercial and reputational benefits, for example, to the New Zealand economy, but there is no clear alignment of costs to benefits.
Finally, as a corollary, there is no reason to expect our efforts – however well intentioned – to limit the harmful effects of climate change. This can only come from coordinated global action such as the Paris Agreement.
Now let’s get to the plan. The government has set ambitious targets to achieve net zero by 2050 with emissions budgets declining in five-year increments. For example, a 20% reduction from 2021 levels is requested over the period 2026-2030; and 35% from 2031 to 2035. This is not negligible.
In the absence of quantifiable benefits, the challenge is to achieve these targeted reductions at the lowest cost to the economy. And the economy can help. The idea is to equalize the unit cost of emission reduction for all emitters and achieve the goal. Emitters have a choice: pay the price of New Zealand units and cover emissions, or reduce emissions.
Let’s now turn to the plan released on May 16 to achieve the targeted reductions for 2022-2025. The financing of the plan contrasts with previous attempts to transition the economy, develop energy resources and achieve some degree of energy independence. The national government’s Think Big program, supposed to cost about $7 billion in 1980 dollars, went straight to public debt. Over time, taxation, asset sales, and revenues from state-owned enterprises have serviced this debt.
Today, we have implemented the ETS which generates revenue to support targeted emission reductions. Revenues from the ETS – payments received by the government for the right to emit CO2 – are recycled to support investments to reduce emissions.
The government took a kick and allocated $2.9 billion from the Climate Emergency Response Fund (CERF), funded by recycled revenues.
So that’s a brief summary of the problem and the plan. The question now is: will the repartition and the mandatory policies that accompany it achieve the targeted reductions? For example, $1 billion has been allocated to transportation, of which $569 million is allocated to a “scrap and replace” program and $20 million to help low-income families rent low-emission vehicles. . A total of $1 billion over seven years for energy, including $650 million for industry decarbonization over four years. Agriculture and forestry received $710 million over the next four years. Agriculture, which contributes the most GHGs, has not yet been included in the ETS.
Whether the incentives offered achieve the intended results depends on the behavior. For example, a company currently using coal for heating faces a choice: pay the market price for NZUs to cover emissions or take advantage of the incentive to decarbonize. Others, including owners of older vehicles, face a similar choice. Let’s go back to the previous question: will these incentives make it possible to achieve the targeted reductions and at the lowest cost? We don’t know – the punt could find contact. Some might object to companies financed by foreign investment and oligopolies, of which we have many, receiving CERF funds.
The scale and scope of the emissions reduction plan will affect most, if not all, sectors and households in the economy. It will have an impact on the stock of capital, the profitability of companies, transport and households. The plan is the first step towards transitioning to a low-carbon economy. It will become the object of political tinkering. However, over time, we can expect a fundamental change in the structure of the economy and the incentives that businesses and households face. There will be additional costs, not included in the financial package, associated with the procurement, measurement and monitoring of emissions.
Climate response politics will take us into uncharted waters and it would be dishonest of our political masters to say otherwise. It is important to note that the allocation of funds and the results achieved must be made public.