The proposed Emissions Trading Scheme (ETS) is under intense scrutiny at the moment. Lobbyists, economists and politicians are all pounding their respective beats, and as is usual in these matters, a great deal more heat than light is being shed on the proposed legislation. At the beginning of the week, the government’s climate change leadership forum – the great and the good of the business world – announced that it supported the broad outline of the ETS with some caveats (announcement, Herald), only for Business NZ to promptly withdraw its support. Then the Sustainability Council of NZ published a report [PDF] criticising the way that the ETS transfers revenue from consumers to key industries – especially agriculture – and warned that it wouldn’t do enough to reduce emissions. Not to be outdone, the NZ Institute for Economic Research produced its own report [PDF], warning that the scheme would do little good and cost the economy billions, and advising that we shold do nothing except buy Kyoto compliance on the world market. ACT leader Rodney Hide then announced that “the Government’s ETS is a crock and should be dumped.” There are now rumours that the government is running scared, and might delay implementing the petrol and fuels part of the scheme to avoid frightening consumers in the run up to the election. So, who’s right? Is Rodney’s incisive analysis on the money?
First, it has to be pointed out that the whole point of the emissions trading scheme – or any market-based scheme intended to reduce emissions – is to put a price on those emissions. With a suitable price signal in the market, the economy responds by reducing emissions output. In other words, there has to be a cost. No cost, no action. Economists, in general, prefer the purity of a carbon tax. Set a price, let the market work its wonders. That’s what NZ was going to have, until the government caved in to intense lobbying from business and agriculture. Now we have an emissions trading scheme, much more complex, but much more flexible. Different sectors can be treated differently, big emitters can be bought off with free emissions units, and politics in its rawest form – brute force lobbying and the plaintive cries of special interests can be heard around the land.
In all this, what tends to be forgotten is the bigger goal – doing something about climate change. The context for action in New Zealand is actually very little to do with achieving emissions reductions here. Our emissions are so small in global terms that even a 90 percent cut tomorrow would have no impact on global climate. What makes it important to do something is that we be seen to be playing the game. And what gives the game its edge is the urgency: if climate change happens faster than expected, faster than the IPCC suggested last year, then the policy response in our key markets will have immediate impacts here.
In that context the NZIER report, bruited around the political and media traps as “proving” the ETS will be incredibly expensive, falls at the first hurdle. It explicitly assumes that there is no international action to reduce emissions, so that our ETS is out all on its own, and our exporters are therefore forced to price themselves out of their markets. No matter how good the economics in the rest of the report, that assumption renders it useless as guide to making policy. It does have some redeeming features – the discussion of how free allocations to emitters should be phased out is a useful contribution to the debate (because the detail of how it’s done has a large impact on big emitters). But like the earlier NZI “fast follower” report, it gets the urgency of the international situation and the likely international policy response wrong. Forget the big scary numbers (they’re mostly way out in the future, anyway), if the planet hasn’t started cooperating to reduce emissions by the time Kyoto 2 comes along, a few percentage points off GDP will be the least of our worries. And the NZIER’s suggestion, that we ditch the ETS and buy all the Kyoto credits we need overseas strikes me as delusional. Exporters – including Fonterra – would be crucified by international perception of such cynical inaction.
The Sustainability Council’s report, on the other hand, seems to me be operating in the real world. The authors acknowledge the international context, and “get” the seriousness of the issue in a way the NZIER doesn’t. This is serious, they say. Let’s make it work. It’s a long report (157 pages) and I haven’t gone through it with a fine tooth comb, but it will certainly repay further study.
And Rodney? Stick to the dancing, mate.
Carbon trading is a massive distraction which does little but delay the real decisions that must be made if we are to reduce greenhouse gases. This emissions trading system is a cap and trade system without a cap, its a farce. Even if it did have a cap it wouldn’t work for a hundred reasons. Climate change isn’t the kind of thing you can deal with through markets and pollution trading in general is a sick joke which has never worked bar sulphur dioxide trading in the states which was a competely different system under completely different circumstances compared to any carbon trading systems which have been put in place to date. Incidently, there has never been a carbon trading system put in place which has resulted in a decrease in greenhouse gases.
The NZ ETS is; as it was described in the so-called “consultation” meetings “not designed to reduce greenhouse gases, but to meet New Zealand’s Kyoto obligations at least cost”. That message should have been put on the front cover of the proposed scheme itself. Not only will the ETS in any form fail to reduce New Zealand’s greenhouse gases but it goes so far over the heads of New Zealanders that it effectively shuts down public debate over what SHOULD be done about the climate crisis, ensuring decision making is kept at an elite level. Some might say that this is all too convenient a feature of such a system for those who creeated and endorsed it.
And don’t forget it was Business NZ who said it was a good idea in the first place.
For case studies and a history of carbon trading and pollution trading in general download this http://www.carbontradewatch.org/pubs/carbon_neutral_myth.pdf
Re: “You can’t…”
If there is no cap in the ETS, how is it supposed to work? Do emitters just buy as many units as they want internationally? That really would be a joke. If the Kyoto agreement lets us get away with it then it is a bit of a joke too. Perhaps Gareth can do an “ETS for dummies” piece.
Why can’t cap and trade lead to lower emissions? It must if the cap is progressively lowered. I thought the current price of CO_2 was cheap because the cap hasn’t bumped into output yet. When it does – which I thought was going to happen quite soon in Europe – the price of CO_2 will surely skyrocket.
9 years of prevarication and growing emissions will surely make achieving sufficient progress in the next 5 years more difficult under any scheme.
Robert
Thanks for the link to the Hard Talk interview with Helen Clark, Cindy. So “Carbon neutral by 2020” has become “90% renewable electricity by 2025” and perhaps “carbon neutral transport by 2040” (which would take some doing).
How it is proposed to increase renewable electricity from 70% to 90%?
Current capacity 8642MW (2004) of which 70%, 6050MW, is renewable.
Demand growth estimates 1.2% (govt) – 2.5% (greenpeace), let’s say 2%, so we will need 13100MW capacity in 2025, of which 90% or 11800MW is to be renewable. Even if no existing generation needs replacing, we need to build 5750MW of new renewable capacity in 17 years.
Where is it going to come from?
We currently have 320MW of wind power, and while there are 2700MW planned, I would be very surprised if all of it goes ahead. Most sources say at most 20% of power can come from wind. The canned Project Aqua was 520MW. Geothermal has gone from 431MW in 1999 to 434MW in 2008 (due to decommissioning), there are a couple of new stations planned by Contact, maybe 400MW.
It looks like the 90% renewable goal will require some major new initiatives. At the moment the only good news is the 1 MW trial for the Cook Strait turbine. Really, we have been lagging in the whole renewables area.
Germany: 270W/person wind power
Spain: 370W/person
NZ: 80W/person
Any other ideas out there?
Robert
There is a cap in the ETS: the number of permits issued by the government. Yes, participants can collectively bypass it by buying credits on the international market (e.g. CDM credit or credits from the European ETS), but these are real reductions, and I don’t see it as a problem. A ton of carbon is a ton of carbon, and the atmosphere doesn’t care where it is emitted.
Robert: Firstly, we need to look at power used, not generation capacity. While the latter obviously affects the former, its patently not the case that having 90% of our electricity generated from renewables needs 90% of generation capacity to be renewable (remember, power usage fluctuates throughout the day and throughout the year, and at some times of the year much of our thermal capacity lies idle. We want to increase that idle time…)
Currently, the government estimates that we need to build ~150 MW of new generation capacity a year to meet demand growth. They think we can meet the target if we build a little extra – around 175 MW – and make sure that all of it is renewable. And so far, this policy has been pretty successful – new investment is focused on wind and geothermal, only the diehards in Genesis are looking at gas (and they’re going to run smack-bang into both the thermal ban and a government directive), no-one is looking at coal anymore, and we have enough new wind in the pipeline to meet the target all by itself. And this is all down to the credible threat of a price on carbon, first through the dumped carbon tax, then through the creation of a marginal price with the projects mechanism, and now through the ETS.
“You can’t…â€:
What are the “real decision we need to make”? How would they be made?
If we are to reduce emissions, we ultimately need to change people’s behaviour (this includes behaviour around technology choices, as well as behaviour such as burning coal). The traditional way of doing this is by regulation – making things illegal. The problem is that the government needs to work out what needs to happen at a very detailed level, and then deal with the associated politicallobbying. The strength of price-based mechanisms such as carbon taxes and the ETS is that people work out the details for themselves (and remember, in the case of claimate change, for “people” we’re not so much talking about individual consumers here, but the managers of large companies faced with choices between clean and dirty technology. that ultimately is where the solution lies, and price-based mechanisms give a clear signal which way people should go).
That’s not to claim that market mechanisms are perfect or that regulation is useless; we need both. But making polluters pay will help, and will help change people’s behaviour in thousands of small ways which will all, in the end, add up.
Thanks I/S, you’re covering the bases rather well!
I would only add that one very good reason for the NZ ETS to be internationally linked (tied in to the Kyoto cap), is that it makes the market less vulnerable to shortages of domestically generated credits. It gives businesses the choice of least-cost reductions, or local units. Some businesses might choose the latter for marketing reasons…
I don’t think foreign reductions are going to be “least cost” anymore. The government won’t accept Russian “hot air” (because the EU won’t accept it), which means we basically have to rely on CDM credit. And there’s rather less of that about, and a rising international demand for it…
Hey, really sorry I’ve taken so long to respond to your comments, been away from blog-land for a while.
I’ll quickly try to respond to these comments but I must say that I can’t articulate these points as well as the book I reccomended in the first post does. All of the answers to what the NZ ETS is all about and Emissions trading in general are covered in that book, its essential reading for anyone wanting to get to grips with the overcomplicated ineffective mess that emissions trading is.
Q1) If there is no cap in the ETS, how is it supposed to work? Do emitters just buy as many units as they want internationally? That really would be a joke.
A) Yea, this is a massive problem with the NZ ETS. Without a cap it IS a complete joke.
Q2) Why can’t cap and trade lead to lower emissions? It must if the cap is progressively lowered. I thought the current price of CO_2 was cheap because the cap hasn’t bumped into output yet. When it does – which I thought was going to happen quite soon in Europe – the price of CO_2 will surely skyrocket.
A) In theory it can, but with all the other flaws it still wouldn’t work. It is unlikely whether the price of CO2 will ever get to a level whereby it is more expensive to make the reductions yourself than pay someone else. I believe that one tonne of CO2 would have to cost $150-$200 for this to happen. At the moment it costs around $25-$30.
Q) There is a cap in the ETS: the number of permits issued by the government. Yes, participants can collectively bypass it by buying credits on the international market (e.g. CDM credit or credits from the European ETS), but these are real reductions, and I don’t see it as a problem. A ton of carbon is a ton of carbon, and the atmosphere doesn’t care where it is emitted.
A) They’re not neccesarily real reductions, there has been so many scam projects that have been awarded carbon credits (including CDM credits) its ridiculous, many projects that would have gone ahead anyway are receiving credits. Future value accounting methods distort the true reductions in such a way that the entire lifetime of the reductions made by a project is converted into credits which are used to justify the setting up of dirty projects elswhere without the guarantee that the so called “clean” project will continue to operate. There has been many cases of polluters building filthy power stations with the intentions of investing in upgrades later and collecting credits for these reductions.
Q3) What are the “real decision we need to make”? How would they be made?
A) One of the most important real decisions is simply bringing in a cap. A carbon tax across all GHG polluting sectors would equitaly reduce emissions. Putting an end to the political preferential treatment given to the big polluters like the NZ Dairy Industry and Solid Energy. And basically, simple measure which actually discourage fossil fuels from being taken out of the ground in the first place. Simple solutions which people can understand and engage in rather than elitist hgh level decision making which leads to corrupt decisions and preferential treatment for big polluters (like the ETS has).
Q4) If we are to reduce emissions, we ultimately need to change people’s behaviour (this includes behaviour around technology choices, as well as behaviour such as burning coal). The traditional way of doing this is by regulation – making things illegal. The problem is that the government needs to work out what needs to happen at a very detailed level, and then deal with the associated politicallobbying. The strength of price-based mechanisms such as carbon taxes and the ETS is that people work out the details for themselves (and remember, in the case of claimate change, for “people” we’re not so much talking about individual consumers here, but the managers of large companies faced with choices between clean and dirty technology. that ultimately is where the solution lies, and price-based mechanisms give a clear signal which way people should go).
A) Yea, a carbon tax would’ve been great 🙂 if it wasn’t beaten back my industry.
That’s not to claim that market mechanisms are perfect or that regulation is useless; we need both. But making polluters pay will help, and will help change people’s behaviour in thousands of small ways which will all, in the end, add up.
A) If they pay the true cost then yea that would be great but that dosen’t happen with these emission trading systems, it never has and it never will.
Probably the most devestating impact that this ETS will have is the time wasting factor. When many believe we’ve already gone too far to avoid feedback loops, catastrophy etc we cant afford to spend the next 5 years arguing over a system which is fatally fawed to begin with.
“we’re in a speeding csar headed for a brick wall and everyone’s fighting over where they want to sit”
Maybe if you ommit the elitest political paradigms we could actually get somewhere, is it possible that our decision making systems are simply inadequate for dealing with a crisis like this???
SURELY NOT!!
**smirk*
Surely coupled with emission schemes and renewable energy power production we should also look at providing Solar energy on a bigger scale. Just imagine the uptake if the
Government ran a similar scheme to the CNG car conversion scheme. With a decent number of houses and business using Solar Energy we might not need the projected increases in power generation.
All it needs is some effective polices and we could emulate countries like Germany who have a very high uptake of Solar energy
Thanks I/S and You Can’t
I/S, you do make 90% renewable electricity by 2025 sound achievable, just. I would think holding demand growth to 150MW/year would require much bigger efficiency gains that we are currently seeing. (Currently just 2000 solar water heaters are installed per year according to EECA – this would hardly cover the new houses alone.)
It would also require building a project the size of West Wind in Makara (140MW) every year – doable, but a stretch at the current rate.
Also, in this model, the 2600MW of non-renewable capacity is not switched off, so CO2 output is not reduced at all.
Still, at least the moratorium on thermal power stations is something. Has any other country done that?
Robert
You can’t etc: We’re in a speeding csar headed for a brick wall
That’s why the Russians had a revolution…
Re power: It always amazes me that the demand side of the power supply equation is so poorly explored. We ask people to switch off when hydro levels are low, but the investment in efficiency measures and/or distributed generation is still tiny.
Also relevant to the current situation: closing Tiwai Point’s aluminium business would put a lot of generation capacity back into the system. Would it be cheaper to pay off Comalco than build lots of new generation?
Robert: It would also require building a project the size of West Wind in Makara (140MW) every year – doable, but a stretch at the current rate.
Go and look at the NZ Wind Energy Association’s list of projects and then talk to me about the current rate. I’ve been watching it for a couple of years now, and I think the “current rate” is pretty good.
Also, in this model, the 2600MW of non-renewable capacity is not switched off, so CO2 output is not reduced at all.
“Switched off” implies that its permanently on at the moment. As I mentioned above, it is currently idle for much of the time (and is designed to be). Increasing renewables will increase that idle time. Yes, we’ll likely keep burning gas on the coldest nights in winter, or when there hasn’t been enough rain in the lakes, but we’ll be burning a hell of a lot less of it. And as a result our electricity-sector emissions will decrease.
Re power: It always amazes me that the demand side of the power supply equation is so poorly explored. We ask people to switch off when hydro levels are low, but the investment in efficiency measures and/or distributed generation is still tiny.
Ditto. In NZ, the marginal generator in times of high demand is coal (Huntly). Therefore there’s a big carbon payoff for every Joule you save. And I’m not sure why the government isn’t operating on this principle.
As for turning off in times of high demand, if some industrial user wants me to go without so they can enjoy lower spot prices and higher profits, they can bloody well pay me. Live by the market, die by the market.
Would it be cheaper to pay off Comalco than build lots of new generation?
Nope, not least because we have very limited capacity going north from Invercargill. There’s really very little else we can do with the power, unless we want to upgrade the national grid in a big way.
Ron: Photovoltaics are generally considered to be too expensive to be worth it, especially given our latitude. When they get significantly cheaper, it might be worth doing, but there are othe cheaper alternatives with better co-benefits (insulating houses, for example – not only does it save power; it stops people from getting sick and dying, and the latter is worth it in the saved health costs alone).
Ther’s a program for subsidising solar hot-water installations, but capacity constraints have turned it into a disaster.
I/S: It’s not just capacity that’s causing problems for solar HW. One local authority (Waimakariri) wanted to charge huge compliance certification costs. It backed down, eventually, but it’s still not cheap.
It should be mandatory on all new build, subsidised for all retrofits, and free compliance through grants. Might cost a bit more, but would probably still be cheaper than building new power, or upgrading the lines north of Invercargill.
Mr Savant has got the electricity system covered pretty well, 90% renewables is definitely do-able at around 150MW per year. But, it is going to take a major shift in the way some people think.
Wind power is going to have to take the major stake in that electricity growth, which means a lot of people are going to have to accept that wind turbines will be part of their view (it’s lucky that they look so good). Or, we have to dam more rivers, or, go nuclear. I don’t think tidal can deploy in time (and probably not nuclear for that matter) and neither of those options will be cheap. I do hear a few people say we should go nuclear but it always seems to be on the assumption that the power plant will be ‘somewhere else’.
Demand side action needs to be pursued with all vigour too, but i get annoyed about the number of people that wait for someone else (eg the government) to do it for them. It pays back in many ways (as I/S raised) – just get on with it.
I/S says that he should be paid for saving power (that someone else will benefit from) and he is dead right…That is what smart metering is for, and it is coming (albeit slowly).
There are limits to what can be achieved in domestic demand reduction too given the relatively small supply chain and the inertia of the existing housing stock.
It will take a concerted effort to get to the 90% renewable target and there are many ways that the target could be derailed. The main thing that worries me is that there doesn’t seem to be a Plan B.
Gareth: resource consent costs are the comparatively easy end of the problem; a bigger one is that there still aren’t enough people who know how to properly install these things.
As for mandatory installation, that’s a bit of a blunt instrument, and in some cases, pretty useless. The utility of solar water heating depends on geography, and its worse than useless in cold, dark places (like eg Dunedin and parts of Wellington – the hilly bits which are in shade for most of the day). This either means extensive testing, an exemption scheme (which would require some testing just to enforce properly), or devolving the issue to local authorities, who are likely to know which parts of their area get sun. Alternatively, just making the things ludicrously cheap so that people will install them if its at all useful might help.
I’m happy to accept all of your points, I/S. My comment was born of frustration, but the “easy answers” are seldom easy to implement.
The building/planning aspects of requiring new build to be low-carbon (in all aspects – build and use of energy) is something we could certainly do more to address.
Out of left field…wonder if this would be any use for the issue of ‘shade’:
‘Satellite camera has NZ covered’ http://stuff.co.nz/4511439a11.html
I’m happy to accept all of your points, I/S. My comment was born of frustration, but the “easy answers†are seldom easy to implement.
As we’re finding out with emissions trading…
An anecdotal contribution on the demand side of energy: I don’t know whether we were unusually profligate in our home electricity use, but putting into effect two or three years ago all the hints about lowering usage, including changing most of our incandescent globes, resulted in a 25% drop in usage. I was surprised – I’d thought we might manage 10% at most. A further 25% drop required spending some money on heat pumps, a solar hot water panel and a bit of double glazing.
On the transport front I became one of the cycling elderly and also made use of local and inter-city bus transport whenever possible (admittedly easier for the retired than for those still working), which resulted in a 45% drop in our car usage. Changing our medium size car for a small one meant a 30% drop in fuel mileage.
It seems to me that our experience points to the possibility of substantial gains from efficiency that are not explored with the vigour they deserve.