Monday , July 13 2020
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Climate and recovery

Summary:
Eloise Gibson over in the Dom Post rounds up comment on climate priorities as we come through the Covid-19 mess.I suggested pushing harder and faster on getting the ETS into proper order; Eloise briefly covers my comments there. I'll expand on them here.So much in this space seems to get things backwards. Let's work it forwards first, then show the problems we get in thinking backwards.A properly working ETS will set a binding path to hitting NZ's commitments, but with one fudge that I'll add in here. The fudge is that prices in New Zealand should never lead prices in other countries that are taking climate seriously.There are two ways of getting that.One way is making sure the ETS can handle international tradeability in real and credible carbon permits. If you have that, then NZ

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Eloise Gibson over in the Dom Post rounds up comment on climate priorities as we come through the Covid-19 mess.

I suggested pushing harder and faster on getting the ETS into proper order; Eloise briefly covers my comments there. I'll expand on them here.

So much in this space seems to get things backwards. Let's work it forwards first, then show the problems we get in thinking backwards.

A properly working ETS will set a binding path to hitting NZ's commitments, but with one fudge that I'll add in here. The fudge is that prices in New Zealand should never lead prices in other countries that are taking climate seriously.

There are two ways of getting that.

One way is making sure the ETS can handle international tradeability in real and credible carbon permits. If you have that, then NZ emissions can exceed the NZ cap so long as they're offset by emissions elsewhere. Where that tradeability is restricted to credible credits, you maintain the same path to global emission reduction at lower overall cost - which means the world can have more ambitious goals than otherwise.

Alternatively, until international tradeability is in place, the government can set a price cap equal to prices on the European market. Basically the government would be willing to sell an infinite number of emission credits for any year's emissions at the European price. Whenever European prices go up, NZ prices would too if we were at that cap. This would commit us to moving in lockstep with the most stringent regimes, but no faster. That kind of move makes a ton of sense where the climate benefits of moving ahead of the pack are trivial while the economic costs can be substantial. Basically, you want mechanisms where countries all agree to do as much as the one doing the most - at least until you get to carbon prices matching the social cost of emissions. I doubt prices ever need to wind up rising to the current social cost of carbon because tech would come in to help, but the market could discover that.

That would then let the Climate Commission put up an expected price path for carbon. An expected price path for carbon would allow modelling of expected changes in demand for all kinds of stuff, from electric car charging stations through to power generation. Those expected changes in demand could inform infrastructure planning.

The other way of doing it is backward. You'll hear calls for a green-investment stimulus package. The optimal investment path will depend on what demand is going to look like as prices change, but you work that out by working out what demand is going to look like under that revised price path, not by just deciding that some investments are green and some are not-green.

If you do it backward, you risk sinking huge amounts of money in places where it will not do the most good. When we're thinking about big infrastructure projects getting into the hundreds of millions or billions of dollars, those should be based on business cases that take expected demand seriously, with some decent thinking about how that demand will be affected by changes in carbon prices.

Looking through the rest of Gibson's article, we see stuff like:

  • EDS wanting revised building standards for energy savings
    • ...but if everyone knows that carbon prices are going up, then people will invest appropriately as the marginal cost of heating increases with rising power prices. Why pay commercial building owners to retrofit when tenants expecting higher heating costs would be willing to pay higher rent to avoid those heating costs? Get the price path up and folks will adjust.
  • A renewed push for the feebate scheme
    • This was always stupid. The article frames it as NZ First having blocked it, which it likely did, but Treasury's report on the scheme was absolutely and correctly scathing. Petrol is in the ETS. You don't need to put extra charges on less efficient vehicles. You might as well put an import charge on Jaguars because they have higher maintenance costs, ignoring that the Jag's owner already knows that and is already going to be paying that cost. It's just dumb. Petrol is in the ETS, the ETS price is increasing, and folks will be thinking about that when they buy a car - they make the choice that's right for them. The feebate scheme was one of the stupidest ideas going. You don't need to incentivise buying climate friendly cars. The higher running costs of petrol vehicles is already appropriate and sufficient disincentive. The only plausible rationale for it was around lower emissions in cities and health effects of that, but really just knocking out the smokiest vehicles at WoF time would be rather more effective. 
  • EDS and Greenpeace wanting more solar power in homes and offices and replacing existing fossil fuel plants with renewables.
    • But power is in the ETS. Any carbon used in power generation is already priced in. Again - you publish the price path and you'll get the efficient decisions around long term energy investments. Sure, ease up the RMA processes to allow new hydroelectric generation. But coming in to direct what kind of generation should take place is colossally stupid and expensive. Just look at the mess Germany got itself into. We had a report on this last year. Forcing power generation to be 100% renewable would be outrageously expensive, with costs per tonne of carbon abated many multiples of the going price in the ETS. Just absolutely nuts. 
  • EDS, Forest & Bird, and others wanting electrification of the rail network
    • I am absolutely agnostic about whether the trains should be electric or diesel. But transport is in the ETS. Any carbon cost of diesel in the trains is already paid. If there's then a business case showing that investment in electrification pays off, given expected increases in ETS costs, great. But that's the only basis on which it should be done.
Running things backwards will lead to abatement costs far in excess of that which is necessary. Running it forwards, starting from ETS prices and looking at the business cases from there, makes sure that climate efforts are well focused. 

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