The May 2014 edition of Policy Quarterly contains an article by Adrian Macey titled “Climate Change: Towards policy coherence”. Adrian Macey, New Zealand’s former Climate Change Ambassador, is an adjunct professor at the New Zealand Climate Change Research Institute and a member of Motu’s Low-Emission Future Dialogue. In the article Macey gives an overview of the international negotiations and a good assessment of the key challenges for New Zealand’s international contribution and domestic policy. The piece has already made an impact, featuring in this discussion in Parliament between Kennedy Graham, (Green Party) and the Minister for Climate Change Issues, Tim Groser.
Macey’s paper is short (less than 10 pages), and well written, but covers a fair few issues so I’ll direct you to the original instead of offering a (less well written) summary. I will mention a couple of things however.
Macey reminds us, as is often forgotten, that mitigation in New Zealand has valuable co-benefits. For example, including nitrous oxide emissions from agriculture in the New Zealand Emissions Trading Scheme (NZ ETS) by putting an emission obligation on nitrogen fertiliser sales would not only lower New Zealand’s greenhouse gas emissions by encouraging farmers to reduce fertiliser use , but also go some way towards solving our water quality problem.
Macey also writes that “The advantage of auctioning is that the government has the scope to determine what price is best” (p.54) This issue has underlying subtleties and ties in with some work I’m doing, so I’ll take this opportunity to offer some economic analysis.
With the current low price of Kyoto ERUs and CERs, virtually no NZUs have been submitted for compliance in the NZ ETS in the last year and lots have been banked. This means that going forward we already have quite a high level of supply of NZUs (namely the ones that have been banked). If the government were to supply no more NZUs via free allocation then future demand would meet supply at some price. Suppose this price were, say, $10 per tonne. Then if the government wanted to auction units at any price greater than $10 per tonne no one would buy them; they would just buy the cheaper units in the market. Hence the government couldn’t drive the price up with auctioning – though they might drive a higher price with other policies, such as removing the one-for-two surrender obligation which currently applies to all ETS sectors except forestry. In short, both auctioning and free allocation increase supply and hence both must decrease the price (or have no effect on it) relative to the price at current supply.
To make matters more complicated, the current NZU price probably reflects an expectation of more NZU supply in the future. But as this future supply is uncertain, this leads to uncertainty about prices on top of the existing price uncertainty generated by highly uncertain future demand.
The uncertainty of prices is a huge issue, and one that Macey mentions in his paper. Suzi Kerr is doing research on mitigation under uncertainty as part of Motu’s Low-Emission Future programme – so we will post more on this issue another time.
I’d recommend Macey’s article. It’s short, non-technical, and free of bureaucratese. Go read it and see what you think.
As a side note, my colleagues and I are happy that Macey mentions Motu’s Low-Emission Future programme positively, but we would like to point out that Motu is an independent not-for-profit economic and public policy research institute. We are not a consultancy as Macey says!