What a small country’s successes and mistakes can teach us about emission pricing

By Suzi Kerr, Chief Economist at Environmental Defense Fund. First published at EDF's blog.

I’m from Aotearoa, New Zealand, and I really love its land and people, but I am fully aware that from a global perspective it appears pretty insignificant – that’s actually one of its charms.  But being small doesn’t mean you can’t make big contributions including toward stabilizing the climate. This recently published article highlights some lessons New Zealand’s experience with emissions trading can offer other Emissions Trading System (ETS) designers at a time when effective climate action is ever more urgent.

Talking intensively to ETS practitioners and experts around the globe about their diverse choices and the reasons why they made them has made me acutely aware of the need to tailor every ETS to local conditions.  In a complex, heterogeneous world facing an existential crisis, diversity in climate policy design makes us stronger and frankly, improves the odds that the young people we love will live in a world where they can thrive.

Zero Carbon Bill - oral submission from Catherine Leining and John McDermott

John McDermott is the Executive Director at Motu Economic and Public Policy Research in Wellington, and Catherine Leining is a Policy Fellow at Motu. This is the oral submission to the Environment Select Committee they made on the Zero Carbon Bill in their individual capacities.  

To build a successful low-emission economy, we need continuity of sound, evidence-based policy across elections. Today we will highlight three technical areas for improving this bill in line with New Zealand’s commitments under the Paris Agreement, and conclude with comments about target ambition. 

How emissions trading schemes work and they can help us shift to a zero carbon future

by Catherine Leining, Policy Fellow, Motu Economic and Public Policy Research

Would you please explain how the New Zealand Emissions Trading Scheme (ETS) works in simple terms? Who pays and where does the money go?

Every tonne of emissions causes damages and a cost to society. In traditional market transactions, these costs are ignored. Putting a price on emissions forces us to face at least some of the cost of the emissions associated with what we produce and consume, and it influences us to choose lower-emission options.

An emissions trading scheme (ETS) is a tool that puts a quantity limit and a price on emissions. Its “currency” is emission units issued by the government. Each unit is like a voucher that allows the holder to emit one tonne of greenhouse gases.

The New Zealand Emissions Trading Scheme (NZ ETS) is the government’s main tool to meet our target under the Paris Agreement. In a typical ETS, the government caps the number of units in line with its emissions target and the trading market sets the corresponding emission price.

Integrating climate with economy needs to extend beyond government

A reaction to the Wellbeing Budget of May 2019 by Catherine Leining, Policy Fellow at Motu Economic and Public Policy Research

On 30 May 2019, the New Zealand government released its first “Wellbeing Budget.” Under this framework, new funding for climate change mitigation has been integrated with economic development. Adaptation gets only a brief nod. Is this budget allocation adequate to meet the climate change challenge before us? No – but could it ever be?

One key theme is research for a low-emission future. Examples are a National New-Energy Development Centre in Taranaki ($27m), an Advanced Energy Technology Platform ($20m), a Bioresource Processing Alliance and Product Accelerator ($18m), and an Agricultural Climate Change Research Platform ($3.2m). MBIE will advance policy on the future of work and “just transition” issues.

Commentary on Tranche Two Decisions on the New Zealand Emissions Trading Scheme

by Catherine Leining, Policy Fellow, Motu Economic and Public Policy Research. 

Reforming New Zealand’s climate change legislation is a complex tango. Where the Zero Carbon Amendment Bill leads, NZ ETS amendments must follow. The government’s latest NZ ETS policy decisions will help ensure future emission prices rise in step with our targets. Check out our “Top Ten” list of alterations to watch for as we outfit the NZ ETS for the important job ahead or read on for comments on yesterday's announcements.

Commentary on introduction of the Zero Carbon Amendment Bill

by Catherine Leining, Policy Fellow at Motu Economic and Public Policy Research

The Government is heeding the stark warning in the IPCC’s Special Report on 1.5oC and putting New Zealand on an ambitious pathway toward net zero emissions of long-lived GHGs and substantial reductions in methane from agriculture and waste by 2050. The Zero Carbon Amendment Bill may finally light the fire under NZ mitigation action. It breaks important new ground in 6 ways.

PCE report on “Farms, forests and fossil fuels”: One lump or two?

by Catherine Leining, Policy Fellow, Motu Economic and Public Policy Research

On 26 March 2019, the Parliamentary Commissioner for the Environment (PCE) released a report on “Farms, forests and fossil fuels: The next great landscape transformation?” It looks at the challenges in decarbonising New Zealand’s economy and asks whether a fundamental restructure of the New Zealand Emissions Trading Scheme (NZ ETS) will be needed. 

The PCE usefully reinforces three important points: targets and policies should reflect differences across greenhouse gases (GHGs), fossil carbon dioxide (CO2) emissions need to reach zero during this century, and management of New Zealand’s land sector would be enhanced by a landscape approach that integrates climate change and other considerations.

Greenhouse gas recommendations from the Government’s Tax Working Group

by Catherine Leining, Policy Fellow at Motu Economic and Public Policy Research

On 21 February 2019, the Government’s Tax Working Group (TWG) issued a report with advice on using environmental taxes to manage greenhouse gas emissions. It recommended retaining the New Zealand Emissions Trading Scheme (NZ ETS) with reforms to provide greater guidance on price, generate revenue through auctioning, and enable periodic review. It also recommended extending emission pricing to biological emissions from the agriculture sector, whether through the NZ ETS or a complementary system. It suggested those changes can help drive behaviour change to reduce emissions, generate revenue supporting the transition to a more sustainable economy, and, in the longer term, broaden the overall tax base.

Zero Carbon Bill Submission

by Catherine Leining and Suzi Kerr.
The New Zealand government has recently consulted on its proposal for a Zero Carbon Bill. This would:

• set a new and more ambitious 2050 greenhouse gas emission reduction target
• establish interim five-year “emissions budgets” consistent with meeting those targets
• require the government to issue plans for achieving its emissions budgets
• require preparation of a national climate change risk assessment and national adaptation plan
• set up a new independent Climate Change Commission to advise the government and monitor its progress.

Our full submission on the Zero Caron Bill is available here. In this blog we highlight five key opportunities to improve the government’s proposal.

E-Mission Possible roundtable summaries

by Catherine Leining and Ceridwyn Roberts, Motu Economic and Public Policy Research

The road to a net-zero future is paved with challenging questions for which there are no definitive answers – just choices to be made under uncertainty and consequences to be faced under risk. In order to shed new light on particularly thorny questions for NZ's low-emission transition Motu, Productivity Commission, the Institute for Governance and Policy Studies at Victoria University of Wellington, and the Environmental Defence Society convened a series of roundtables.

We have now completed the summaries from all four E-Mission Possible Roundtables.  We received very positive feedback on all of the roundtables in the series, and want to thank everyone who contributed to their design, funding and implementation.

Budget 2018 and climate change

by Catherine Leining, Policy Fellow at Motu Research

When it comes to the climate change portfolio, Budget 2018 feels like the calm before the storm. It focuses more on policy processes for future action than catalysing action now. Budget allocations will support development of international carbon markets (key to helping New Zealand meet its 2030 target under the Paris Agreement), the Zero Carbon Act, the Climate Change Commission, and amendments to the New Zealand Emissions Trading Scheme (NZ ETS).

Designing a Climate Commission that works for New Zealand

Catherine Leining from Motu Economic and Public Policy discusses today's release of the Zero Carbon Act Report from the Parliamentary Commissioner for the Environment.

Climate change has been described by Lord Nicholas Stern as the greatest market failure the world has ever seen, but it could just as validly be described as the greatest governance failure. Short-term election cycles and under-resourced departments are poorly suited for managing risks that accumulate over generations and policies imposing near-term, local costs in return for long-term, globally distributed benefits.

New Zealand’s Parliamentary Commissioner for the Environment (PCE) has released a report that addresses part of the solution: legislating emission reduction targets and establishing an independent Climate Commission. These are both components of the government’s Zero Carbon Act which is under development.

Approaching a Low-Emission Future: Emission Trading Scheme vs. Command-and-Control Approaches in New Zealand

By Rosemary Irving and Rosa Hill, University of Canterbury 

Rosie and Rosa are undergraduate students. They won the Motu Environment Economics Essay prize in 2017. You can find out more information about Motu's proposal for the Emissions Trading Scheme (ETS) and our wider ETS work.  

Rosie Irving and Rosa Hill

Achieving emission targets can be accomplished through numerous policies; however, some of these policies are more efficient and cost effective than others. Here in New Zealand, we currently run an ETS. Economic rationale supports an ETS policy as being more efficient as opposed to a command-and-control approach for a number of reasons which we will explore in depth below. 

Economic Rationale: How an Emissions Trading Scheme Works

Figure 1: Command-and-control (equal
misery) approach  

 Figure 2: Emissions trading scheme
approach  

The NZ ETS: Better equipped for the journey – but still unsure of the path

by Catherine Leining, Policy Fellow at Motu Economic and Public Policy Research

Every tramper knows the value of good gear. A well-designed backpack that distributes the weight to the areas of greatest strength can transform the experience of a challenging bushwalk.  

The changes to the New Zealand Emissions Trading Scheme (NZ ETS) announced by the government last month will usefully equip the system for the journey to net-zero domestic emissions. Like a good backpack, they offer a sturdy framework for distributing mitigation responsibilities and costs across the economy. However, we still do not know what route lies ahead, what pace we will set, what provisions will sustain our efforts, and who will carry the heaviest weight.

The government has not altered our path through 2020. What longer-term changes can we expect to see in the NZ ETS?

A new approach to emissions trading in a post-Paris climate

This article was prepared by Suzi Kerr, Catherine Leining and Ceridwyn Roberts at Motu Economic and Public Policy Research. It was first published on The Conversation.

Despite the US withdrawal from the 2015 Paris Agreement on climate change, other countries, including New Zealand, remain committed to cutting their greenhouse gas emissions.

In our report, we explore how New Zealand, a trailblazer for emissions trading, might drive a low-emission transformation, both at home and overseas.

Turning off the tap

Emitting greenhouse gases is a lot like overflowing a bathtub. Even a slow trickle will eventually flood the room.

The Paris Agreement gives all countries a common destination: net zero emissions during the second half of the century. It is also an acknowledgement that the world has only a short time to turn the tide on emissions and limit global temperature rise to below two degrees. The sooner we turn down the tap, the more time we have for developing solutions.

Retooling the emissions trading scheme to ‘decarbonise’ NZ

There are practical ways to change the NZ ETS so it delivers clear and predictable emission price signals. This would ensure that New Zealand’s emitters reduce their greenhouse gases more quickly than is currently happening.  

A new paper released today by Motu Economic and Public Policy Research suggests a package of changes to improve the NZ ETS. The proposal emerged from discussions over the past year among diverse cross-sector experts involved in Motu’s ETS Dialogue. 

International transfers of mitigation to achieve the goals of the Paris Agreement

By Suzi Kerr (Motu Economic and Public Policy Research) and Mike Toman (World Bank)

More than a year has passed since the signing of the Paris Agreement under the United Nations Framework Convention on Climate Change, in which developed, emerging and developing countries across the world have pledged to limit or reduce their greenhouse gas emissions (GHGs) as a start toward limiting dangerous climate change. Under the Agreement, countries can work together to reduce emissions. 

Mike Toman, a Lead Economist in the World Bank’s Development Research Group, and Motu’s Suzi Kerr have come up with three basic guidelines for financing of emissions reductions in less economically advanced countries:
1. Do not conflate “international carbon markets” with “internationally transferred mitigation outcomes.”
2. Be cautious about the apparent gains from linking emissions trading markets.
3. Create contracts between developed and developing country governments for internationally transferred mitigation obligations.

Assessing the impacts of Motu’s Low-Emission Future Programme

by Catherine Leining, Ceridwyn Roberts, and Suzi Kerr of Motu Economic and Public Policy Research Trust.

In November 2016, Motu surveyed 360 people interested in climate change policy and had 81 responses. The survey was designed to help assess the impacts of Motu’s programme ‘Shaping New Zealand’s Low-Emission Future’ and its cross-stakeholder Emissions Trading Scheme and Low-Emission Future Dialogues as well as inform future programme planning. As a ‘thank you’ to all those who took part Motu will purchase and plant six trees through the Wellington City Council’s ‘Two Million Trees’ initiative.

We feel encouraged that more than three quarters of respondents agree or strongly agree that Motu’s work has enhanced the quality of policy discussion on climate change mitigation and that more than four fifths of respondents regard Motu as a credible source of independent expert information on climate change mitigation.

Forestry in the Emissions Trading Scheme

by Tom Carver, Motu Intern

The New Zealand Emissions Trading Scheme (NZ ETS) is “the Government’s principal policy response to climate change”.[1] It has been operational since 2008; however, much of the information and data that is are necessary to evaluate its performance and model the future evolution of the ETS and its implications for meeting future targets haves not been publicly released by the government. 

Earlier this year Motu requested information on:

• Clarification for how forestry will be accounted for under New Zealand’s Paris INDC targets, and any associated modelling;
• Forecasts of afforestation, emissions and removals from ETS registered forests;
• Extra details on forestry that had not yet been made public:

1. Age and size profile for ETS registered forests;
2. Area weighted average age of deforestation for pre-1990 forests;
3. Region, age and species of land removed from the ETS;
4. Other technical details: The extent of ETS exemptions for tree weeds and owners with less than 50 hectares of pre-1990 forest, distinctions between data reporting in voluntary vs. mandatory returns, forest area involved in forest offsetting provisions (enabling landowners to avoid ETS deforestation liabilities if they establish a comparable forest elsewhere), and the proportion of NZUs in the ETS bank that are attached to future liabilities for post-1989 forest.

MPI officials withheld information on the first point on the grounds that negotiations for these rules are still being finalised after the Paris agreement last year and that these are therefore sensitive. The information they provided is available on the Motu website.

"Climate Cheats II": The Return of New Zealand’s ERU Controversy

by Catherine Leining, Motu Economic and Public Policy Research

In the tradition of dramatic sequels, the Morgan Foundation has just released "Climate Cheats II," this time with a focus on the 'dirty dozen' NZ ETS participants who used the most 'hot air' Emission Reduction Units (ERUs).[1]

The issue at the heart of both “Climate Cheats” reports is vitally important: New Zealand must safeguard the integrity of its contribution to climate change mitigation and the operation of the NZ ETS. The environmental, economic and reputational consequences of doing otherwise would be severe. The past choices made by the New Zealand government and NZ ETS participants followed the letter of the law internationally and domestically but not the spirit of the quest for a stable climate system. Importantly, those choices have a troubling legacy in the form of surplus Kyoto units of questionable integrity and international status, and a large participant-held bank of NZUs.

I have three key points in response to "Climate Cheats II." 

1. New Zealand didn’t cheat, but the climate got cheated by a global agreement with weak targets.