We still do not know how the government’s emissions strategy reduces emissions

Carbon News recently interviewed James Shaw ($), the Minister for the Environment. The interview is excellent throughout, but it opened with a particularly good question:

One of the criticisms of the recently announced feebate scheme was that you could have achieved the same result by simply reducing the ETS cap by the amount of carbon emissions the policy is expected to save. What’s your response to that?

After talking about feebate, Shaw eventually gives his answer for not just reducing the ETS cap:

There’s a couple of things there. The ETS doesn’t cover all the economy. It doesn’t cover all emissions. Second of all, the cap is a sinking lid. So, what they’re talking about is something called the ‘waterbed effect’. If you cut emissions in one area and that takes things below the cap then it allows others to pollute more in the meantime.

But if you’re successfully lowering the cap every time then you minimise that effect because you’re saying, ‘Yes we’re taking emissions out here with the feebate and also with the ETS and then next time we set an emissions budget it will take account of the fact that emissions are lower.’

The way it works is you’ve got your 2050 target which is sort of long term. Then you’ve got your three five yearly budgets and each one is smaller than the one before. Every five years, at the start of each budget period, if circumstances dramatically change since you set the budget five years earlier, you can adjust at that time and say, ‘hey look things have moved far quicker or in unexpected ways we can adjust the budget to take account of that emissions budget.’

In a nutshell, Shaw says he can link the policy with the cap: for every tonne taken by the policy, the cap can be reduced by one tonne.

But notice Shaw did not answer the question: why not just reduce the cap without the policy?

If the ETS cap is binding – which means the cap is low enough to force emissions below what they would otherwise be – then emissions from the parts of the economy covered by the ETS will be solely determined by the cap (provided the government keeps enforcing the ETS). You can only cap emissions once.

Whether the cap is set according to policy outcomes, or based on a straight line to emissions targets, or set by rolling dice, whatever, a binding cap decides overall emissions.

Shaw is right that reducing the cap in line with policy outcomes from feebate reduces emissions. But all of the reduction is due to reducing the ETS cap. None of the reduction in emissions comes from the policy. If the ETS cap is binding, all a policy working within that cap can do is change where emission come down, and the cost. But not overall emissions.

The problem with Shaw’s strategy of linking the ETS cap with individual policies is to pre-empt discovery of how and where emissions can be reduced most cost-effectively. That is what an ETS does: for any given cap, the ETS raises the carbon price to however high is necessary to bring emissions down to within the cap. People who can reduce greenhouse gas emissions for a cost that is less than the carbon price will reduce, everyone else will pay the carbon price because for them that is cheaper than cutting emissions. Emissions come down from the least-cost sources first.

Linking the cap with feebate forces emissions to come down through a particular channel: people switching from combustion vehicles to EVs.

The alternative is to reduce the cap without the policy. Emissions come down via whatever channels are the most cost-effective. That is almost certainly not going to be EVs, for now.

The penalty for linking the ETS cap with policies is substantial: right now, the ETS can reduce or remove a tonne of emission for $43. Government policies regularly spend over $1,000 to achieve the same result. What, Minister, is the benefit those policies bring that could justify their huge cost?

If ETS+other policies reduces emissions by the same amount as the ETS alone, then it is not clear how the government’s emissions strategy cuts emissions. (The exceptions are policies outside the ETS cap – agriculture or international travel.)

Overriding the ETS comes with a substantial cost penalty. We are not talking 5% or 10%. The penalty appears closer to 1,000%. What then is the case for doing other policies?

What makes the question of why not just do ETS so important is that it goes to the government’s whole emissions strategy. For as long as that question goes unanswered, nearly every time ministers announce a new emissions policy they have no basis for saying their policy cuts emissions (unless it concerns livestock or 777s). Not the feebate scheme. Not the cycleway across Auckland harbour. Not the boiler replacement scheme. Not new LEDs in Parliament.

Policies which raise costs for no effect on overall emissions are worse than useless. They make it harder to get to our emissions targets, effectively taking us away from net zero emissions.