An emissions cap massively simplifies the problem of reducing greenhouse gases.
With an emissions cap, burning coal to keep the lights on in a dry year, for example, does not raise emissions. By definition, a cap means that for every tonne of emissions that leaves the generator’s smokestack, there must be one less tonne of emissions somewhere else in the economy. Getting to our emissions targets is a matter of reducing the emissions cap in line with those targets. James Shaw has aptly called this a “sinking lid”.
The Emissions Trading Scheme (ETS) caps emissions and the cap is falling over time in line with our emissions targets.
But good luck to any executive who says their company is fully meeting its responsibilities to reduce emissions thanks to the ETS cap. That line is simply not going to work.
That is because few people have heard of the ETS. Many who know about it don’t believe it really caps emissions. And although the ETS looks good on paper, right now we have little more than anecdote to show it is working in this country.
I expect the NZ ETS will prove to be highly effective, in line with findings from studies of cap-and-trade systems in other countries.
For the sake of argument, put to one side for now the important question of ETS effectiveness.
Consider two paths to net zero emissions in 2050:
- Our current path, which has an ETS cap that is effective but not credible* combined with a welter of policies which give ministers and officials control over large parts of the economy, or
- An alternative path, which has an ETS cap that is effective and credible. There are supporting policies but they stop well short of the sweeping controls in the current path.
What is the shorter path to success on climate? Is it to create a vast bureaucracy which has control over everything that produces emissions? Or is the shorter path to solve the ETS’s credibility problem?
I do not think improving the ETS’s credibility will be easy. But it is easier than the alternative.
I think the ETS’s credibility problem can be solved in four parts:
- Strengthen the ETS to cover more emissions more robustly.
- Introduce systems to test and demonstrate the ETS is working.
- Credible protections for households and businesses against shocks in the carbon price, and
- A carbon dividend to every household.
The key thing is to establish in the minds of enough voters that the government already has a system for reducing emissions, and that system makes other policies like a ute tax or a new bridge in Auckland not just unnecessary but worse than useless.
*It is important to note that I use the word ‘credible’ here in a particular way: I mean credible in the eyes of citizens. A $48 NZU price suggests the ETS is highly credible in the more usual sense that it has support in Parliament, that support is expected to endure, and the rights embedded in emissions units are regarded as secure.