Why not subsidise more EVs, Minister?

This morning’s Emissions Trading Scheme (ETS) auction resulted in a clearing price of $53.85, breaching the $50 price cap.

The government issued an additional 1.6 million ETS emissions units from a reserve to defend the cap.* These extra units will raise New Zealand’s emissions by 1.6 million tonnes. The law requires the extra units to be backed, or offset, so that they do not raise emissions overall. A sound mechanism.

As James Shaw said in a statement:

The Government is committed to balancing out the additional units released today to ensure there is no overall impact on emissions released into the atmosphere.

Great. Shaw went on to say how the extra units could be neutralised:

Officials are currently looking into the best way to achieve this, including by changing the volume of units available to purchase at future auctions.

Excellent. Issuing 1.6 million fewer emissions units in the future will indeed neutralise the extra units issued today.

Another way to neutralise the extra units are actions (reductions and/or removals) which are outside the ETS. For example, buying and shredding EU ETS units, or planting trees provided those trees are excluded from the ETS now and forever.

But what about, say, more EV subsidies to neutralise the extra units? If not, why not, Minister?

The answer, of course, is that EV subsidies will not – cannot – neutralise the extra units issued today because EVs are already in the ETS.

You can subsidise EVs until you are blue in the face. But that will not change the fact there are 1.6 million more emissions units in circulation which means 1.6 million tonnes’ more emissions from the areas of the economy covered by the ETS (which is nearly all of it).

No action which is covered by the ETS cap can neutralise the extra 1.6 million tonnes of emissions unless it changes the number of units in circulation. Why? Because the action – more EVs, for example – will simply free up emissions units for someone else to use. There will still be 1.6 million more units in circulation which means 1.6 million tonnes more emissions.

Which is exactly why EV subsidies and pretty much every other government emissions policy are a waste of time and money: virtually all of it is already in the ETS. EV subsidies can’t neutralise the extra units issued today for the same reason they have no effect on overall emissions: they are covered by the ETS cap, the cap is binding, so total emissions are determined solely by the cap (for the parts of the economy covered by the ETS).

Shaw is right (I hope) to rule out using more EV subsidies and similar policies to neutralise today’s extra emissions units. That would be futile. It’s just that this logic should rule out doing EV subsidies and policies like it at all. Those policies cannot neutralise today’s extra units because they do not lower overall emissions.

* Actually the government issued 7 million units to defend the cap, but 5.4 million were already budgeted and therefore did not raise emissions.

Keep climate policy focused on the social cost of carbon

A new paper in the journal Climate Policy says “Keep climate policy focused on the social cost of carbon”. Its abstract:

In the context of climate change, the application of cost-benefit analysis to inform mitigation policies can help to achieve the best outcomes and avoid the worst: spending trillions of dollars but failing to get the job done.

The job, of course, is to cut emissions.

The costs of a climate policy are the abatement costs of reducing emissions of carbon dioxide (CO2) (or other greenhouse gases). The standard measure of the benefits of a climate policy is the social cost of carbon (SCC), which measures the avoided economic damages associated with a metric ton of CO2 emissions. Recently, however, there have been calls for an alternative approach to policy evaluation that ignores the benefits of avoided climate damages and instead focuses only on minimizing the compliance costs of a given, politically determined climate objective. We argue here that a shift from use of the SCC and cost-benefit analysis to an alternative approach for evaluating policy that focuses on costs alone would be misguided. Rather than advocate for alternative approaches, now is the time to support efforts to update the SCC and its application to official climate policy evaluation.[emphasis added]

I note the Climate Change Commission used neither the social cost of carbon, nor cost-benefit analysis, nor costs alone to inform each of its recommendations to the government in its final report.

Perhaps the authors of the Climate Policy paper could write a follow up piece called “At least do something, for goodness sake” and send a copy to the Commission.

Numpties

Let’s Get Wellington Moving wants to spend $350 million to reduce emissions by 1,000 tonnes. That is a bad deal – for you, the environment, just about everyone except Let’s Get Wellington Moving, it seems. Here is part of the summary of a plan called “City Streets”:

Let’s pretend for a moment that the government had not capped emissions with the Emissions Trading Scheme last year. Let’s ignore the statutory cap on emissions.

At a discount rate of 6%, Treasury’s standard rate for public spending, $350 million has an annual cost of $21 million. Which means Let’s Get Wellington Moving is proposing to spend $21,000 per tonne of emissions avoided.

Spending that much on each tonne means the country goes bankrupt before we get to net zero. At $21,000 per tonne, net zero emissions costs 230% of GDP.

Of course, we have an ETS, domestic transport is in the ETS cap, and the ETS cap is the law. As a result, LGWM will reduce emissions by exactly zero tonnes. You’re not helping your grandchildren by borrowing to pay for emissions policies that don’t cut emissions. You’re just saddling them with debt and making them poorer.

Notwithstanding the whole not cutting emissions thing, congratulations LGWM. You’re in the hall of fame:

Let’s Get Wellington Moving IBD, August 2021, $21,000/tonne

EECA Low emissions contestable fund, December 2020, $33,000/tonne

Auckland Harbour walkway and cycleway, June 2021, $7,800-$230,000/tonne

Time to get real about emissions

It is nice to see others point out the consequences of an emissions cap. Thomas Lumley gets the logic of an ETS:

We’ve got a cap (more or less). One of the non-intuitive aspects of having a cap rather than a fixed price is that parallel efforts to reduce carbon emission don’t work the way you’d expect them to. If I replace my gas stove with an electric one, my kitchen will emit less carbon (modulo the impacts of making the new equipment). If everyone did it, everyone’s kitchen would emit less carbon (again, ignoring the impacts of making the new equipment). What would happen to NZ’s total carbon emissions? Nothing. We have a cap. Less of the cap would go on carbon coupons for burning natural gas; more of it would be available for cars or trucks or coal-fired power stations. The impact of our kitchen-renovation decisions would be cheaper emissions rights for other polluters, not lower emissions.

Well said, Thomas.

A commenter on Thomas’s post has some fairly standard objections to the argument:

First, the ETS was thoroughly undermined by the previous govt because the carbon price did not rise and companies were able to use dodgy offsets from overseas. If such a thorough undermining of a supposedly brilliant and effective self-regulating system could happen once, then it could happen again (with another change of govt).

This is solved by not opening the window to fraudulent credits. Or a commitment to make good on any credits which turn out to be fraudulent. Or both. That future governments might act in bad faith on emissions is an argument for the transparency of the sort an ETS provides.

Second, how high would the price of carbon have to go to shift people’s behaviour? And at that point is there the chance that you might get a general popular revolt that would undermine the political will to make the system to work as it should.

Good question. The Climate Change Commission says $50/tonne (p91). Basil Sharp et. al. say $85/tonne. In 2018, Concept Consulting, Motu and Public Policy Research said $76-$127/tonne. NZIER estimated far higher costs, also in 2018. None of this apart from NZIER looks scary with 29 years until the net zero deadline in 2050.

Anyway, non-ETS policies are far worse on a cost per tonne basis. Almost everybody acknowledges this. Cap and trade cuts at least cost. If your objection to the ETS is cost, you should be even more worried about other policies. As the joke goes, you do not have to outrun the bear to survive, you only have to outrun your colleague.

Officials have argued that the lack of transparency of non-ETS emissions policies buys enough cover to justify their higher costs. Except we have already had a public revolt mainly (though not entirely) against non-ETS emissions policies. I’d have thought is obvious that policies which add thousands of dollars to the cost of an imported car are going to be easy to spot. In any case, non-transparency is a non-argument for policies which have to work in the long run. Voters are going to it figure out eventually, and one might question the democratic merits of trickery.

Thirdly, there is the danger that emitters, rather than reducing emissions, basically rely on offsets. So, that will be great for increasing forestation, but it still might not change behaviour and reduce emissions

Which is just shifting the goal posts from emissions – you know, the thing that causes climate change – to changing behaviour and disrupting lives per se, which does not cause climate change. A tonne of emissions removed has exactly the same climate change benefit as a tonne reduced. From a climate change perspective, any distinction between reductions and removals is arbitrary. We should just do whatever combination of reductions and removals best helps the climate.

But try explaining to most environmentalists the idea that there is an emissions penalty that goes with arbitrarily insisting on reductions over removals, or domestic over offshore, or EVs over pretty much every other scalable way to avoid emissions. I cannot recall ever seeing an environmentalist say they are concerned we might lose 95% of the emissions benefits of a policy by insisting each tonne has to come from EVs and nothing else. The attitude seems to be who cares if we could have cut 20 times more emissions for the same cost?

I do. And when the rubber meets the road, so will voters. Time to get real.

Why so angry?

After a recent article in the Herald (ungated version here) I received the following email:

I realise that your objective is to advance a right wing agenda rather than provide factual information, but I was sufficiently annoyed by your article that I have provided media with the attached more informative article, to help people understand the real issues.

The article from my correspondent (I will not name him) was mostly about how EVs are good and will become great in the near future. I suspect he is right.

But that completely misses the point of my Herald piece.

My point is that having capped emissions with the Emissions Trading Scheme (ETS), to then tax or subsidise vehicles or anything else already covered by the cap will make no difference to total emissions.

This has nothing to do with the merits of EVs. Of course EVs can reduce emissions. But the emissions benefits of EV subsidies must be zero under a binding emissions cap.

The question I want to consider here is why an argument against ineffective emissions policies should lead somebody who is worried about climate change to feel angry.

I do not know my correspondent. I assume he was not the only person annoyed by my article. For the purposes of this post, I will assume people who feel angry reading my article:

Are worried about the climate change.
Believe greenhouse gas emissions cause climate change, and
Support policies and actions which lower emissions.

What could lead someone who holds those views to object to an argument that we should oppose emissions policies which do not lower emissions?

Before I try to answer this question, let me first say I do not usually spend time thinking about peoples’ motivations on policy matters. My focus is on the merits of policy. Here I make an exception because I want to reach people who are concerned about climate and who see me as an opponent. If I can understand why people get mad, I have a better chance of communicating effectively and, ultimately, helping.

So let the speculation on where the anger is coming from begin.

First, the objective (lower emissions) is bundled with specific actions. Support for action on climate is support for more EVs, more renewables, less coal and petrol. These actions go with the goal of lower emissions like peas and carrots. EVs always mean lower emissions. Coal always means higher emissions. And more is always better when it comes to favoured technologies; for disfavoured technologies, less. No exceptions.

This view does not fit well with reality. It is probably not obvious, for example, that using coal and natural gas plausibly makes it easier to reduce emissions, or that further investment in renewables beyond some unseen limit in our electricity system will make it harder to achieve our emissions targets. See the ICCC final report on electricity.

For anyone who sees action on climate and getting more EVs on roads as the same thing, any argument against EV subsidies is going to look a lot like an argument against cutting emissions per se.

Second, the only alternative to taxes, subsidies and regulations to lower emissions is to do nothing. Here is James Shaw (at 43:00) saying exactly that to Parliament’s Environment Committee at a recent appearance, for example, after being challenged on the effectiveness of policies.

Such a conclusion is surely natural for anyone who has not heard of the ETS, or who does not know that it caps emissions, or who does not see the cap as credible, or who does not understand how a cap will generally neutralise other policies.

Shaw is in none of those categories, by the way – it is his cap! He introduced the legislation which gave the ETS its hard emissions cap. The bill passed last year.

I suspect another driver of this “alternative is doing nothing” view may have something to do with the idea that human agency is a necessary part of lowering emissions. Sure, the ETS will have some effect, the thinking might go. Profit-maximising corporates will always respond to the incentives of a carbon price. But we will not succeed, the thinking may go, unless somebody decides how and where emissions come down. Many seem to believe prices alone cannot bite hard enough to shift behaviours; we need more than incentives to overcome consumers’ myopia.

Third, I wonder if people are quick to suspect trickery lies behind any question of emissions policies? Sure, this person says he wants lower emissions, but perhaps there is a hidden agenda, either a political agenda or opposition to action on climate.

Another possibility is that the response to my article is a “rally behind the flag” effect. The classic example of rallying behind the flag is America’s response to the attack on Pearl Harbour by Japan in 1941. Political accountability for the catastrophe was put to one side. The focus was squarely on the forward-looking question of winning the war.

I do not think flag-rallying explains much in climate. Bad emissions policies are not in the past – they are not sunk, as it were. Policies are very much in the here and now, or in the future. They can be changed. Those policies will determine success or failure in the war on emissions.

If anything, rallying behind the flag should encourage not deter (constructive) skepticism of policies. Yet many people do not welcome questions about whether emissions policies work. If rallying behind the flag means overlooking past mistakes to focus on the mission at hand, climate policies are not a good fit.

Whatever explains the anger towards my article, it probably does not help that I am one of the only people saying emissions policies should work. It is striking how, out of all the people who demand action on climate, almost nobody has any apparent interest in the performance of the government’s emissions policies.

Anyway, these are my guesses about the psychology behind the interesting conundrum of why well-meaning, intelligent people who want action to reduce emissions feel genuinely angry when they see someone pointing out where emissions policies might not work.

This anger has consequences. It will, and almost certainly has, suppressed questions at the government on the performance of its policies.

We now stand at a precipice. In the next few months the government could commit to policies that will cost percentages of GDP but will not lower emissions, not by a single tonne. If the current track continues, we will end up materially poorer while doing nothing to help future generations on climate.

Surely, there no political constituency for that outcome? Yet that is the path we are on. Almost nobody is asking the government this most basic question: how does your emissions strategy cut emissions?

That question helps protect future generations. So don’t be angry at the person asking it. Be angry about the answer.

A solution searching for a problem

John Cochrane may be grumpy but he is possibly my favourite living economist.

In this article he makes a number of great points about climate financial risk. Here are two:

The idea that climate change poses a threat to the financial system is absurd, not least because everyone already knows that global warming is happening
…
Climate regulatory risk is slightly more plausible. Environmental regulators could turn out to be so incompetent that they damage the economy to the point of creating a systemic run.

One hopes that officials working on climate financial regulation in New Zealand understand the significance of knowing what has already been priced, and that regulation has costs and risk and if sufficiently-poorly designed could be a greater threat than the underlying problem. Officials seem to find market failure in a lot of places; regulatory failure less so.

Cochrane concludes:

Climate change and financial stability are pressing problems. They require coherent, intelligent, scientifically valid policy responses, and promptly. But climate financial regulation will not help the climate, will further politicize central banks, and will destroy their precious independence, while forcing financial companies to devise absurdly fictitious climate-risk assessments will ruin financial regulation. The next crisis will come from some other source. And our climate-obsessed regulators will once again fail utterly to anticipate it – just as a decade’s worth of stress testers never considered the possibility of a pandemic.

Read the whole thing.

HT Jim Rose.

Take the shorter path to success on climate

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.

De-commission the Climate Change Commission

Tim Hazeldine writes ($) in the Herald today on how the Climate Change Commission has gone so far off-target. It is hard to excerpt, the whole article is excellent.

Our climate change policy should be solely about climate change. “You can’t kill two birds with one stone” is a cliche but it is not trite. It is true and important in almost every policy context. Yet the Commission considers it should in future “consider broader well-being factors, like eradicating poverty, safeguarding food security and addressing other environmental outcomes”. Wrong, wrong, wrong and wrong.

Exactly. It is not that those other outcomes are undesirable. But insisting emissions policies also solve those other problems puts our emissions targets at risk. Allowing other objectives into the decision making carries a huge emissions penalty. Second-best emissions policies have roughly no effect on emissions.

It is farmers, other businesses, entrepreneurs, innovators, inventors, scientists, workers, and, not least, households – the whole team of five million – who will get the job done, and at the lowest cost, so long as the overall cap set by the Emissions Trading Scheme (or through a carbon tax) is secure.
Also mostly pointless, are the multitude of policy recommendations that pour forth from the report. If the real decision-makers in the economy (i.e. all those listed above) are getting the correct price signal from the ETS, then there is generally no justification for further government intervention. What should be done will be done… The main exception will be in the provision of what economists call “public goods” – in particular research results

A binding ETS cap does not mean doing nothing else. It means being smarter about where to point other policies, targeting then in places the ETS does not reach or might not reach adequately. Where possible, use cost-benefit analysis to check policies are cutting emissions at a high-enough rate to justify their cost, taking proper account of the effects of the ETS. I say “where possible” because research is something that cost-benefit analysis may not be much help. But fill your boots on feebate and harbour crossings.

Just one of the [Commission’s] 1000 technical references is a well-published economics article. This, by the way, rates subsidising electric vehicles as the highest-cost of all known climate policies.

An indictment of the Commission. Naturally, having shown EVs underperform other technologies with the one piece of economic evidence they cite, the Commission recommends accelerating the uptake of EVs.

So, what to do? The Climate Change Commission has, in just a few months, seriously outgrown its boots. The Government should step in, and with polite thanks for their efforts, de-commission the commission. It should then persuade a super-smart mid-career research-grade Kiwi economist – tough-minded but humble (they do exist) – to take the reins of a slimmed-down secretariat.

This is a pretty robust conclusion. However, the Climate Change Commission arguably exceeded its legislated mandate in its first report, and its emissions reduction plan threatens our emissions targets. Those two problems are serious enough to fully justify Hazeldine’s conclusion.