Only ten beers on the table

The response by James Shaw to today’s breach of the ETS price cap has reminded me of the most helpful analogy I have heard to describe how a binding ETS cap really does neutralise every policy under the cap under nearly all foreseeable circumstances. The analogy comes from Eric Crampton. It involves beer.

To recap today’s events:

Earlier today, the government issued an extra 1.6 million ETS emissions units to defend the price cap
Those extra units will raise New Zealand’s emissions by 1.6 million tonnes
Shaw is looking at ways to neutralise the extra units so that they do not raise overall emissions. One of those ways is to issue 1.6 million fewer units in the future. Shaw is correct that this will indeed neutralise the emissions from the extra units issued today.

Shaw’s implied view is that in order to neutralise the extra units under a binding ETS cap, you have to reduce the cap. Right on. Shaw did not say he is also looking at more EV subsidies to neutralise the extra units. That is good because it would not work.

So here is my adapted version of Eric’s beer analogy, the takeaway being the cap is the cap is the cap:

Each Friday, Alex, Bob and Cath drink beer together. Alex always drinks 3 pints, Bob 4 pints, and Cath 5 pints. They have all 12 pints delivered to their table at the start of the night and go home when the last glass is empty.
Tonight, the pub has run dry. Only 10 pints arrive at their table. The friends discuss how to divide up the smaller number of beers. They come up with all kinds of elaborate schemes.
Further complicating things, the pub owner is friends with Alex and decides to charge her only half price for whatever she has to drink. It is such a good deal that Alex ends up drinking four pints, more than her usual three.
So what effect does the owner’s subsidy and all the elaborate schemes have on the total number of beers consumed? Zero. Exactly 10 pints are consumed, because that is all the beer there is. The subsidy and the schemes change how the beers are divided – but do not and cannot change the total number of beers consumed.

And so it is with a binding ETS cap. Subsidise EVs all you like. Raise taxes on petrol. Ban new gas connections. Do all the elaborate, tricky policies you want. They will have zero effect on total emissions. Because total emissions under a binding cap is solely determined by the cap – the number of emissions units issued by the government.

Next month, the government will commit tens of billions of dollars-worth of new emissions policies under its Emissions Reduction Plan. Nearly all of them will work under a binding ETS cap. As a result, they will not change total emissions by a single tonne. We will be no closer to our emissions targets, not by one gram. We will just be poorer.

Hundreds of officials, perhaps thousands, working away on their elaborate plans to lower emissions cannot see the obvious truth. Whatever their plans, there will be ten beers on the table.

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.

How much land do we really need to plant with trees?

Both the government and the Climate Change Commission have misrepresented how much land will be covered in forests in 2050 with current emissions policies.

In its final report, the Commission told the government the existing policies and the Emissions Trading Scheme at $50 will deliver net zero emissions in 2050.

That extraordinary finding put a significant dent in the case for the Commission’s plan which has us paying somewhere between $250 and more than $500 per tonne of emissions – not $50 – to achieve the same emissions goal.

The Commission needed a way to explain why we should not stick with existing policies, which its own modelling shows more affordable and as effective as their plan. Their primary argument is that existing policies plant too many exotic trees.

The Commission and ministers have made various statements to this effect. For example, back in June, James Shaw told Parliament’s Environment Committee this (at 44:07 and again at 44:22):

[T]he pathway to getting to net zero at the least cost… involve[s] converting virtually every farm in the country into pine forestry.

Shaw’s statement is not close to being correct.

In its final report, the Climate Change Commission says getting to net zero emissions with existing policies including the ETS at $50 will require an additional 1.24 million hectares of exotic forests to be planted by 2050.

That is only 11% of the 11.7 million hectares of New Zealand farms which are not already forested. So much for Shaw’s “virtually every farm” claim.

Perhaps Shaw meant some time after 2050? So at what date could the last New Zealand farm be forested if we extrapolate from the rate between now until 2050?

On conservative assumptions, the earliest date exotic forests will cover the last New Zealand farm will be in the year 2250. That is about the same year the USS Enterprise from Star Trek is scheduled to launch.

But that date is based on the most conservative assumptions possible: gross emissions never fall from their current levels; all trees are only planted on farmland; agriculture pays a carbon price near zero; and zero access to offshore emissions units.

More realistically, the last farm land will not be forested until sometime after the year 2500.

Except the last farm will never be covered in trees – ever. We have land markets which mean trees will become an uneconomic way to capture and store carbon emissions long before the last farm is covered in pines.

In any case, the afforestation problem does not have to be solved today and certainly not by the central government. Local councils should be asked to do the job of capping afforestation in their areas, which has the advantage of being democratic and based on the circumstances which confront them in the future.

Remember there is a constituency for trees as well as against. Many landowners like trees because they are profitable. Funny how a carbon price helps do that.

The Commission’s main argument that existing policies will plant too many trees is almost equally applicable to its own plan.

The Commission’s modelling shows its plan will plant a further 4.4% of New Zealand’s total land area in forests. That compares to an extra 5.1% for current policies.

The Commission’s plan plants more native trees and fewer exotics, but this change in composition is hardly earthshaking. With current policies, exotics will make up 24% of all trees in 2050; under the Commission’s plan, 19%. Would anybody but industry insiders notice the difference?

See if you can spot the difference in outcomes between existing policies, which deliver net zero emissions in 2050 with an ETS price of $50, and the Commission’s plan, which has us paying between $250 and more than $500 per tonne of carbon:

By contrast to these minor changes in land use, households and businesses will not fail to notice the effects of the Commission’s plan on their cost of living. With carbon prices of between $250 and more than $500 per tonne, the Commission’s plan will profoundly affect the cost of everything, especially energy and travel. Its worst effects will almost certainly fall on low-income households.

As far as I can tell, the Commission has not considered the consequences of its ruinous plan for households and individuals living on low incomes. Its distributional analysis mainly considers effects across economic sectors of the economy – which is not really a distributional analysis at all. For all the talk about equity, it is not clear the Commission has checked what $500/tonne means for the price of bread, the cost of your daily commute, your power bill, or a flight to Auckland.

Another problem is that the Commission has presented existing policies as relying too much on trees and not enough on gross emissions reductions i.e. reductions at source.

But the Commission’s modelling shows existing policies do far more than just plant trees to lower emissions. Modelling for its draft report (it does not seem to have been repeated for the final report) showed that by 2075, 74% of the reduction in net emissions would come from lower gross emissions with existing policies including the ETS; only 26% from removals.

Is successful delivery of our emissions targets, but with a few more exotic trees and a somewhat more gradual transition in gross emissions, so bad as to justify paying between five to ten times more per tonne of carbon? Consider which option puts our emissions targets at greater risk.

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.

Another reason to love natural gas

Natural gas does not just save us from burning coal. It saved us from nuclear. In the 1960s, nuclear power was seriously considered for this country until the discovery of the Maui gas field in Taranaki 1969:

In 1968, the national power plan first identified the likely need for nuclear power in New Zealand a decade or more ahead, since readily-developed hydro-electric sites had been utilized. Plans were made and a site at Oyster Point on the Kaipara harbour near Auckland was reserved for the first plant. Four 250 MWe reactors were envisaged, to supply 80% of Auckland’s needs by 1990. But then the Maui gas field was discovered, along with coal reserves near Huntly, and the project was abandoned by 1972.

In 1976, the Royal Commission on Nuclear Power Generation in New Zealand was set up to inquire further into the question. Its 1978 report said that there was no immediate need for New Zealand to embark upon a nuclear power program, but suggested that early in the 21st Century “a significant nuclear programme should be economically possible.”

Stuff reports the discovery of uranium on the West Coast in 1955 occurred when two drunk guys stopped to relieve themselves on the side of the road and decided to try out their new Geiger counter.

And this:

In the 1970s, Norman Kirk’s Labour government set up its own group of scientists to look into the matter. National turned it into an election issue by promising to fully investigate the possibility of nuclear power in its manifesto.

Imagine that, the two main political parties fighting for nuclear.

And good on them. Nuclear is a wonderful technology.

The iron law of electricity

My Insights #2 this week:

Events have rather overtaken last week’s blackout. The outage on the evening of 9 August left 35,000 households in the dark for up to two hours on the coldest night of the year.

This week we published a paper on the blackout by Carl Hansen, the former Chief Executive of the Electricity Authority from 2010 to 2018.

Hansen’s paper is full of insights. He steps through the blackout to identify the crucial moment which led to the outage. He explains how the electricity system deals with shortages. And he shows who is responsible for what, when outages occur.

Hansen’s main message is that officials at the Electricity Authority must be allowed to do their job and investigate the outage. The facts must be established before any response from the government.

The blackout was a stern reminder of electricity’s iron law: the lights must stay on.

This law is one reason why most government interventions in electricity end up doing the opposite of what was intended.

Take the offshore oil and gas exploration ban, for example. That might seem like a good way to reduce emissions, including from electricity generation. Until the next dry year, that is, when we find ourselves importing coal with twice the emissions per kilowatt of gas to keep the lights on.

Last week’s blackout was probably not the direct result of any government policy. But policies like 100% renewable electricity and the gas exploration ban will eventually lead to more blackouts.

In 2019, the government’s Interim Climate Change Committee estimated 100% renewables could produce 100 times more blackouts than business as usual. The policy will also raise power prices and effectively increase emissions.

The government responded to this devastating critique from its own experts the only way it could. It brought forward the start date for 100% renewables from 2035 to 2030.

Despite the blackout, New Zealand has a world-class electricity system. It is more green and more affordable than most other systems, and about as reliable.

Blackouts are shocking because they have become so rare, a remarkable feat for a system which requires supply and demand to balance every second of every day. In an isolated country which cannot import electricity from across the border to secure supply. In a system which is more than 80% renewable.

Our electricity system almost defies gravity, it is so good. Which makes last week’s blackout a momentary wobble on a magic carpet. Tread carefully, Minister.

You can read Carl Hansen’s paper here. You can also sign up for our weekly Insights newsletter here.

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

New competition for the Flat Earth Society

Supermarkets are easy, apparently. So easy, according to this article on Stuff, that you can set up and run a chain of them and at the same time “actively work towards other government goals across the environment, technology, business, and the labour market.”

What does that mean? The author helpfully explains (I am not making this up, somebody actually said this):

develop[ing] skills and technology in software, robotics, and distribution systems
developing 21st-century skills across the New Zealand workforce.
sustainable practices such as innovative packaging, bulk product refill stations
solar-powered warehouses could give consumers more reasons to use Kiwishop
prioritising local suppliers to reduce transportation costs
ensure better nutritional values for produce
incentives for food suppliers to use sustainable practices… utilising hybrid, organic, or te ao Māori farming methods
sustainable seafood manufacturing practices could be rewarded, further enabling the Government to achieve its related objectives.
better business practices, such as paying staff at least the living wage
strong work-based education programmes
leading to poverty alleviation, increased literacy, and a reduction in prisoner recidivism.

That’s right. The government’s new supermarket will help solve climate change and lower recidivism. All while remaining competitive with Foodstuffs and Progressive. It is just that easy to sell food.

Kiwishop is an opportunity to create a new ecosystem of food sourcing and sales with a smarter way of achieving economic, social, and environmental aims. In short, a much-needed disruptor in a market that has stunk for far too long.

The world is just one big free lunch. God help me.

The author concludes,

Kiwishop is a big idea, but so is KiwiSaver, Kiwibank, and Three Waters. We know how to do big in this small country.

What, no Kiwibuild or Kiwirail?

Venezuela has state supermarkets. Looks like their low, low prices deliver empty, empty shelves. Sorpresa!

Source: npr.org

Opening statement on the Natural and Built Environments bill

My opening remarks to the Environment Committee this morning on the Natural and Built Environments bill, which will replace the RMA:

Any planning system must allow trade-offs between competing outcomes.

Property rights confront owners with some but not all of these trade-offs.

The reforms should be based on understanding which trade-offs the planning system needs to solve, who is best placed to make decisions, and how.

This bill proposes the Minister for the Environment can decide everything using regulation.

This is not a credible approach. With the best will, the Minister cannot deliver a framework which makes sense of so much complexity. Decisions should be devolved to the lowest level, and with checks and balances, which regulation does not do.

The main goal of these reforms should be to improve housing affordability. The RMA has substantially contributed to the housing crisis. Quite simply, the new system must make it easier to build a house.

The key idea I want you consider is this. Cities protect the natural environment.

London, Tokyo and New York City are among the most environmentally friendly places on earth.

People living in those cities have smaller carbon and environmental footprints. They have higher prosperity and report higher wellbeing than other people.

This idea, that cities protect the environment, is important, because it means we can solve housing and protect the natural environment with a planning system that supports urban growth.

This bill proposes to apply rigorous bottom lines for the natural environment in urban areas. Paradoxically, this could harm the natural environment by stifling growth.

Planning cannot deliver urban growth if it does not protect urban amenity. Homeowners have the clout to stop any growth which threatens their standard of living. This bill must square the circle of supporting growth by protecting amenity.

So, three ideas to make sense of the complexity.

Cities protect the environment. This bill can support the Minister’s environmental goals if it embeds a presumption in favour of development.
Don’t put decisions in one place. Ask who is best placed to consider tradeoffs. And think about scope – what problems can only be solved by planning.
Finally, treat urban areas separately. Urban amenity is sufficiently distinct and important to justify its own treatment. Bundling urban and non-urban areas threatens to water down environmental bottom lines, and repeat the RMA’s mistake of stifling growth while failing to protect the natural environment.

This bill is not fit for purpose and should not go ahead in anything like its current form.

Thank you.

Link, from 50 minutes: https://fb.watch/7khkp_7mxS/

How Musk deals with complexity

Elon Musk has given a personal tour of SpaceX’s Starbase at Boca Chica in Texas to a Youtuber, Tim Dodd aka the Everyday Astronaut. You can see the first part of the interview here.

Musk’s interview is in his capacity as Chief Engineer at SpaceX. Musk is also the CEO of Tesla and a founder of Paypal, and currently the world’s third wealthiest person. The interview is fascinating throughout.

What I find most interesting is seeing how Musk handles massive complexity. As the Chief Engineer at SpaceX, part of his job is getting the left and right hands talking to each other across the processes that support the design and manufacturing of a rocket.

His interview reveals some elements of his strategy: a clear objective; a small number of metrics to guide decisions; awareness of how problems emerge in complex design and manufacturing; preserving the option to experiment (and fail) cheaply because some things are only discoverable through trial and error; solve the problems that need solving first.

I can’t help but think some of these strategies for dealing with complexity in scalable systems is relevant to public policy. Officials and ministers are not building rockets or cars. But they have to make sense of practically unlimited complexity. I don’t know what strategies officials use to manage the complexity they deal with. Whatever they are, few of those strategies seem to make it into public discourse.

Musk makes the interesting observation that because every Space Shuttle flight had people on board, failure was intolerable, experimentation was costly, and innovation essential stopped as a result. Keeping the doors open to experimentation which does not hurt anybody is important. That seems like a relevant idea for public policy.

Here are some of Musk’s insights from Part 1 of his interview with Dodd.

Objective

Become a multiplanetary species

Metrics

$/tonne of thrust: “What is hard is how do we make a Raptor [rocket engine] where the cost per tonne of thrust is under $1,000”
$/tonne to low Earth orbit: “The fundamental thing that needs to be fixed is the cost per tonne to orbit”
$/tonne delivered to Moon, Mars

Musk talks about thrust in tonnes, rather than the more correct measure Newtons, to make it easy to compare with the mass of the rocket the engines propel. He is happy to sacrifice correctness for clarity and simplicity.

On fuel mix, the bias is in favour of oxygen over methane because oxygen is cheaper and more dense, which reduces cost per tonne.

Process

Musk has a five step process for managing complex processes.

1. Make your requirements less dumb. “It is particularly dangerous if a smart person gave you the requirements. Because you might not question them enough.”

2. Try very hard to delete the part or process. If you are not adding things back in 10% of the time you are not deleting enough. The bias is to keep things just in case. You can make that argument for almost anything.

3. Simplify or optimise. This is the third step not the first because a common error of a smart engineer is to optimise a thing that should not exist.

4. Accelerate cycle time. But only after the first three steps. Otherwise you are just “digging your own grave faster.”

5. Automate.

“I have personally made the mistake of going backwards on all five steps. Multiple times.” Musk tells an interesting story of fibreglass mats in manufacturing Tesla cars.

“Any requirement or constraint must come with a name not a department.” Otherwise some person years ago could randomly come up with a requirement that today nobody supports. The requirement will persist if it is not owned.

Other points

“All designs are wrong, it’s just a matter of how wrong.”

“Everyone is wrong some of the time.”

If you look at the various reasons for Starship’s landing failures, none of those reasons were on prior risk lists.

Musk has more than one optimisation metric, but he treats them in a sequence. “Fundamentally, the optimisation is for cost per tonne to orbit, and ultimately cost per tonne to the surface of Mars.”

A common problem in production is too much testing. The production line will be tested at each stage to identify where problems are occurring. Once the problem is diagnosed, it is common for testing to not be removed.

Production processes (manufacturing rocket parts at scale) requires 10-100 times more effort than the technology. “Manufacturing is underrated. Design is overrated.” So rocket science is the easy bit. Mind blowing.

Boosters and ships (the drone ships boosters land on) are easier to build than the launch pad. The pad includes the mechanism for catching returning first stages. The pad is going to catch them from the air.