Climate Change Commission report invites two major problems

By Phil O'Reilly, February 2021

The fact that we have a non-political Climate Change Commission is a good thing and deserves to be widely supported. Yet, we shouldn't assume that this independence equals infallibility.

We need to cast a very close eye over what the Commission is recommending, as once changes are agreed and legislated, they will have a profound impact on our communities and businesses.

It is useful to note that this latest commissioned report is not the start of debate about how New Zealand should respond to climate change. That debate has been progressing for well over a decade now, with various governments bringing about positive change.

Prior to the establishment of the Climate Change Commission, perhaps the most significant regulatory intervention was the Emission Trading Scheme (ETS) which commenced in 2002.

The idea was to put a price on greenhouse gas emissions and increase it over time so that polluters would face increased costs for their actions. This would encourage them to innovate and escape the ETS costs by reducing emissions or exiting those activities. The scheme would eventually cover all gases (carbon, nitrous oxide, methane) and all sectors.

The reason why the ETS was a good idea then - and remains so today - is that it is not technology, sector or fuel-specific. It doesn't pick any winners. Instead, it encourages innovation and the lowest cost pathways towards mitigation.

It also has the capacity to accommodate international emission-reducing initiatives across borders and even in other countries if it is more logical to take action there instead of in New Zealand. Climate change is a global phenomenon after all.

When the ETS was introduced it was by no means perfect and there is still room for improvement. Yet, the core idea of creating a single price and allowing for innovation is still one of the most innovative pieces of climate friendly legislation available to us.

Regrettably, the Commission's draft report has pushed to one side the idea of the ETS, preferring actions at the sectoral level. Many of these are quite detailed, such as the plan to ban gas appliances in homes over time. Clearly the Commission doesn't think that the central purpose of an ETS is adequate.

There has always been a role for additional regulation and activity to complement the ETS, but this recommendation pushes the sectoral approach as the central one. And this creates a number of complications.

First, by using all of these sectoral initiatives the Commission is, in effect, creating hundreds of emissions prices. For example, the cost of reducing vehicle emissions will be different depending on the type of vehicle and it will be different to the cost of reducing coal use in our energy generation mix.

The problem with having lots of prices is that the pathway to a lower emissions economy will inevitably be much more expensive and less efficient that it would be with a single price. In addition, it is likely to lead to the very lobbying, rent seeking and politicising behaviour that the Commission appears to want to reduce.

Another significant problem with the sectoral approach is the heavy carbon emitters in our economy who are competing with similar industries offshore. The Commission itself recognises that these heavy emitting industries are an issue. Yet, the reality is that every country in the world has them. What we need to aim for is to reduce their carbon intensity over time.

If we were to close all of our carbon intensive industries overnight, we would lose thousands of well-paid jobs in those businesses and in the communities that support them.

Furthermore, we would probably not create any positive climate action at all, since they would simply move their activities offshore – to be undertaken by potentially more carbon intensive businesses than those that exist in New Zealand.

The government has long recognised this by providing a free allocation of New Zealand units under the ETS to enable those businesses to remain competitive against international competitors who don't face such prices. The Climate Commission knows this to be a core issue for New Zealand and refers explicitly to this free allocation of credits in the ETS.

The problem though with the Commission putting in place all of the sectoral initiatives that it proposes is that those companies will face additional costs on top of an ETS price. And those additional costs may not be faced by competitors abroad.

This may well lead to the very investment and carbon leakage that the New Zealand business community and others have been concerned about for some time now.

I am hoping that the Commission will turn its attention to resolving these two very important matters of multiple emissions prices (with the associated inefficiency and cost that this implies), and a sector-based approach that puts many of our larger businesses at risk of extra costs – costs, which their overseas competitors may not face.

All of New Zealand wants to speed up our pathway towards zero net emissions. But I suspect all New Zealanders will want to do it in the most efficient and sensible way possible, retaining and enhancing jobs and communities rather than destroying them.

The Commission needs to put more thought into this before it releases its final report.