New Zealand Government agencies at loggerheads on climate policy

14 April 2023

New Zealand’s Emissions Trading Scheme needs reform, but with differing views from Wellington’s policymakers, it’s unclear if it will move in the right direction. Yesterday saw the latest salvo from the Climate Change Commission.


Climate Change Commission vs. Government: A Game of Policy Tennis

Back in July, New Zealand’s Climate Change Commission recommended auctioning fewer carbon credits from 2023 onwards, to help meet national emissions reduction objectives. They also suggested that the price of a pool of additional units (known as the Cost Containment Reserve or CCR) should be increased from $70 to over $170, compared with a spot price then around $80.

The Government said it would not take up this advice. A lower price for the CCR of $80 was set and an additional 6% of credits were approved to be issued.

The market clearly heard the message that there would be more carbon credits at lower prices. Since then, the carbon price dropped from record highs of around $90 to just over $60. And in March, for the first time in recent years, an ETS auction failed to clear as the Government’s reserve price for units was not reached.

Treasury recommended against the Commission’s advice, saying toughening the Emissions Trading Scheme would risk increasing prices of fuel, gas and electricity.

Fast forward to yesterday, the Commission released a new set of recommendations, which sound a lot like the ones not adopted in 2022. They recommend a reduction in the number of carbon units to be auctioned, raising the price trigger for the pool of credits in the CCR, and increasing the reserve price.

This game of policy tennis isn’t over yet.

Treasury’s doubts on low emission technologies: fact or fiction?

On the one hand, it’s not surprising that Treasury should express a different view to the Commission. It is an important part of Treasury’s role to scrutinise the policy and funding advice of other agencies. Yet the rationale for their views itself needs scrutiny.

Treasury say the current economy makes uptake of low emission technologies harder and slower. At the Climate VC Fund we are not convinced that’s true. Recessionary times encourage cost-cutting, and happily, many low emissions technologies have the advantage of being cheaper than their more polluting predecessors.

Even if Treasury’s position is correct, the ETS changes proposed would have brought more revenue to the Government, thus allowing more co-funding and therefore making uptake of low emissions tech easier and faster.

Short-term thinking misplaces how “distributional impacts” will really be felt

Secondly, Treasury notes the Commission’s view that distributional impacts of the ETS should be addressed by complementary measures outside the ETS, and says these measures are under-developed, and have unclear costs and timeframes.

“Distributional impacts” is economist-speak for additional negative effects felt by poorer people. These impacts are obvious. For example, poorer households are more likely to be in outer suburbs, characterised by worse public transport options and longer commutes. For such households, petrol is typically a higher portion of income than wealthier, inner city households. The impact is double – such households may be more reliant on petrol and diesel cars, and have less available income to support a rise in the price of fuel.

If Treasury’s view is that measures to address these inequities really are “under-developed”, surely the obvious way to fix the situation would be to further develop them? The alternative which Treasury recommends, to hold down prices in the ETS while these measures are built out, seems odd. Why restrict the part of climate policy which is starting to work, because you haven’t developed the other policies which are needed?

It also seems recklessly naïve to suggest that the short term distributional impacts of a higher carbon price will have anything close to the negative distributional health and economic impacts of continuing to prolong the transition to a lower emissions economy.

Will kiwi drivers really feel the heat of ETS changes?

Let’s also look closer at Treasury’s claim that following the Commission’s advice would substantially increase prices for consumers, particularly that of petrol and diesel. It’s clear that amid an inflation spike, there is substantial pressure on the cost of living, and thus huge political interest in ways in which prices of everyday items can be held down.

At the current carbon price, the ETS costs New Zealand motorists around 16 cents per litre of standard petrol. This compares with 45 cents for the Petrol Excise Duty (reduced from 70 cents by the Government in 2022 as a temporary measure after Russia’s invasion of Ukraine increased global oil prices). An ACC levy of 6 cents, a special levy of 10 cents for Aucklanders, and GST of 15% all add to the price you’re paying at the bowser.

In all, the ETS makes up 15-18% of the tax component of a litre of petrol, or about 6% of the total price you pay. The fall in the spot price for carbon since late 2022 is saving New Zealand drivers less than 1% of the retail price, hardly a great wad of cash in your back pocket. The 25 cents per litre reduction in the Petrol Excise Duty is having a much greater impact on the cost of living, but sadly is also pushing emissions in the wrong direction.

Carbon pricing schemes: why politicians need to stop fiddling at the edges!

Treasury said the proposed settings for the CCR could see the carbon spot price increase to $120, which would increase fuel prices by a more substantial 5%. But again, the discount on the Petrol Excise Duty of 25 cents per litre is a larger sum. If the Commission’s advice had been followed, the Government tax take from petrol would still be lower than in 2021. This would have reduced the cost of living, while helping to curtail emissions.

Ultimately, carbon pricing schemes are all about imposing a cost on the activity we want to see less of (like driving gas guzzlers), and/ or offering a benefit to activities we want to see more of. When our politicians fiddle at the edges of these schemes, they risk harming the long term policy (a cleaner car fleet and much greater chance of meeting climate change goals) for a small and ephemeral community benefit (a reduction in the retail fuel price of less than 1%).

At the end of the day, you need to let the carbon price do its job.

Of course, New Zealand motorists are increasing switching to electric vehicles to dodge the petrol bowser altogether. In the three months to March 2023, around 40% of NZ vehicle sales were pure EV or hybrid vehicles. That’s a clear indicator that the Government’s Clean Car Discount is working.

The chair of the Climate Change Commission, Dr Rod Carr, recently noted that even in a cost of living crisis, we need to continue the transition to a cleaner economy. The key to this is to let the carbon price encourage a lower relative price of clean technologies and higher relative prices of polluting technologies. If Governments need to address cost of living concerns – those pesky “distributional impacts” – they should target absolute prices, being the costs which people actually pay.*

What is happening now exemplifies a deeper truth: the hard work of cutting emissions to mitigate climate change has been deferred and delayed for decades, by governments and businesses around the world.

There will always be another distraction – cost of living concerns, an economic crisis, war, or who knows, another pandemic. But it’s clear as a planet we are out of time. We need to reduce emissions at the same time as addressing all the myriad other matters which concern our Governments from time to time.

That’s why at the Climate VC Fund we are focussed on helping to build transformative businesses with hefty levels of emissions reduction. As emissions reduction becomes easier, we hope officialdom will realise that a low emissions economy is good for both the cost of living and for the planet.

*With thanks to climate policy expert Dr Christina Hood, who made this point recently on Vincent Heeringa’s This Climate Business podcast.

Rohan MacMahon is a co-founder of the Climate Venture Capital Fund