Matt Burgess: Why the Decarbonising Fund will have no impact on NZ’s emissions

OPINION:

Last week, the Government announced a new $70 million fund which will pay companies to move heating processes from coal to cleaner alternatives.

The Prime Minister said the fund, which is called Government Investment in Decarbonising Industry (GIDI), is a “win-win” that will “create jobs while lowering emissions”.

I hope she is right about the jobs. Because the fund will not reduce emissions.

That is because New Zealand already has a system for reducing emissions. It is called the Emissions Trading Scheme, or “ETS”.

New Zealand’s ETS is genuinely world-leading. When it launched in 2008, it was the first scheme in the world intended to cover all sectors and all greenhouse gases.

Today, the ETS includes every part of the economy except agriculture, about 96 per cent of our GDP but only half of our emissions.

In its first term, the Government made good progress on strengthening the ETS led by James Shaw.

Shaw managed to introduce a hard cap on emissions while maintaining the parliamentary consensus for the ETS. His achievement is under-appreciated.

However, an important by-product of an ETS cap on emissions is that other emissions policies, including the new GIDI fund, cannot reduce emissions any further.

The reason is how the ETS works.

The ETS is a “cap and trade” scheme, which is a bit like a game of musical chairs.

While the music plays, people run around the chairs. When the music stops, you must find a seat.

There is always one less chair than people. Whoever is left standing when the music stops must leave the game.

It’s the same with the ETS. Each year, emitters including oil and electricity companies, importers, food producers, coal and gas miners – everyone except sheep and cattle – must obtain permits to cover their emissions, then surrender those permits back to the Government. Each permit, called a New Zealand Unit or NZU, covers one tonne of greenhouse gases.

Whoever ends up not holding emissions permits must cut their emissions or pay a penalty.

But unlike musical chairs, where the next person to leave is decided by whoever is slowest or perhaps the least violent, cuts in emissions are negotiated through the trading of emissions permits.

The Government can use the ETS to cut emissions by reducing the number of permits it issues. This is the “cap” in “cap and trade”.

The “trade” works out where emissions should be cut.

Permits trade on markets for a price, currently around $35 per tonne. This is a carbon price, effectively a tax on emissions.

Taxing emissions means each emitter must decide whether it is cheaper for them to reduce their emissions or buy emissions permits for surrender to the Government.

That encourages companies and their customers to find ways to eke out lower emissions from their businesses. An upgrade here. An EV there. A tweak to the production line over there. The process is granular and mostly invisible, but it all adds up to lower national emissions.

What this means is that the Government’s $70m GIDI fund will make no difference to total emissions.

If New Zealand’s emissions are capped by the number of emissions permits, then the GIDI fund cannot lower total emissions since it leaves the number of emissions permits unchanged.

Here is how the fund will play out. Part of the money will go to companies that were going to transition to low-emissions technologies anyway. For those companies, money from the fund is a gift with no effect on emissions.

The rest of the money will go towards new investments in low emissions equipment. This will reduce emissions from those companies. However, the emissions permits that would have been used by these newly-green companies stead stay in circulation. Those permits will be purchased and surrendered elsewhere in the economy.

And that means higher emissions elsewhere in the economy, which will exactly offset the reductions made by GIDI recipients. Overall emissions will not change. Not one less tonne.

All the fund will do is shift where emissions are reduced. It will also dramatically increase the cost of cutting emissions. On the Government’s own numbers, each tonne of carbon cut by GIDI will cost nearly five times more than the same reductions through the ETS.

To cut emissions, the Government should have just reduced emissions permits.

For $70m, the Government could have gone to the market and bought up to 2 million permits, and then shredded them. Or it could have reduced the number of permits it issues in the future.

Either way, it would permanently remove up to 2 million tonnes of greenhouse gases – around 3 per cent of New Zealand’s net emissions in a year.

Shredding permits might not be as politically attractive as new funds. It puts upwards pressure on the carbon price, though the pressure would be minor in this case. But shredding permits comes with one important advantage: it would actually reduce emissions.

The Government has said there is a climate crisis. If it is serious, there should be no room for ineffective emissions policies.

But you could drive a bus through the Government’s strategy and processes on climate.

The Government has no organised testing of whether its policies work. Flagship policies like 100 per cent renewable electricity make it harder to reach our emissions targets. It is not clear anybody has realised how the ETS can neutralise other policies.

The Government has put itself at the centre of how and where emissions will be reduced, but it has not put in place the systems it needs to make good decisions. It seems to be flying by the seat of its pants.

As a result, the Government has just thrown away $70m on a fund that will not reduce overall emissions. It is about to sink billions more on other schemes for the same result.

Somebody stop the madness.

– Matt Burgess is senior economist at the New Zealand Initiative. Disclosure: he owns a small number of NZUs through the New Zealand SALT Fund.

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