The ETS is a “cap and trade” system based on government-issued carbon emission credits. Photo / AerialPerspective Images, Getty Images
OPINION
Local government often finds itself stuck between a rock and a hard place. Councils have limited sources of funding – mainly ratepayers and borrowings – which have practical limits. Yet they face an almost endless list of demands from local constituencies.
Limited means make it all the more important that councils stick to their knitting.
They should focus their resources on the things they must do – like providing local roads and other infrastructure, public transport, and waste management.
And they must be disciplined about not wasting their resources on causes they cannot influence or are not suited to solving.
Readers of this column will know it has recently criticised the Auckland Council’s draft Future Development Strategy. In ‘Orwellian-sounding’ Auckland Council forgets city must grow up, and out, I explained why the strategy’s goal of creating a “compact city” by reinforcing the rural-urban boundary will exacerbate the city’s housing affordability crisis.
But along the way, I also took a swipe at the council’s greenhouse gas emissions (GHG) reduction plans, saying it should be abandoned.
That is because, with a nationwide emissions trading scheme (ETS) that covers both transport and building, there is nothing Auckland Council can do to reduce New Zealand’s net emissions.
Following reader feedback, this column elaborates on why this is so.
How the ETS works
The ETS uses prices to lower emissions. It raises the price of goods and services according to their emissions content. Almost everything we buy includes an ETS charge.
The scheme is a “cap and trade” system based on government-issued carbon emissions credits or “NZUs”.
For each tonne of emissions, businesses must obtain an NZU, then surrender it to the Government. The Government issues NZUs using auctions and free allocations to some businesses. It also issues NZUs for activities which remove emissions from the atmosphere, for example by planting trees.
In 2020, the Government strengthened the ETS by introducing a fixed cap on the number of NZUs not backed by emissions reductions or removals issued for industries covered by the scheme.
The cap is set on a rolling five-year basis and will progressively fall with the goal of achieving net zero GHG emissions by 2050.
When we reach net zero, all emissions will need to be offset by NZUs backed by emissions removals.
The market price of NZUs is the cost of emitting one tonne of greenhouse gases. The current ETS price is $54 per tonne of CO2. At that price, the scheme has only a modest effect on the cost of petrol but has a material impact on the cost of coal.
Because NZUs can be traded, the scheme incentivises businesses to avoid emissions – or to remove emissions from the atmosphere – whenever this can be done economically.
As a result, the ETS reduces emissions for the least cost. Measured against regulatory interventions – like subsidising the purchase of electric cars – relying on the ETS is typically many times cheaper.
Rearranging deck chairs
The introduction of a cap on unbacked NZUs in 2020 is critical to Auckland Council and to councils generally.
The cap determines the level of net emissions in sectors covered by the ETS, including domestic transport and the building industry.
If Auckland Council constrains the city’s growth to reduce transport emissions from cars and buses, this might reduce the level of gross emissions from Auckland’s commuters.
But that will just free up NZUs that would’ve otherwise been used to offset emissions from the use of petrol. Those credits will then be available for use in other ways under the ETS.
Auckland’s Council’s activities simply involve rearranging the deck chairs. The ETS cap determines the overall level of net emissions – a view endorsed by the Government’s own Urban Land Markets Working Group in its submission to the Ministry for the Environment in 2021.
Consequently, the council’s emissions reduction policy is pointless.
That doesn’t mean councils should ignore climate change. It means they should consider climate change in a different way.
Carbon prices will rise considerably along the path to net zero. How people want to live and travel will change as carbon prices rise. Rather than use consenting and land use policy to try to drive down emissions, councils should do their best to enable lifestyle changes people will want to make when carbon prices are higher.
Advocates for bespoke interventions like Auckland Council’s emissions plan sometimes argue this type of intervention is needed to “make the ETS work.”
They argue that without forcing emissions reductions (for example, from commuters), the price of NZUs under the scheme will skyrocket and a future government will lose its nerve about reducing the ETS cap to let the country achieve net zero by 2050.
At best, the argument lacks logic. The scheme creates a market for avoiding or removing GHG emissions.
Market participants are incentivised to discover the most efficient ways of achieving a given level of GHG savings. If net GHG targets cannot be achieved without the price of credits skyrocketing under the ETS, that’s because more cost-effective options are not available.
By definition, bespoke regulatory solutions – like constraining the outward growth of Auckland City – will be even more costly. Hence the illogicality.
But a lack of logic may not be the worst charge levelled against this argument. A more concerning criticism is that costly bespoke emissions reduction policies will have to fool voters by concealing the fact they are more costly than simply relying on the ETS.
A good example is the current Government’s electric car subsidy. Encouraging new car buyers into electric vehicles is saving gross emissions. But it is doing so at an estimated cost to taxpayers of $170-$190 per tonne of CO2. Compared with a carbon price of $54 per tonne, this is a shocking waste of taxpayers’ money. And it is an approach to Government spending inconsistent with a commitment to New Zealanders’ overall welfare.
But there is another reason why Auckland Council’s compact city emissions reduction policy is pointless. It would be drawing an exceptionally long bow to claim Auckland’s Future Development Strategy could have such a profound effect on the country’s gross GHG emissions to materially affect the workability of the ETS.
Emissions prevented by the strategy would have to be so big as to put otherwise intolerable political pressure on the ETS cap. When the council can add bus or other public transport routes to serve new developments, that pressure can only be minor.
With Wayne Brown struggling to fill a black hole in council finances, the mayor should take a close look at his planners’ emissions reduction strategy. And not just because abandoning the policy will save the council money.
The strategy is one reason his planners are proposing to stop the city from growing outwards. But the compact city strategy will contribute to unaffordable housing – and therefore to poverty and hardship. That’s quite an achievement for an emissions reduction policy that forgets that the ETS is already on the job.
The co-op has posted a $14.3 million net loss after tax for the year ended June 2024.