The Climate Change Commission-He Pou a Rangi wants fewer carbon credits available for polluters to buy, and has advised the Government to quickly reduce the number of credits it feeds into the system, and thereby reducing the total stock of units available.
The recommendation comes in advice the Commission provides annually on Emissions Trading Scheme (ETS) settings, and it was tabled in Parliament by Climate Change Minister Simon Watts.
Changes made to settings under the previous Government undermined confidence in the ETS scheme, resulting in all four ETS auctions failing to clear last year.
Climate Change Commission chair Dr Rod Carr said in a statement on the advice that the Commission had “suspected” there was a surplus of NZUs (a unit of emissions under the scheme) in the market.
“Recent data and updated analysis suggest that the surplus is larger than we previously assessed and that the change in our assessment is material. The outcomes of all four government auctions in 2023 - which were declined with no units sold - support this conclusion.
“This unit surplus will not self-correct.
“It is critical that the Government adjust the NZ ETS unit volume limits as soon as possible to draw the surplus down and bring the settings back into alignment with emissions reduction goals. There is scope to do this, while keeping the current price control settings essentially the same in real terms,” Carr said.
The Commission recommended dramatic reductions in the volumes of credits to be made available at auctions from 2025 to 2029. This would reduce the total number of NZUs auctioned to 22.7 million over that period.
Next Wednesday will see the first auction of the year, when 3.525m units up for sale. This is more than the total number of units the Commission reckons should be auctioned by the Government in 2029, when it advises just 3m be put up for auction.
Watts said the Government will consider the advice and make decisions later in the year. Changes will be finalised by the end of September 2024. Any reduction in units would mean a higher ETS price, which will feed into cost of living concerns. One of the reasons for the ETS’ recent dysfunction was market meddling designed to keep the cost low for households. The Government was forced to review the decision by the High Court, after it lost a case brought by the Lawyers for Climate Action New Zealand group.
The current Government, then the Opposition, lambasted those decisions at the time, but now find themselves faced with the same choice.
Treasury modelling from 2022 found that for every $10 change in the ETS price, low-income households’ weekly costs would rise by 66 cents, middle-income households’ costs would rise by $1.18, and high-income households’ costs would increase by $1.46.
The Commission said the Government did have the ability to cut ETS unit volume limits down, while keeping “current price control settings essentially the same”.
There is some good news: projected emissions are tracking down, “meaning lower demand for units in the NZ ETS than previously expected”.
The Green Party’s Climate Change spokesman James Shaw warned the Government will need a much higher ETS price to follow through on its climate goals.
“The Government has signalled that it wants to lean much more heavily on the ETS to achieve emissions reductions. It has also signalled that it wants to use other policy levers much less. The cancellation of the Clean Car Discount and the rewrite of the Government Policy Statement on Transport are examples of this,” Shaw said.
“Inevitably this leads to the conclusion that there will need to be much, much tighter ETS unit supply and, presumably, a correspondingly higher carbon price to achieve the same outcome and to hit our emissions reductions targets,” he said.
He argued the Commission should be allowed to “directly set unit supply in the Emissions Trading Scheme, in line with Emissions Budgets,” and cut out the Beehive from the process.
The advice contains other headaches for the Government, hinting at problems with its tax policy and policy for agricultural emissions.
The Government had planned to direct $2.89b of the revenue it receives from the ETS over the next four years into its tax cut package as a “climate dividend”. However the Commission warned the Government the ETS auctions were “not a reliable source of income” for the Crown.
The advice contained an even bigger headache, warning that the gaps in the ETS mean that by the middle of the next decade, it will fail to be doing its job to incentivise the tree-planting needed to reduce net emissions. This is because large parts of our economy, mainly agriculture, are kept outside of the ETS and do not have their emissions priced in any way.
“Under its current structure, after the mid-2030s, the NZ ETS will also no longer be able to deliver substantial incentives for the forests needed to balance difficult-to-reduce emissions.
“This will be an additional challenge to staying on the path to net zero long-lived emissions by 2050, and staying at net zero in every subsequent calendar year,” the Commission wrote.
It warned this was because “a significant proportion of the country’s long-lived gases (namely nitrous oxide from agriculture) is not covered by the NZ ETS, which means there is currently no incentive to plant forests to compensate for those emissions”.
The Commission also told the Government to continue with the policy of using non-ETS policies to reduce emissions, if the current ETS structure were to be kept. These will need to be outlined in the next Emissions Reduction Plan due out later this year. When in opposition, the current Government had been critical of large swathes of the former Government’s climate agenda, and indicating a keenness to rely on the ETS to drive down emissions.
“The second emissions reduction plan (due December 2024) will need to show, if the current NZ ETS structure is to be maintained, how other policies will make up for the scheme’s limitations – or alternatively, outline how the NZ ETS will evolve. Delay will undermine the confidence of investors, lead to disappointed expectations, delay action needed to meet targets and impose avoidable costs in the future,” Carr said, in his foreword to the advice.
Labour Climate Change spokeswoman Megan Woods said National needed to “move quickly” to ensure it was “up to scratch.
“In the advice released today, the Climate Change Commission has said that leaving the ETS alone will not bring stability to the market, signalling that uncertainty around the Government’s priorities is affecting market and investor confidence in the scheme. This flies in the face of National’s claim that the review was causing price fluctuations.
“The advice also foreshadows lower than expected ETS auction revenue, which is a problem for the Government if the intention is to use the money from auction proceeds for tax cuts,” Woods said.
Thomas Coughlan is Deputy Political Editor and covers politics from Parliament. He has worked for the Herald since 2021 and has worked in the press gallery since 2018.
The Resources Minister came to the select committee sporting a Make NZ Great Again hat.