Labour claims National will hike the cost of fuel. Photo / Michael Neilson
ANALYSIS:
This week Labour alleged a “huge hole” in National’s climate budget, which would see the cost of petrol rise 40 cents a litre thanks to rising emissions prices.
“Filling a 50 litre tank of petrol could go up around $20, more than what many households will get per week from National’s tax cuts,” Labour’s Megan Woods said.
National leader Christopher Luxon shot back, saying that this was incorrect and that National would “double the amount of clean electricity in this country”.
He said the cost of pollution “will continue to rise as polluters need to pay for their pollution”, but poured cold water on the prices mentioned by Woods.
This is a very serious question, and arguably one of the most serious claims made on the campaign.
Unlike the more common “fiscal” variety of hole, which can be plugged by tax hikes, spending cuts, and borrowing, this hole would have an immediate and large impact on households. The allegation amounts to a secret climate tax hike so large it will wipe out what most people would get from their tax cuts. That’s not just an election issue, it would mean a price hike so large it would be the election issue.
But National denies it, arguing there’s little to see - and, bolder still, that Labour’s climate policies are not just bad, they do nothing to actually reduce emissions.
They are both right in part. Labour is correct that National’s plan of relying on emissions pricing to drive emissions reductions would, at least initially, see prices rise - although it too must concede that the cost of pollution will rise whoever holds the keys to the Beehive, and National has a point that in a broader sense, Labour’s emissions policies do less to reduce overall emissions than they say on the tin.
Emissions targets
The debate raging between Labour and National is about the best way of getting the country’s greenhouse gas emissions to net zero by 2050 in a way that preserves strategic industries and doesn’t hike the cost of living for households.
Both have agreed to the net zero 2050 target. They’ve agreed to the three emissions budgets that are meant to get us there, and they’ve agreed to our Paris targets. Where they disagree furiously is on the precise blend of government policy and the Emissions Trading Scheme to get us there.
Labour wants a balance between the two, National says it will lean more on the latter (though it has not, to date, provided much detail about how).
What the hell are they talking about?
The number in question here - the thing responsible for hiking the price of fuel in Woods’ example - is the price of an NZU.
An NZU equates to the right to emit the equivalent of a tonne of carbon under New Zealand’s Emissions Trading Scheme, often shortened to ETS (NZU, carbon credit, and “ETS price” are often used interchangeably). The price of an NZU is currently hovering just below $70.
The ETS is New Zealand’s main tool for getting to net zero emissions. It currently applies to about half of our greenhouse gas emissions. The other half, mainly agriculture, is mostly out, and is fighting very, very hard to keep it that way (and winning).
The ETS is fiendishly complicated, but works on a very simple principle: ETS users get credits for efforts to sequester carbon (planting trees), and polluters must buy and surrender credits to the Government for the right to pollute.
The laws of economics mean that if there is a lot of pollution in the economy, as there is now, the price of an NZU would rise quite high - that would encourage the economy to do two things: invest in zero-carbon alternatives to avoid paying an emissions price in the first place, or plant heaps of trees to make a small fortune from effectively selling businesses the right to pollute.
That way, the ETS finds a balance between emissions that the economy needs (emissions that are worth paying a lot for) and emissions businesses can innovate themselves out of, if the emissions price is high enough to make it worth their while.
You, the consumer, don’t notice any of this, but the businesses that supply you with stuff do.
The ETS operates upstream of consumers.
Unlike things like GST, you don’t see the cost of your own pollution in your bills, but when you fill up your car, you are paying for the right to the pollution you will cause by driving. It’s just that the company you’ve bought your fuel from has already paid the bill for you, and passed the cost on to you. Over the last few years, the AA reckons the cost has been about 10-20 cents a litre, based on an NZU price between $30-$90 (again, the price is currently just under $70, so at the upper end of that window).
The ETS also isn’t meant to get us to net zero emissions today, but guide us to net zero emissions by 2050. That means some pollution at the moment is not cancelled out by any sequestration - more on this below.
… and one more important thing
The simple principle mentioned earlier, has been drastically compromised in practice. A pure ETS could impose a carbon price on the economy so large it would put whole sectors out of business and grind households into bankruptcy.
Because so much of our lives are dependent on carbon pollution, the ETS, at its most lethally effective, would be a blunt and cruel tax on businesses and households. Unfettered, it could drive strategically important businesses into bankruptcy and push households into poverty.
To avoid this, the Government has added a handful of quirks to the ETS to smooth the transition to net zero. They make life easier for us now, in the hope that in future, we’ll be able to decarbonise more cheaply, keeping businesses and households above water.
There is an effective price ceiling on the ETS. If prices go too high, additional units get released into the system, keeping the price within the bounds of what the government thinks households and businesses can afford.
The Government also conducts a semi-regular auction of NZUs into the market.
Both of these types of NZUs are “unbacked”. That means that unlike forestry units, where a right to pollute is cancelled out by tree planting elsewhere, unbacked units simply allow polluters to pollute for a fee.
The Government also gives free units to strategically important sectors and the businesses in them, which it argues would become internationally uncompetitive if they paid the full cost of their pollution. There’s no sense New Zealand driving industry out of production only to reward countries that might not put a price on pollution at all.
These quirks mean the ETS price stays lower than it should be in a strict market sense.
The Government has traded off a near-perfect market-based emissions reduction tool with the needs of households and businesses to be handheld through an otherwise very costly climate transition.
Eventually, these measures will phase out and we’ll move towards a purer system of just sequestration and pollution (even that is up for debate - although in the interests of brevity, we needn’t bother with that here).
What does this have to do with Christopher Luxon and Megan Woods?
Right! Back to the main allegation: National’s alleged secret tax on households.
The Government has a host of other emissions policies, many of them paid for out of the Climate Emergency Response Fund, which spends revenue the Government receives from the ETS.
These include things like the GIDI fund, which funnels hundreds of millions of dollars towards heavy industry like steel production to help them install climate change friendly alternatives.
Some of the projects supported by GIDI will be enormously successful. A new furnace at NZ Steel will, on its own, contribute 5.3 per cent of the emissions reductions needed to hit New Zealand’s second emissions budget.
Then there’s the Clean Car Discount (which National calls a “ute tax”). This taxes polluting cars (including utes) to fund discounts on green hybrids or EVs.
It has been immensely successful, and is on track to reduce 50 per cent more emissions than originally estimated by 2035, and 230 per cent more by 2025.
Those two policies would be gone under National.
Why is this so serious?
Here’s where we get to the nub of the allegation made by Woods. An NZU is just under $70 currently, meaning it is a relatively light impost on households.
According to Woods, businesses say that in order for them to decide to switch to the sort of technologies the Government funds with GIDI, the price of an NZU would need to rise closer to $200.
Modelling by Concept Consulting and Retyna estimated that relying on the NZ ETS alone to boost electric vehicle uptake would require a carbon price of $595.
Woods alleges that the emissions price would have to rise very high for National to meet the climate commitments it has signed up to while also cancelling a host of Labour climate policies.
Modelling published by the Government showed that an increase of $10 per NZU sees average annual household costs by about $1.67 per week.
Increasing the carbon price by $130 would therefore hit households to the tune of $21.71 a week. That would turn National’s carbon dividend-funded tax cut into something closer to a carbon tax.
Increasing the NZU price to closer to $600 to achieve a switch to EVs would be a tax on households of about $88 a week - an unimaginable tax hike.
You can see how this works: If you can afford a new EV, it makes sense to buy one to avoid paying $88 a week climate charges. You can also see the counter-argument works too. If you don’t have the spare cash for a new EV, you’re trapped in a cycle of forking out $88 a week to the government or taking a chance on New Zealand’s sometimes good sometimes bad public transport networks. Many households would be stuck.
National’s plan to hit New Zealand’s climate targets is a version of this. It wants to lean more heavily on the ETS price to find the most economically efficient way of getting people to stop polluting.
Importantly not even National is a full-throated supporter of the ETS-only option, probably because the costs involved are toxic to any party’s election chances.
Luxon said on Wednesday, “the idea is that emissions are capped and the price goes up over time.
“We want the ETS scheme to do the heavy lifting - then the question is what can governments do that other players in the economy can’t do,” he said.
Reading between the lines, this is a blended strategy, much like the current one, but with more work being done by the ETS.
Climate Change Commission’s verdict
The Climate Change Commission is also supportive of the Government policies taking some of the edge off the ETS.
Climate Change Commissioner Catherine Leining, who was part of the team who designed the original ETS in 2007-08, wrote in a post on the Commission’s website that policies aside from the ETS alone were “needed to secure equitable outcomes, overcome barriers to change that are not about price and coordinate research and investment at the frontier of innovation.
“The ETS is a blunt instrument. It incentivises emission reductions when doing so is profitable – regardless of other consequences to society, the economy and the environment.
“Those who can afford rising emission prices will force change on others who are less able to pay, potentially to the point where well-being is threatened,” she wrote.
But these policies don’t actually reduce net emissions, do they?
This isn’t where the story ends. If only it were that simple.
The counter-argument is that the above policies do nothing or next to nothing to reduce New Zealand’s net emissions.
…annoyingly, for people who like these things kept simple, this argument is also broadly correct.
The Clean Car Discount is the most egregious example. When you fill up a petrol car, part of the price you pay is a right to pollute because transport emissions are included in the ETS.
If you swap to an EV, you won’t be polluting as much, but you haven’t done anything to stop someone else from simply buying the right to pollute in your stead.
Sure, you don’t pollute as much, but someone else will buy the right to pollute instead of you. In fact, by moving to an EV, you’ve reduced demand on pollution and put downward pressure on the price they would pay.
Moving to an EV does not change the cap on emissions under the ETS, the number of NZUs sold into the scheme - all it really does is mean that someone else pays the price, leading to the not entirely unreasonable critique of the scheme that it is a tax cut for people who can switch to an EV paid for by people who can’t.
This argument isn’t perfect. By decarbonising essential parts of the economy and things that households are particularly sensitive to (like fuel prices), it makes it less painful in future to taper down on unbacked units and move to a purer more functional ETS. It also makes it easier for the government as it sets about fixing irksome failings in the current ETS.
As Leining argues, these policies help get to net zero less painfully and more equitably.
But thanks to the ETS settings being aligned to New Zealand’s emissions budgets (we have three, stretching out to 2035) policies that reduce emissions somewhere do not stop an ETS user polluting somewhere else.
The New Zealand Initiative economist Eric Crampton, in a useful blog post, argues for the Government to set a “fixed number of unbacked ‘from-thin-air’ units that can be issued by the government between now and 2050. Those units, plus currently outstanding ‘from-thin-air’ units, would be the hard and known cap on net emissions”.
Doing this would set a clear pathway under the ETS to slowly phase out unbacked credits and move to a net zero system.
Despite both sides being full of hot air (thank you), the debate between them is a useful one.
Climate change is the ultimate cost of living issue. It’s an election issue too. Not in the sense that it should be, as an issue that threatens the habitability of the planet, but in the sense that climate change is a focused version of the issue that defines most elections: cost.
Emissions are baked into practically every part of life, the essentials and the nice-to-haves. This is the first election fought since ETS reforms made under Labour and the Greens gave even a semblance of functionality after it was gutted by the last National government.
Future elections will almost certainly see almighty fights between the best way to reduce emissions, and the cost that imposes onto households.
Commentators (including myself) have framed this as a cost-of-living - but as a three-digit carbon price and the 2050 net zero deadline approach, it’s safe to say we haven’t seen anything yet.
Thomas Coughlan is Deputy Political Editor based in Parliament. He has worked for the Herald since 2021 and has worked in the press gallery since 2018.
Minister Andrew Bayly sat down with Tom Raynel to discuss his 2024, and what comes next.