Back in June 2020, the Minister for Climate Change James Shaw released a statement criticising previous (National) governments for their management of the New Zealand emissions trading scheme. He said:
"the rules set by previous Governments left the scheme too weak to have any real impact on reducing our emissions."
Specifically Shaw said that the emissions trading scheme under National was "a cap and trade system without a cap."
Shaw concluded;
This has meant that emissions permitted under the scheme were, in effect, unlimited. I am delighted to say we are finally changing that.
So that's a great policy win isn't it? Cap and trade emissions trading is very simple really. And we have a Minister who 'gets it'.
Emissions trading schemes, although an exceedingly obtuse subject, can be explained in a single sentence.
"Cap and trade sets a maximum level of pollution, a cap, and distributes emissions permits among firms that produce emissions" (Grantham Institute).
Or;
"The government limits the supply of emission units into a trading market which then sets the emission price based on unit supply and demand" (Motu Research).
So an emissions trading scheme is all about scarcity of emissions permits. The cap.
So hey we are lucky to have a Minister for Climate Change who is well informed and well prepared and who is pushing through the obvious fixes, such as the lack of a cap, to the National Party's woeful emissions trading scheme.
However, there is a problem with this narrative from James Shaw that he has introduced a cap into the emissions trading scheme. It is factually wrong.
The New Zealand emissions trading scheme is still awash with excessive quantities of emission units. While these surpluses of emissions units remain available to buyers, the emissions trading scheme can in no way be described as capping emissions.
There are far too many surplus units in the NZ emissions trading scheme
There are six ways the New Zealand emissions trading scheme has too many units. A real cap on units means scarcity and demand being constrained to a limit on supply to a market. The six ways all involve variations on the theme of too many emission units. The emissions trading scheme in 2022 is still "a cap and trade system without a cap". This post now lists the six ways the scheme fails to limit emissions.
One - the enormous quantity of privately held units in the New Zealand emissions trading register
There are 158 million privately owned emission units recorded in the New Zealand emissions trading register run by the EPA.
How did that happen?
Brian Fallow of the Herald wrote on 28 May 2014 that:
"..the collapse in international carbon prices has presented the smokestack sector with an arbitrage opportunity too. They have been able to hoard their NZUs, in the expectation they will be more valuable in the future, and meet their obligations in the meantime with cheap imported Kyoto units instead"
On 31 August 2015, Carbon forest consultant Ollie Belton said this;
"In 2012-2015 when the flood of Russian and Ukrainian ERUs were released, the tiny NZ ETS became the last market accepting them. This collapsed the NZ ETS price of carbon from about NZ$20/unit to about 20c/unit. NZ emitters naturally responded by meeting their surrender obligations with ERUs at a negligible cost (while back pocketing NZUs and making big arbitrage profits)."
"..trade exposed industries that were gifted up to 90% of their surrender obligations were able to meet all their obligations with the super cheap ERUs and bank the gifted NZUs. Since 2012, NZUs have had much higher market value than ERUs, generally more than five times as high, hence the arbitrage opportunity. Never have polluters had it so good. They have made hundreds of millions in arbitrage profits."
Dr Suzi Kerr of Motu said in 2016 that
"because of arbitrage, ETS participants now hold an excessive number of units that the government is required to accept against future emissions,”
By "arbitrage", Dr Kerr means the importing of fraudulent Russion and Ukrainian 'hot air' units into the emissions trading scheme described in the Morgan Foundation's Climate Cheats report. New Zealand Steel Limited were up to their necks in arbitrage.
These units are available to be sold to emitters for surrendering back to the Government at any time. They trump the so-called "cap".
Two - industrial over allocation of free emissions units
The free allocation of huge quantities of emissions units to large corporates like New Zealand Steel Limited and New Zealand Aluminium Smelter Limited under section 81 and section 83 of the Climate Change Response Act 2002 is production or output based. The emitters have always received more units than they need to surrender. Way more than a 90% entitlement.
Each year they receive a 'provisional' allocation of units which is calculated as their actual production from the previous year multiplied by the provisional allocative baseline. At year end they submit a 'final adjustment' return to the EPA once they know their actual output. The final units allocated to emitters equals their output multiplied by emissions factors. This process happens irrespective of any "cap" claimed by James Shaw. Free allocation trumps the "cap".
Three - price caps come at the expense of quantity caps - the cost containment reserve
The Ministry for the Environment's recent report "Te hau mÄrohi ki anamata | Transitioning to a low-emissions and climate-resilient future: Have your say and shape the emissions reduction plan." states on page 37 in footnote 14
"The cost containment reserve (CCR) is a reserve volume of units available to be released to the NZ ETS market if the CCR trigger price is hit at auction."
Auctioning of emissions units was another measure introduced in the June 2020 amendments to the emissions trading scheme.
Stuff's Olivia Wannan describes the cost containment reserve as
"a trigger to prevent the carbon price from going too high. If enough people place a unit bid above $50 during the auctions, the Government can sell an additional 7 million units. These equate to 7 million tonnes of additional climate pollution, which could be created this year or at any point in future."
Sure enough, during the September 2021 auction, the emissions unit price reached $50 per tonne and the additional 7 million units were released and sold to bidders at a price of $53.85.
So, again, the cost containment reserve is a farce that increased the supply of units to the market in spite of Minister Shaw's claim of a "cap" on units.
Four - The emissions budget is done backwards by subtracting the exceptions from the ETS
The New Zealand emissions budget for the 5 years 2021 to 2025, required by the Zero Carbon bill, was done backwards. It calculates by the sleight of hand of subtraction. It takes the emissions that should be capped and then subtracts the exceptions in the coverage of the emissions trading scheme. The exceptions gained by lobbying.
The Ministry for the Environment started with a gross emissions quantity of 354 million tonnes (mt) over 5 years (or 70.8 mt p.a.). They then subtract 194 mt for agriculture (outside the ETS, 39 mt p.a.), then 43 mt for free industrial allocation (8.6 mt p.a.) and then 27 mt for 'stockpile reduction (5.4 mt p.a.)'. By 'stockpile' they mean the 138 million units in private hands. And that they would like the 138 million units to reduce by less than 1% in 5 years.
The remaining number, 90 mt over 5 years becomes the indicative budget for the new auctions. It is therefore the amount to be auctioned.
The emissions budget under a plain ordinary vanilla cap'n'trade scheme should have been determined by addition. Add up the verified historic greenhouse gases from the inventory and the only subtraction should be the reduction amount to go from historic actual emission to enforceable limit or cap
Five - free industrial allocation of units included non-emitters.
Significant quantitles of emissions units were gifted to non-emitters as compensation or as a cost-reducing measure. The sectors are pre-1990 forest owners, the fishing boat owners and hothouse/glasshouse horticulture exporters. These allocations just lead to more stray units being supplied to the market for emitters to obtain for their increasing emissions. And more units in the private holdings of 138 million unit 'bank'.
Six - just run up an overdraft of emissions units with 'banking and borrowing'
Thanks to the Zero Carbon bill, the legislation provides for 'banking and borrowing' under Section 5ZF. This gives the Minister for Climate Change the power to fail to meet an emissions budget and to make up the difference with 'borrowing' the shortfall from the next emissions budget period. Again that is contrary to the idea of a "cap".
In spite of Minister for Climate Change James Shaw's claim of including a "cap", and in spite of the inclusion of "auctions" and "emissions budgets", the emissions trading scheme is still awash with surplus units. That's the opposite of scarcity of units implied by the word "cap". The emissions trading scheme remains a mix of creative carbon accounting and 'future-eating': emissions growth today and emissions reductions in the future (or maybe not all).