More of the endless cycle of incremental reform of the emissions trading scheme

There is a new Cabinet paper to read; "A Review of the Emissions Trading Scheme", 28 pages, by the Office of the Minister of Climate Change

What use is a Cabinet paper when the key policy options are redacted?

Last Wednesday 22 March 2023, the Ministry for the Environment announced yet another review of the My-Eyes-Glaze-Over New Zealand Emissions Trading Scheme.

For some reason, I downloaded the Cabinet paper.

For some even more masochistic reason, I actually read all 28 pages.

It was largely a waste of time.

I can't even use the metaphor that the Cabinet paper was "rearranging the deckchairs on the Titanic" as I have already used that title on a blog post on a past consultation on industrial allocation.

The first paragraph of the Cabinet paper tells us what the paper is about. So far so good.

"This paper seeks agreement to the scope and process of a review of the New Zealand Emissions Trading Scheme (NZ ETS). This review is in response to Cabinet’s decision to prioritise gross emissions reductions in New Zealand’s first emissions reduction plan (ERP), and Cabinet’s in-principle decision to at agree to the Climate Change Commission’s recommendations to strengthen the incentives for gross emissions reductions in the NZ ETS."

The fourth paragraph states;

"Enabling a just transition to a low-emissions, climate resilient future is a Government priority..."

Okay. I am all for a just transition. I'd like the transition to help those with low incomes instead of being corporate welfare for emissions intensive industry as in the case of the dreaded industrial allocation.

Back to the Cabinet paper. Who is being mean to the emissions trading scheme saying it needs more reform? It's the naughty He Pou a Rangi/Climate Change Commission. The Cabinet paper says in paragraph 50 that:

"In their 2021 advice, the Commission highlighted the risk that the NZ ETS would drive relatively low-cost net emission reductions through exotic forests, rather than gross emissions reductions needed to put us on track to net zero by 2050".

For emissions nerds who have tracked the emissions trading scheme since it's inception in 2007, this isn't just a future risk. It is exactly what has already happened in the 2008 to 2012 period of the Kyoto Protocol. Gross emissions rose in proportion to economic growth but "Net Kyoto" emissions (that included "afforestation and reforestation" sequestration credits that were not in the 1990 baseline) were less than the baseline.

This was before the fraudulent hot air emission units from Russia and Ukraine flooded into New Zealand. Here is Geoff Simmons in the Spinoff.

The Cabinet paper continues with a lot of background to the emissions trading scheme that is probably unnecessary. For example its not like Chris Hipkins would read that. He couldn't remember any details of other Cabinet papers where policies had consequences measurable in emissions.

Finally, I got to paragraph 79 on page 11. Maybe the officials who wrote the paper would finally mention where they see this reform proposal going. That would be new information. For example, what do the officials think are the possible high level options for amending the emissions trading scheme? Great, they are going to say what they think. Here is paragraph 79.

"However, in my view there is value in identifying some of the potential, high-level options Ministers may be presented as an output of the review. This will help give a sense of the kinds of options that could support balancing gross and net emissions reductions in the NZ ETS."

I turned the page expecting to be mildly enlightened. Okay that is sarcasm. It would have been nice to learn something new though.

This is paragraph 80. And 81 and 82.

Yes the potential, high-level options have been redacted! The whole point of downloading and reading the Cabinet paper was really to find out the possible options or new directions for dealing with known problems.

I kept plowing my way through the paper. Several pages are dedicated to the peculiarities of the inter-departmental 'process' to be followed. Remember the emissions trading scheme involves several government departments: principally Ministry for the Environment on policy, but also the Environmental Protection Authority for operating the emissions trading scheme, the Ministry for Primary Industries for foresty, MBIE for energy sector emissions and Ministry of Foreign Affairs and Trade for international climate agreements.

These departments interact in accordance with the their own perceptions of relevant interests. I add the observation that such interactions may not be in the direction of 'no more than 1.5C warming' or 'net zero carbon by 2050. The Cabinet paper leaves that unsaid.

However, such interactions are implicit as on page 14 paragraph 100, as the paper proposes some 'governance terms of reference' to presumably make the public servants play nicely.

I am reminded of the italian novelist Umberto Eco's explanation of the behaviour of the crusading Knights Templar religious order. The historic reality of knightly behaviour in the Holy lands was best understood by considering the order's offical commandments. For example, "thou shall not be drunk on a horse blaspheming the name of the Lord" was in fact the proof that such behaviour was the rule and not the exception.

So yes I am mildly interested in the 'governance terms of reference'. Here are the relevant paragraphs.

Yes the 'governance terms of reference' have been fucking redacted!

So I logged onto FYI.org.nz, the online transparent and open portal for requesting official information from public agencies. And I requested a complete copy of the Cabinet paper with all 26 redactions restored all their improbable glory. The 26 redactions are probably not earth-shatteringly egregious but the point of principle is - do there need to be any redactions if the Government is pursuing emissions policies consistently with their own professed value statement of a "just transition"?

I was so mad about that point that I started writing an email to Minister for Climate Change James Shaw asking him that exact question. The email turned into a three page letter. Oh well, push the send button, and try not to forget what the issue was when I finally get a reply after waiting a month or two for a reply. Of course, the same proviso applies to my Official Information Act request at FYI.org.nz. The Ministry may well extend the timeframe, or transfer the request to the Minister's office, or just ignore the timeframe - or a combination of all three.

Of course, in terms of climate change policy responses, we don't have time for this shit.

Explaining the emissions budget it's the bodge that gives the number of emissions units to auction

I feel I need to do a deep dive into emissions budgets.

The emissions budget is the bodge that papers over all the cracks and flaws in the emissions trading scheme. It calculates the number emissions units to auction into the New Zealand carbon market.

Emissions budgets are part of the huge blob that is New Zealand's climate policy framework, along with:

• the "Zero Carbon Act" that was an amendment not an original statute.
• the Climate Change Commission
• the Paris Agreement
• the Net Zero by 2050 goal
• the 2030 emissions target

Specifically emissions budgets are a relatively new tool (added in the 2020 reforms) to calculate the amount of emissions units that will be auctioned to emitters under the New Zealand Emissions Trading Scheme. The first auction of emission units was in March 2021.

The Ministry for the Environment's web site has an explanation of how the emissions budgets help calculate the amount of units to auction into the emissions trading scheme each quarter.

The web page features this chart showing the working parts of the emissions budget.

The web page then shows this table of the annual auction volumes.

However, the table and the chart don't match. They cover different five year periods. There is also an error in the html code of the table. There is a blank cell missing in the first row and first column. And the column headings need to be moved one cell to the right so that 'TOTAL' is above '75.2'.

I emailed the Ministry back in mid February to let them know. However, nothing has changed.

I find that quite comical. The web site administrator and the external relations person just got so bored talking with the emission policy person that they fell to sleep. If it's comedy, it's really a tragedy-comedy. One day far in the future, alien anthropologists will discover that the planet Earth missed it's global warming goals because they were too "My Eyes Glaze Over" for any one to understand.

Specifically, the emissions budget is the 2020 provisional emissions budget for the years 2021 to 2025. This comes from a Q and A document attached to a Government media release dated 2 June 2020 Emission trading reforms another step to meeting climate targets by James Shaw Minister for Climate Change Issues.

These five year emissions budgets roll forward as each year passes. So the current emissions budget is 2023 to 2027.

What is the point of the five year emissions budget?

It is to drag down the trend line in New Zealand's gross and net emissions of greenhouse gases. This is helpfully shown by this chart from the Climate Change Commission's advice to the Government. We can see the three jaffa and blue coloured bars representing the three five year budgets 1 , 2 and 3 sequentially reducing and pulling down the trend line of emissions.

This next chart, 'Figure 7' from the Ministry for the Environment presents what looks like an area chart (Except its actually a barplot of five time intervals). Look at the area underneath the black dashed line of net emissions and the solid red line of a trajectory towards the 2030 emissions target. A wedge shaped area of 'additional reductions' is needed to drag the forecast line down to the trajectory to the target. The area under the trajectory (to the target) is 354 million tonnes of net emissions. So the decreases in emissions are squeezed to the later years.

Here is my version of the same bar chart of five years of emissions. It uses the same area 354 million tonnes of net emissions (derived from the 2030 target) and the same colours.

The next step is to add the target trajectory red line and the annual amounts of net emissions from 72 million tonnes in 2022 to 68 million tonnes in 2025.

So, okay, we have an emissions trading scheme. Those 354 million tonnes of greenhouse gases will be represented by 354 million emission units that could be auctioned to emitters. As basic economics says that will be the most efficient way of allocating the emissions to buyers.

Ha ha ha! Of course that's not what is done! Instead we have to do a 'bodge' and subtract millions of tonnes from the emissions budget to deal with the fundamental flaws in the emissions trading scheme.

This is the crux of the problem. However, neither James Shaw or the Ministry for the Environment discuss this 'budgetting' as the crude bodge that it is.

The emissions of pastoral agriculture are not yet subject either to a methane-based emissions levy or to the emissions trading scheme. And perhaps may never be subject to emissions pricing if Beef and Lamb NZ's latest anti-regulation campaign succeeds.

So the first step is a 'bodge' to subtract the emissions of agriculture. This is 194 million tonnes, more than half the emissions budget of 354 million tonnes.

So are the remaining 160 million tonnes going to be auctioned? No, there's another subtraction. Under the emissions trading scheme industrial allocation rules, emissions-intensive industries are given free emissions units...which they then surrender back to the Government.

So those emissions are not priced. Free allocation of units has the same effect as the exemption of agriculture, the units have to be subtracted from the emissions budget as you can't auction units that have already been given for free to emitters. The numbers are 8.6 million units per year or 43 million for 2021 to 2025.

Is that it? No, there's another bodge. There are too many emission units in private hands. There were 164,329,773 emission units at 31 December 2022. This surplus is called the stockpile. These units could be sold into the market at any time. Which would allow more emissions. Thus emissions would exceed the emissions budgets. The Climate Change Commissions and the Government would like to reduce the stockpile. So another 27 million tonnes are subtracted.

Now my chart of the 2020 provisional emissions budget is almost the same as the Ministry of the Environment's chart. That final bodge leaves a budget of 90 million tonnes left to auction into the carbon market. Or 18 million per year. Or 4.75 million emissions units to be auctioned from the first quarterly auction of emission units held on 17 March 2021.

This chart displays the same unit numbers and shows the sum of the bodges, how 264 million tonnes out of 354 million tonnes are not priced through the emissions budget process.

This chart has the same axes as the previous chart but just shows the number of units to be auctioned. Only 90 out of 354 million tonnes of emissions are priced via the auctions.

This chart now summarises the message of the two previous charts. Because the design flaws in the emissions trading scheme require bodges (by subtraction) to the emissions budget, only a quarter (25%) of the 2021 to 2025 emissions budget is expected to be priced via auction sales to emitters.

Summary points to note. The emissions trading scheme has fundamental flaws in it's design:

1. the exclusion of agricultural emissions from ETS obligation,
2. the excessively generous industrial allocation of free emissions units to emitters,
3. the excessive surplus of privately held emission units reflecting the importing of 'hot air' international units.

These three flaws require bodges to the emissions budgetting process that reduce the quantity of emissions subject to an emissions price via auctions.

End the industry allocation subsidized free emission units given to polluting industry to fund Cyclone Gabrielle recovery

Every year since 2010, emissions intensive emitters have received a subsidy of millions of free emissions units under the emissions trading scheme 'industrial allocation' rules.

Is it still morally conscionable for the emissions trading scheme to keep giving emitters millions of dollars worth of free emissions units, when the costs of recovery from the climate tragedy Cyclone Gabrielle are going to be billions of dollars?

I penned this message to Prime Minister Chris Hipkins, Finance Minister Grant Robertson and Minister for Climate Change James Shaw.

"Tena koe Prime Minister Hipkins,

The Dominion Post has reporting that the Minister of Finance the Hon Grant Robertson has said that billions of dollars will be needed for the recovery from Cyclone Gabrielle. I don't think anyone reasonable is disagreeing with him about the scale of the challenge helping impacted communities.

I have a suggestion to help provide funds for Cyclone Gabrielle without either raising new taxes or new borrowing or by reducing funding of important existing programs.

The Ministry for the Environment and the Climate Change Commission both expect that in calendar year 2023, 6.4 million emissions units will be allocated at no cost to industries.

At Tuesday's spot price of $67.50, these units would be valued at $432 million. My suggestion is to quickly amend the Climate Change Response Act 2002 (or it's related regulations) and add the industrial allocation units to the quarterly auctions of emission units and commit the proceeds to recovery from Cyclone Gabrielle.

You will need to get officials to act promptly as emitters will be applying for units from January to April 2023.

As the amount of forecast allocation units is over 6 million units through to 2027, there is an ongoing stream of about 400 to 500 million dollars (depending on unit prices) available for another 5 years.

What could be a better source of funding for recovery from a climate crisis event than diverting funding from emitter industries?"

The Climate Change Commission's estimate of the free emission units allocated is from page 38 of their report "Advice on NZ ETS unit limits and price control settings for 2023-2027".

Let's make a bar plot of the free emission units.

The Ministry for the Environment says that the spot market NZU price has followed the cost containment reserve trigger price (page 25 of Proposed changes to New Zealand Emissions Trading Scheme limit and price control settings for units 2022: Consultation document);

Since the NZ ETS closed to international markets in 2015, the market price of NZUs has closely tracked the upper limit price controls, the $25 and then $35 fixed price option, and the more recent $50 and then $70 cost containment reserve trigger price.

What is the cost containment reserve trigger price? The Climate Change Commission (Op cit) says: "The cost containment reserve (CCR) is a reserve of NZUs available for sale if the auction clearing price is at or above a specified trigger price".

The cost containment reserve trigger price is set in Schedule 3 of the Climate Change (Auctions, Limits, and Price Controls for Units) Regulations 2020.

The reserve trigger prices are also listed on the Ministry for the Environment's website Price control settings.

Clearly we need a bar plot of the cost containment reserve trigger prices.

Assuming that from now until 2027 the spot price for NZUs follows the cost containment reserve trigger price as it did in 2022, then the market values of the 'industrial allocation' free emission units are the volumes (about 6 million units per annum) multiplied by the trigger prices.

Which results in about half a billion $NZD per year for recovery from Cyclone Gabrielle.

2023 $516,096,000
2024 $577,143,000
2025 $650,412,000
2026 $718,208,000
2027 $792,817,000

By 2027 this will add up to a total fund of over $3 billion $NZD ($3,254,676,000).

We need to make another bar plot.

While I have received automated email replies to my emails to Hipkins, Robertson and Shaw, I have not received a substantative reply.

It just seems a no brainer to me that it is morally unconscionable to have an emissions trading scheme that subsidizes emissions intensive industry with $3 billion worth of free emissions units when those funds could be put into recovery from Cyclone Gabrielle.