The unbearable annual updates to the NZ ETS auction volume limits and price control settings for units 2023

The Ministry for the Environment is running a consultation on the utterly incomprehensible Annual updates to the NZ ETS limits and price control settings for units 2023.

There is a very dense 56 page consultation paper Ministry for the Environment. 2023. Annual updates to New Zealand Emissions Trading Scheme limits and price control settings for units 2023: Consultation document. Wellington: Ministry for the Environment..

This is based on another annual round of dense advice over 64 pages from the Climate Change Commission Advice on NZ ETS unit limits and price control settings for 2024-2028

I wrote a submission today. Due to the density of the reports, and the way Ministry for the Environment framed the 24 compulsory questions, it was really hard. Submissions close on 16 June 2023.

I can however try to summarise it in three charts.

The Climate Change Commission wants the Government to reduce the number of emission units it auctions from 2026 to 2028.

The Climate Change Commission wants the Government to increase the minimum price for emission units in the auctions from 2026 to 2028.

The Climate Change Commission wants the Government to increase the cost containment reserve 'maximum price' for emission units in the auctions from 2026 to 2028.

I am guessing that a Chris Hipkins led Labour Government is probably going to try to ignore the Commission's recomendations.

Russell McVeagh have the best short summary of the issues: Climate Change Commission urges Government to reduce ETS unit supply and raise trigger prices.

Kyoto Protocol carbon prices 2005 to 2015 used by New Zealand's Ministry for the Environment

Perhaps the first data set of New Zealand carbon prices was the Ministry for the Environment's carbon prices used to calculate New Zealand's net position (either financial asset or liability) under the Kyoto Protocol.

The Ministry for the Environment had a web page About the 2008-2012 net position under the Kyoto Protocol

There was also a web page providing the Latest update on New Zealand's net position.

The net position was updated monthly in the crown financial statements for New Zealand issued by Treasury. A monthly data set of carbon prices was needed. From 2005, international carbon prices from either the United States ($USD) or Europe (euro) were converted to New Zealand dollars using the relevant foreign currency rate.

Another web page displayed the historic updates of the Kyoto Protocol financial information in the form of a table of eight columns. The seventh column was the carbon price in New Zealand dollars.

Here is what the table looked like.

Some years ago I saved an html file of that web page. I read the html file into R and tidied it into a data set with one row for every month and seven columns of variables. I even made a couple of charts!

In 2017, the Ministry for the Environment redesigned their website and the net position pages and the data set disappeared. I had thought about preserving it for the public record. I didn't get around to it.

I have just noticed I still have a folder of my R analysis. So I created a Github repository called Historic updates of the Kyoto Protocol carbon price. This now records the original .html file, some R script, the tidied data as a .csv file, a 'Readme' file and some charts.

I updated my chart!

I can't remember how I chose the colour of the line. It's "#D2691E" or "hot cinnamon".

What key point does the chart make?

The international market was flooded with "hot air" emission units from 2011. As the Morgan Foundation report Climate Cheats sets out.

One type of Kyoto carbon credit (the Emission Reduction Unit) was overcome by fraud and corruption in Ukraine and Russia. Virtually all of the credits issued by these countries are ‘hot air’ – they do not represent true emissions reductions. (Chapter 2)

Proportional to our emissions, New Zealand has been by far the largest purchaser of these Ukrainian and Russian credits through our Emissions Trading Scheme. This was due to deliberate decisions by the National-led Government to – unlike any other country – continue allowing unlimited use of these and other foreign credits for as long as the international community let us. (Chapter 3)

This fraud has had several nasty side-effects: It sent the price of carbon units in our Emissions Trading Scheme (ETS) to virtually zero, hammering our nascent carbon forestry industry.

Emissions trading scheme has created a 14 billion dollar asset for big emitting businesses

Last week the web site Carbon News pointed out two seemingly unrelated records achieved by New Zealand's emissions trading scheme.

On 15 November 2022, the New Zealand secondary carbon market reached a new record maximum price of $88.50 per emission unit.

On 19 October 2022, the Environmental Protection Authority released an update of the total number of privately owned emissions units held in the Emissions Unit Register. It was also a new record. Private firms who must mostly be ETS 'participants' (i.e. emitters) held 158,897,263 emission units.

This chart of NZU spot prices shows what we already know: that prices have tripled in the last 24 months.

I put the NZU price movements down to two factors.

First: the emissions trading scheme price cap of the "fixed price option" (unlimited units could be surrendered for $25.00 until the end of 2019 and then $35 for 2020) was replaced by quarterly auctions of units from 17 March 2021 onwards.

Second: the Climate Change Commission keeps advising the Government that the price floor and price caps should consistently track upwards. The most recent example is the July 2022 Climate Change Commission advice NZ ETS unit limits and price control settings. It again recommended an upward trajectory for the carbon price floors for the emission unit auctions. This is Figure 7 from page 56.

Conventional thinking might be that a higher emission unit price is a good thing. A sign of the emissions trading scheme being finally fixed so that it reduces emissions. However, that is unlikely if the 'stockpile' of privately held emission units keeps growing. As this bar chart shows.

These holdings of units are current investment assets in the balance sheets of firms. That can be easily marked to market value by the latest record NZU price in the spot market. Which has just broken a record in reaching more than $88 per unit. And 158,897,263 privately held emission units valued at $88 each equals $14 billion dollars!

The stockpile of emissions units isn't a good thing as it threatens climate targets and the potential supply of emissions units to the market is just one of the many reasons why the emissions trading scheme does not cap emissions.

Conventional thinking might be that a higher emission unit price should incentivise firms to sell their units. Thus reducing the stockpile. However, this is not happening. The stockpile is growing and is now worth a whopping 14 billion dollars! This $14 billion will be an investment asset on the balance sheets of firms participating in the emissions trading scheme.

Recall my recent post about New Zealand Steel Limited consistently being allocated more units than they surrender. Their holding of units is always accumulating.

They don't sell any of their units for two reasons:

1. they don't need to because of the continual annual over-allocation of units under Industrial Allocation and,
2. NZ Steel Limited, having read the Climate Change Commission's advice to Government, expects the price to continue to rise - further boosting the market value of their "investment asset".

So why sell an investment asset when you expect it to appreciate? You don't. Your strategy is "hold"

NZ emissions unit price chart Datawapper style

This is an experiment in embedding a chart created in Data Wrapper. That's Data Wrapper style.

It looks alright.

The Zenodo citation for the data source is "New Zealand emission unit (NZU) monthly prices 2010 to 2016: V1.0.01".

The annotation from the citation is "This data and R code repository provides a reproducible public domain data series of mean monthly spot prices of the New Zealand emission unit (or "NZU"), the domestic emission unit in the New Zealand emissions trading scheme (https://en.wikipedia.org/wiki/New_Zealand_Emissions_Trading_Scheme/). Version 1.0.01".

Five reasons why international carbon markets are a waste of time Thomas Spencer

Negotiators, diplomats, ENGOs, BINGOs and New Zealand Minister for Climate Change Issues James Shaw are meeting in Madrid for the 25th Conference of the Parties (COP25) of the UNFCCC.

This conference has a specific stepping stone goal for implementing the 2015 Paris Agreement; that is to agree the rules for international carbon markets.

However, Kevin Anderson's twitter account lead me which to a really concise ten point tweet from Thomas Spencer that explained why international carbon markets and linked international emissions trading schemes won't be an effective method to prevent global warming exceeding 1.5 degrees Celsius. Here it is.

Why international carbon markets are a waste of time

As negotiators battle it out in Madrid over Article 6, time for me to share my (perhaps controversial) views on carbon markets.

Buckle up.

Five reasons why international carbon markets are a waste of time.

One, the cost-optimising potential of international trading is wildly overstated. The costs of our transition will depend on getting things right which are not susceptible to being directed (only) by carbon prices: massive energy efficiency, innovation, infrastructure.

Two: in a world where we have 30-40 years to be at net zero as a globe, there is no space for offsets.

Every country needs to be on a pathway for zero by mid-century, a little later for developing countries, and all investments have to be scrutinized from that perspective.

Three: seriously linking carbon markets means unachievable levels of institutional coordination. Linking markets equals linking energy policy. No country will accept that, unless it is within a very tightly knit federal or quasi-federal or extremely integrated economic zone.

Four: the 'cheap abatement potential' in developing countries is not 'cheap'. Massive abatement in developing countries requires grinding governance reforms, market reform and policy reform.

Carbon revenues are not a pixie dust that can remove the need for this.

Five: we do not live in a world were massive public flows of capital are possible. Carbon revenues are not 'private' because the good traded is created and valued by public fiat. Countries are not ready to send tens or hundreds of billions of dollars/euros/yen overseas.

As long as these conditions hold, international carbon markets will continue to remain marginal. Their historical political and intellectual domination reflects a category error: Climate change is not 'like' environmental problems that were solved by pollution markets or resource transfers. Hint: it's not.

The intellectual domination of carbon trading reflects, as well, the dominance of economists and modellers that didn't think enough about the real world.

That's a big shame, almost a criminal error, and it set climate governance efforts back almost 20 years.

This may sound overly pessimistic about the potential and role of international policy coordination. I'm not. We need: targeted, strategic, catalytic international public finance, in greater quantities than we have today and massive innovation and diffusion.

The best thing that developed countries can do is innovate an attractive, low-carbon development model for themselves.

The twenty billion Euro per year that Germany spends on paying back high-cost, early-stage solar was better spent than all the money spent on the Clean Development Mechanism, if the criteria is increasing access to mitigation options for developing countries. Time to do the same for batteries and hydrogen.

All of this is not to belittle the very dedicated negotiators currently fighting it out in Madrid. We need to wrap up that negotiation and move on, and we need to prevent the worst abuses of the mechanisms that will result.

But the need for and gap in international governance of climate change goes far beyond these markets.

Let's try and put as much effort into that.

New Zealand emission unit NZU prices 2010 to 2015

I have made a new graph.

Actually its more accurate to say I have collated or perhaps compiled a data set of New Zealand emission unit (NZU) prices from 2010 to 2015.

Although private sector carbon brokers such as OMF and Carbon Forest Services display some current prices and a few historic prices, there is no openly available public data series of the New Zealand carbon price as represented by trading in the domestic New Zealand Unit.

So I decided to make a monthly data series by digitizing images of graphs via the programme G3Data and via the website Web Plot Digitizer.

I took an image of a chart of New Zealand carbon prices, much like this one below, I drew some vertical lines on it and uploaded it to the Web Plot Digitizer webpage, selected some exact points on the horizontal and vertical axes to orientate the chart and then clicked on the intersection of the data series with the axes. That records the data points in the Web Plot Digitizer app.

The values obtained in this way are best thought of as being similar (but certainly not identical) to a monthly mean. The accuracy is perhaps plus or minus 20 or 50 cents. I know that as I did several 'replications' and they varied from each other by 20 to 50 cents. The data file is available as a Google sheet called "NZU-price-data-2010-2015.csv".

The R script for the chart is also available at Ghost Bin and at the Wikimedia Commons page for the graph.

Friday night climate change and emissions trading reading

What do economists think is the best policy to adopt to respond to climate change? Hat-tip to the Environmental Economics blog.

The New York Times discusses energy taxes as tools to help tackle climate change. Hat tip again to the Environmental Economics blog.

The Davos World Economic Forum is not ignoring climate change. They have commissioned a report saying that curbing climate change will cost $700 billion a year.

Leo Hickman of the Guardian concludes you can't assume your flying emissions are 'offset' just because the EU has an ETS.

A UBS analyst concludes that the emission allowances (emission permits/units/credit) in the European Union emissions trading scheme are “worthless” without a change in the rules to tighten supply and curb the record glut of excess allowances.

According to UBS, the European Commission’s strategy for the glut is to reduce the supply of allowances into the market by postponing the sale of 900 million allowances from the 2013-2015 period to 2019-2020. This is being called "backloading".

However, "The European Commission, the bloc’s regulatory arm, will not get support from governments for its plan to temporarily cut oversupply by delaying auctions of some permits"

Consequently, the "EU nations and the region’s parliament have two options now: to “sit back and do nothing and see the market crash” or to support the short-term rescue plan to backload allowances".

More climate change and energy policy shambles - Gerry Brownlee's anti-carbon tax

Gerry Brownlee, formerly a minister of energy and fossil fuel, and currently the Minister for Transport and for bulldozing democracy, heritage and social order in Christchurch, today announced that petrol duty will be increasing by 3 cents a litre annually for the next 3 years.

Specifically mentioned are the Rangiriri and Tamahere-Cambridge sections of the Waikato Expressway, the Mackays to Peka Peka section of the Wellington Northern Corridor and the four-laning of the Groynes to Sawyers Arms (Johns Road) section of the Western Corridor in Christchurch.

The reason given for this policy is that the funding is needed for the Roads of National Significance programme and some upper North Island transport projects. I guess that means more spaghetti motorway in Auckland.

This is crazy policy.

The first level of craziness of the petrol duty hike is that it will affect the benefit-cost analysis (BCA) of each Roads of National Significance (RONS) project. Projects like Transmission Gully Expressway, have already been justified to hearings before the Environment Protection Authority on very marginal benefit/cost ratios. Julie-Anne Genter of the Greens said the benefit/cost ratio of Transmission Gully was 0.6. The RONS don't even break even in BCA terms. Now with the added petrol duty, the marginal benefit/cost ratio would be even worse. However, I bet that won't make Gerry Brownlee or Steven Joyce any less obsessed with them.

The second level of craziness with the petrol duty increase is the Government's complete failure to understand carbon pricing (which is what a petrol duty is) and to anchor their transport, energy and infrastructure policy with effective carbon pricing.

I have no problem with the price of petrol or diesel increasing. Road transport has many externalities that are not priced. It is "elephant in the room" obvious that the most important unpriced externality of liquid fossil fuels is global warming. And not a lack of four-lane expressways.

"But we have an emissions trading scheme!" I hear some one say. "Surely, road transport fuels are included in the NZETS?"

Yes we sort of have an emissions trading scheme which includes liquid fossil fuels which sort of prices carbon. But NZ carbon prices have crashed 72% in 2012.

According to estimates by the Energy and Data part of Steven Joyce's mega-ministry MoBIE, in the three months ended on 30 September 2012, the NZ emissions trading scheme probably accounted for 0.93 cents out of the regular petrol price of $2.09 per litre.

So we may describe New Zealand's petrol pricing policy as having two mutually conflicting parts. The price includes a component for revenue gathering for unneeded four-lane RONS expressways (3 cents/litre). The price also includes a component for the NZETS carbon price (0.93 cents/litre).

And the four-lane expressways part exceeds the carbon-pricing ETS part by a factor of 3.

This is the complete opposite of effective carbon pricing. Brownlees's petrol duty, to coin an expression, is an anti-carbon tax. What a shambles!

New Zealand emissions trading scheme You are the weakest (international) link

This post argues that the New Zealand Emissions Trading Scheme (NZETS) is "the weakest link" due to it's high exposure to the international carbon market. The strong "international linkage" is the the other side of the coin of the uncapped design of the NZETS. Both features reinforce just how ineffective the NZETS is in providing an incentive to reduce greenhouse gas emissions.

Who remembers the The Weakest Link? The quiz show with Anne Robinson the disciplinarian female host with the popular catchphrase "You are the weakest link. Goodbye!"

Yes that's today's bonkers metaphor for another wonky post on the NZETS. In addition to the observation that I would love to say "NZETS you are the weakest link. Goodbye!" there really is a relevant connection to the economics literature.

"Linking" of emissions trading schemes means that units from one ETS can be imported and surrendered by emitters regulated by a different ETS. There are papers and blog posts about international linkage.

The key economic benefit claimed for linking two or more ETS, assuming that they are otherwise sensibly designed, is that the lowest-cost ways of reducing emissions within the linked schemes become available (via emissions trading) to the emitters of the linked schemes.

An example. Pastoral agriculture may or may not have low-cost ways of reducing emissions. If agriculture has relatively high mitigation costs, then you are doing agriculture a favour by including it within a national all-sectors ETS, rather than just in an agriculture ETS. Agriculture can then just buy 'ways of reducing emissions' in the form of units from the cheapest seller - the emitter who can reduce emissions at a lower cost.

Not surprisingly, National's Minister for Climate Change (and Trade), Tim Groser, is very keen on linking international emissions trading schemes. Groser also does not want the New Zealand price for emissions units to be "dislodged" from the international price. Well that wouldn't be lowest-cost, would it?

However, this is all context for two recent reports on the NZETS in the 2011 calendar year. Last Friday, the Ministry for the Environment (MfE) released 'NZ ETS 2011 Facts and figures'. Earlier, in July, the Environmental Protection Authority (EPA) released its report on 2011 unit surrenders and allocations, the Section 89 Climate Change Response Act report.

This table sums up the MfE report.

In 2011, 16.3 million units were surrendered by New Zealand emitters. Of which, 11.7 million units were imported international units (being 4.2 million CERs, 4.3 million ERUs and 3.2 million RMUs.)

Reaction to the Friday's MfE report was swift. Carbon foresters decried the fact that foreign units were swamping the NZ ETS in 2011 at the expense of units from NZ forestry. "..foreign carbon was the credit of choice for emitters in 2011. International credits comprised a whopping 71% of all units surrendered for compliance.."

BusinessDesk noted the that big emitters had chased the cheap foreign carbon units in preference to NZ units as European carbon prices dropped to historic lows, dragging NZU prices as low as low as $4.50 to $5 per tonne of carbon last week.

Another forester said the NZETS was now a Claytons ETS (no doubt having forgotten that Colin James said 'Claytons emissions trading scheme' first).

Kennedy Graham of the Greens said there was no incentive for NZ polluters to reduce emissions. Kennedy hits the nail on the head.

I don't disagree with any of these sentiments. The importing of 11.7 million international units really spells out the "weakest international link" design flaw of the NZETS.

But for me the key point is not the number of units imported, it is that the unlimited importing of international units has been hardwired into the design of the NZETS since the Labour government's 2007 The Framework for a New Zealand Emissions Trading Scheme document.

And if a small market where the compliance demand is 16 million units can import units from the international market where 977 million units exist, then a cap on domestic emissions is never going to be possible.

Thats why the New Zealand Emissions Trading Scheme really is the weakest (international) link.

Nick Smith fails the smelter spin test

What does The Hon Dr Nick Smith, Minister for Climate Change Issues, say when the Green Party accuses him of subsidising greenhouse gas polluters.

Well it seems he denies it and he produces instructive soundbites of spin. I am informed that at Wellington's Oxfam election and climate change debate he said that the New Zealand Aluminium Smelter Limited's operation at Tiwai Point is the only aluminium smelter in the world exposed to a carbon price.

He has said this soundbite a few times. For example, in response to Kennedy Graham on 29 September 2011:

"..the aluminium smelter in Bluff is the only aluminium smelter in the world to face any price at all for its greenhouse gas emissions".

On TV One's 'Q and A' programme:

"the New Zealand Aluminium Smelter in Bluff, it is the only one in the world that pays any face at all for carbon pricing." (1)

In Parliament in September 2009,

"...the Bluff smelter, on 1 July next year, will be the very first to face a carbon price for its pollution. The European scheme excludes aluminium smelters until 2013..."

Does Dr Nick's soundbite stand up to scrutiny? The European Union Emissions Trading Scheme, which started in 2005, excludes the European aluminium smelters until 2013. But it included electricity generation from 2005. And aluminium smelting is very electricity intensive. As the International Energy Agency says: "Although the primary aluminium sector is not directly covered by the (EU) ETS, the impacts of the CO2 price are felt through increases in electricity prices" (p 8). (2)

Another example of a Smith soundbite is saying that the overly-generous free allocation of emissions units to industry in the NZ emissions trading scheme is not a cost to the taxpayer. For example: Parliament on 29 September 2011:

"This member and other members make the gross error of trying to claim that not exposing industries or consumers to the full price of carbon over all their emissions is somehow a subsidy. A subsidy implies that there is a cost to taxpayers. That is not true.."

Unfortunately for Dr Nick, that's not what the Auditor General, Lynn Provost, says in her accounting and auditing advice for emissions units in the public sector

"NZUs have a market value and the issue of NZUs without charge to participants is an expense to the Government and creates a liability".

Sorry Dr Smith, the Tiwai Point smelter is not the only aluminium smelter exposed to a carbon price in an emissions trading scheme. And the European smelters probably pay a higher carbon price through their electricity costs as the Tiwai Point smelter owner is compensated for electricity costs as well as emissions through excessive free allocation of emissions units.

Sorry Dr Smith, you can't just create and give away a permit to emit greenhouse gases that has a clear market value and say there is no cost to taxpayers as Treasury did not write out a cheque. The Auditor General says there is a cost to taxpayers of giving emissions units away to emitters.

Footnotes
(1) NB By 'pay any face' I think he means 'face any price'.)
(2) IEA, 2008,'Climate Policy and Carbon Leakage - Impacts of the European Emissions Trading Scheme on Aluminium'

Trans-Tasman Emissions Trading Scheme Challenge Part Two

Yesterday the Australian Parliament adopted legislation for its greenhouse gas emissions trading scheme.

So I thought I would write another post on the theme of the "Trans-Tasman Emissions Trading Scheme test series", this time looking at the key differences between the New Zealand Emissions Trading Scheme and the Australian Emissions Trading Scheme. The number one key difference between the two emissions trading schemes is in how clearly each scheme sets the carbon price.

1. Unequivocal carbon price vs volatile carbon price.

Unlike the NZ ETS, the Australian ETS will set an absolutely clear and unequivocal price on greenhouse gas emissions.

The price will be $AU23 per tonne from 1 July 2012, then $AU24.15 in 2013-14 and $AU25.40 2014-15 (Securing a Clean Energy Future, The Australian Government's Climate Change Plan, p 26). From 1 July 2015, the carbon price will float within and upper and lower ceiling with the Government setting an overall 'Cap' or limit on GHGs (Securing a Clean Energy Future p 27).

The price for "New Zealand Units" under the NZ ETS is being set at a discount to the price of international Kyoto units in the volatile international carbon. So the NZ price is ...well...it's yeah whatever. As in this chart for 2010. Did you note that the Australian minimum carbon price of 23.00 Australian Dollars converts to 29.50 New Zealand Dollars? A price of 29.50 NZ dollars is off the scale of this chart!

And as in this updated chart for September, showing the fall in the international price driven by the Euro-Zone debt crisis is further pushing the NZ unit price down.

This direct importing of the international price into the NZ unit price is because of two intrinsic design features of the NZ ETS. The NZ ETS has no cap on domestic GHG emissions and no cap on free allocation of units to emitters. The NZ ETS is highly linked to international markets. It allows almost all international Kyoto units to be imported and surrendered by emitters. So an emitter would say to a seller of NZ units "Why should I buy your NZ units instead of international units, which I could sell in a much wider market, unless the NZ units are at a discount?"

Of course, the Australians, influenced by Ross Garnaut and Bob Brown of the Green Party, are not having a bar of this price volatility. In terms of the economics literature, this is absolutely the right way to go.

A clear and consistent carbon price out for several years will clearly signal to emitters which emission reduction technologies to adopt - ones that will break even at the set carbon price! The same goes for developers of windfarms and producers of biofuels. A clear carbon price into the future will give investors confidence that they will not lose their shirts putting capital into windfarms and biofuel plants. Carbon price volatility, like in New Zealand, just makes investment in either mitigation or substitution of fossil fuels a bad bet.

So why on earth would a big industrial emitter want to have an emission trading scheme like New Zealand's where they have an unpredictable and volatile liability to pay a carbon price instead of an unequivocal and consistent-over-time carbon price as set out in Australia's scheme?

The only answer I can give is that if like Rio Tinto NZ Alcan Limited, you are given more emissions units than you need for your actual emissions then it just doesn't matter what the price is.