Hipkins’ policy bonfire gives off few emissions

Public Policy / analysis

PM Hipkins’ policy bonfire gives off few emissions, but the failed carbon auction reveals bigger problem

16th Mar 23, 7:45am by Dan Brunskill

Photo by Marek Piwnicki on Unsplash

Prime Minister Chris Hipkins has copped criticism this week for tossing out a handful of climate-related policies, despite them having a marginal impact on total emissions.

The real blow to New Zealand’s climate goals was dealt by his predecessor in December and may have resulted in a failed carbon credit auction on Wednesday morning.

On Monday Hipkins announced a second set of government programmes will be stopped or delayed to free up $1 billion to spend on the cost of living crisis.

Among these programmes were several climate-related policies, which prompted a backlash from both media and potential coalition partners.

Te Pāti Māori co-leader Debbie Ngarewa-Packer said the decision was “disgusting” and suggested the Green Party’s Climate Change Minister, James Shaw, ought to resign.

Shaw said cabinet's decision potentially breached the cooperation agreement between the two parties, and made climate goals harder to achieve.

“Every time we kick climate action into the future, we make it harder for ourselves to meet those targets,” he said in a statement.

However, the scrapped policies did very little to help with the most important climate goal, which is reducing greenhouse gas emissions.

The clean-car upgrade and social leasing schemes, for example, would only have reduced emissions by 7,000 tonnes during the first emissions budget period.

The car upgrade scheme, which gave a grant to people who scrap old cars in favor of lower emissions vehicles, was expected to cost $568 million or $81,100 per tonne.

Compare that to the price paid for a tonne of carbon emissions at the quarterly carbon credit auction in December – $79 – and it becomes clear this was not a cost-effective way to lower emissions.

Auction lacks action

On Wednesday morning the quarterly carbon auction failed for the first time in its short history as bidders failed to clear the confidential reserve price.

The reserve was understood to be below the secondary market spot price of approximately $64 prior to auction and above the $33.50 floor price.

This means emitters and carbon traders, who had willingly paid upwards of $80 per tonne last year, were now placing bids somewhere below $64.

Susan Kilsby, an economist at ANZ Bank, said traders may be holding back and waiting for the carbon price to find a floor before buying back in.

Carbon prices have been falling since December when the Government updated auction volumes and price control settings, against Climate Change Commission advice.

The Commission asked for extra units to not be released unless the auction hit $171 per unit, but Cabinet lifted the trigger price only marginally to $80.64.

The Government, then still led by Jacinda Ardern, said it was concerned a higher carbon price could inflict extra costs on households buying fuel and heating.

Kilsby said the lower than expected reserve price increased the likelihood of additional units being released to the market.

“This put downward pressure on carbon prices in December, with price trending down further in recent months in the secondary market for NZU’s”.

One carbon trader told interest.co.nz too many bidders tried to “lowball” the Wednesday auction, resulting in no units being sold at all.

Paul Harrison, a director of Salt Funds, also noted the change in market sentiment since the Government rejected the Climate Change Commission’s advice.

This may have deterred many of the more speculative bidders from buying credits and contributed to the ailing carbon price, which has lagged behind international markets.

“At [a spot price of] $66.50 we run the risk of some decarbonisation projects being put on the backburner,” he said.

Carbon dividend on the cards

Eric Crampton, chief economist at the New Zealand Initiative, said none of the programmes on Hipkins policy bonfire would affect net emissions.

“The only thing that will reliably bring down net national emissions is reductions in the number of emission permits created by the Government for auction or for allocation”.

Interest.co.nz also spoke with a climate expert who agreed the recently scrapped policies were “small fry” relative to the emission reductions required.

Crampton said it sounded as though Hipkins might be clearing space in the Budget for a carbon dividend, a policy supported by both the Green Party and ACT.

Revenues earned from the Emissions Trading Scheme can only be used on climate-related policy. It was from this pool of money the $568m clean-car upgrade was funded, for example.

The details of how these climate-specific funds will be redistributed would be revealed in the May Budget, Hipkins told media.

Crampton said he would be surprised if there wasn’t some sort of carbon dividend, targeted at lower income households to help offset the cost of living.

This could help to relieve the cost pressure of a higher carbon price by returning the revenue raised in the auctions to the public, while still incentivising businesses to find ways to reduce emissions.

Carbon credits could then be allowed to trade at similar levels to overseas markets, such as the European price which climbed above $170 this year.

We welcome your comments below. If you are not already registered, please register to comment

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

36 Comments

by nigelh | 16th Mar 23, 8:00am 1678906829

I see the speculators in the ETS scheme are biding their time.There is something drastically wrong if one can speculate in carbon credits. It becomes a money man playground, particularly if it allows overseas investors in. National won't change it as it affects their big end of town. Labour and Greens don't have the nouse.

Furthermore what happens to the money the govt obtains from it? Into the general pot like petrol excise and gst to be divvied up into non related emissions projects?

by Hamish | 16th Mar 23, 8:16am 1678907785

My brain hurts trying to close this loop. Can someone help please?

Crampton said he would be surprised if there wasn’t some sort of carbon dividend, targeted at lower income households to help offset the cost of living.

This could help to relieve the cost pressure of a higher carbon price by returning the revenue raised in the auctions to the public, while still incentivising businesses to find ways to reduce emissions.

by mfd | 16th Mar 23, 8:38am 1678909094

I don't see a problem. The price on carbon encourages individuals and businesses to reduce their carbon use, e.g. by making coal power generation very expensive, and making petrol slightly more expensive.

The extra price on carbon use shows up in consumer goods meaning that particularly the less affluent are hit harder, as they may spend a large portion of their income on those goods and are less able to get around them by buying insulation, solar panels, electric cars etc.

A carbon dividend takes the proceeds of the government's carbon auction and hands out round to ask citizens evenly, or skewed to lower income.

If you have low carbon use, you will be made richer by this policy. If you have heavy carbon use, you get poorer. Good incentives remain, while on average the population is no better or worse off as the whole carbon price they pay is returned to them.

by Hamish | 16th Mar 23, 8:43am 1678909429

If non carbon emitting energy sources were bang for buck better, then businesses would already been using them, no?

And if so, then as businesses move to more expensive/less efficient, but less carbon emitting energy sources, then they pay less carbon tax, but the price of their goods and services still needs to climb now. And the poorer consumers are subsidised with what? (now that the carbon tax gathered is reduce)

by mfd | 16th Mar 23, 10:54am 1678917262

Generally, yes, companies will take the cheapest option. For most of our industrial history, the externalities of carbon use have not been priced and fossil fuels have been dirt cheap, so using coal/oil/gas made perfect sense. Now we are starting to price those externalities.

Yes, I think you're right to say that reducing carbon emissions will be inflationary however we approach it. Our system of cap & trade together with a carbon dividend could make the pain more equitable. Over time, the number of carbon credits the Government sells will be reduced, but the price can be expected to rise so it is possible the total tax raise will remain pretty steady for quite a while (a decade? Two? I don't really know).

There's plenty of ways to deal with this, but our market solution + a new carbon dividend could be one of the more equitable and simple solutions, without having to get into complexities like individual/company carbon budgets and Governments deciding who should cut what process first.

by Dan Brunskill | 16th Mar 23, 8:45am 1678909501

Its a bit topsy-turvy, sorry! Lets use a electricity company as an example.

The company might run a coal power plant that emits c02, so that company has to buy carbon credits credits from the Govt. It adds the cost of buying credits onto the prices it charges customers, increasing your monthly power bill.

But the government has that money from the carbon auction and could pay a portion of it back to you to offset your increased costs. But you could still switch to lower-emissions power company to get a cheaper bill, without giving up that government payment (which would be a cut of all proceeds from the auction).

So businesses are incentivised to reduce emissions (to keep their costs down and remain competitive) while consumers can use the proceeds of carbon credits to offset any increased costs or invest in lower carbon stuff (eg. an electric bike or an efficient heatpump).

Does that make sense?

by Hamish | 16th Mar 23, 8:56am 1678910181

Thank you for the reply.

You say businesses are incentivised to reduces emmissions to keep costs down. But my thinking is their costs are going up one way or the other. Either through carbon taxes, or through more expensive/less efficient, initial fuel sources. If there were cheaper fuel sources than oil, then they're already being used?

If the ultimate aim of the whole scheme is to move us off carbon emissions, then I just struggle to see how the reality is going to be anything other than a reduction in 'life style'. And gathering and redistributing carbon taxes just keeps putting this off.

by Dan Brunskill | 16th Mar 23, 9:03am 1678910586

You are right, if the economy shifts to lower-emission but higher-cost things eventually the carbon dividend would dwindle to nothing and the higher costs would remain.

But my understanding is that things like electric cars and renewable energy can be cost competitive (if not cheaper) once built at scale. The carbon tax/credits are supposed to help incentivize the capital investments which make scale and cost savings possible.

by Kate | 16th Mar 23, 9:45am 1678913140

Yes, if there is to be a dividend, it should be paid for saving not for using. The incentives are all the wrong way around.

Take a simple example - transport. We should pay people every time they use public transport and/or bike to and from work from the carbon tax collected from petrol use/sales.

Myt eldest grandson is a great example. He took the bus to/from school prior to having a driver's license. If he earned $2.00 each time he boarded the bus to/from school, I know he'd take the bus - if he earned $4 each time he rode his bike to/from school (that's $8 x 10 trips per week) - about what he presently spends on petrol each week.

by Whatwillhappen | 16th Mar 23, 10:00am 1678914016

Making the public transport free would have the same effect as paying people to use it, but it would only work for people inclined to use public transport. Maybe the half price public transport will be there for everyone using a Carbon dividend, and free for community services card holders? It's not long until May 16

by Kate | 16th Mar 23, 10:41am 1678916471

Making the public transport free would have the same effect as paying people to use it

Yes, you are correct. Evidence suggests even "free" doesn't actually incentivize mode shift to any great degree. Not that that is an argument against free PT - it is generally patronized by those on lower incomes, so it has COL benefits for those already struggling.

And again, that is why paying folks to use it for commuting purposes (whether to/from school or work) is a great idea. And it's not without precedent - for example, I do consultancy work and I charge my clients not only for my petrol costs but also for the time I spend going to/from the work. Same as is done by tradespeople. My point is - these types of incentives (pay for travel) are available in normal business transactions.

We need to think they should also be available for a wider public - i.e., those who make transactions with the environment on a routine/daily basis.

I likely sound nuts, but the way of the world (i.e., capitalism as we apply it today) is most certainly designed to provide greater incentives at the higher end of the socioeconomic spectrum. And it, of course, incentivizes bad/immoral/individualistic behaviour.

by AndrewRiddell5886 | 16th Mar 23, 12:21pm 1678922471

And there has to be public transport available in the first place.

by Kate | 16th Mar 23, 2:29pm 1678930150

Yes, but we can also pay bike riders for their commutes! :-).

by interesting1234 | 16th Mar 23, 8:24am 1678908299

We are no longer in an economical place to have the luxury of hard hitting carbon policies that hit carbon targets but cost us in other sectors. The next couple of years will be about keeping our heads above water so to speak, and weathering the global economic fallout that is only just starting to unfold.

by GV 27 | 16th Mar 23, 10:26am 1678915575

Policy wonks have no such concerns. Immutable job security of the kind some public sector employees have in downturns should be considered a fringe benefit and taxed accordingly.

by Stephen06 | 16th Mar 23, 2:30pm 1678930207

100% agree.

Also, why does New Zealand have to lead the world on this? Our economy will make only a marginal difference, and highly likely at the expense of revenue generating industries.

by solardb | 19th Mar 23, 9:33am 1679171584

What makes you think we are leading the world?. We are well behind Europe, for e.g.

by Palmtree08 | 17th Mar 23, 2:37pm 1679017040

My guess is we will never be in an "economical place". Taxing the very thing that powers Homo colossus and its exponential economic growth heat engine isn't actually going to work. Everything will either slow down and get smaller, or Mad Max will be known as a documentary ahead of its time.

by whakahokia mai | 16th Mar 23, 9:21am 1678911704

If this comes to pass in the May budget it sounds reasonably logical and clever to allow households to share in the incentives. Someone could be listening to good advice or is he just more aligned with ordinary NZ’ers? Probably both so far.

by nigelh | 16th Mar 23, 9:27am 1678912058

Interesting input from Dan and Hamish. It seems there is potentially a redistribution, not of wealth but of funds via a supposed carbon dividend to a few who are affected by the cost of goods because that industry costs increase because of their emissions.

There are some heavy financial calculations needed for any industry to determine what the impact of their emissions are on their costs, particularly if the price of carbon credits is high or volatile. In the case of a big emitter like the steel plant near Akl it might just be a case of shut the place down, its cheaper to import steel from China.

Of course we could just slap on tariffs on steel and other goods from China but that could well have trade agreement implications.

I'm not sure whether the ETS is the best of a bad bunch to reduce carbon emissions.

In any event NZ needs to postpone its current emission targets by at least 10 years until the current economic situation improves. I don't think we'll be out of step with the OECD countries on this.

by Millennial_Woman | 16th Mar 23, 1:39pm 1678927158

The ecosystem doesn't have 10 years left to wait. Or do you want 100% of coral reefs to dye? Because that is just one example of what is at stake here.

by nigelh | 16th Mar 23, 5:01pm 1678939285

I think you need to do some more research on coral reefs dying, particularly if it comes from MSM and one or two scientists who have an axe to grind

by fat pat | 16th Mar 23, 10:59am 1678917568

If I built a machine that consumes 1 L of petrol and puts say a net 35 kg of CO₂ in the ground, and if carbon credits are 8c per kg then my machine makes money. I’d scale it up and burn every last drop of petrol I could get my hands on. The broad economy will mimic the machine I described. The real problem mankind is facing is dwindling fossil fuel, not CO₂, so this carbon tax is totally counterproductive. What am I missing?

by Kate | 16th Mar 23, 11:09am 1678918167

Sounds perfectly logical to me. :-).

As I've promoted here before, the way for NZ with respect to climate policy was never the UNFCCC way.

We needed instead to adopt/apply a Climate Pragmatism approach;

accelerate energy innovation, build resilience to extreme weather, and pursue no regrets pollution reduction measures. .

by Kate | 16th Mar 23, 11:58am 1678921136

Great example of a no regrets pollution reduction measure;

1804920598_20240315.pdf (isentia.com)

As the crop also reduces the need for synthetic nitrogen - charge a carbon tax on synthetic nitrogen fertilisers and redistribute the proceeds to farmers to re-sow paddocks in Ecotain plantain.

A schoolkid could design incentives better than most adults. By adulthood we have become so ingrained in the existing thinking/way of the world.

by fat pat | 16th Mar 23, 9:33pm 1678955624

The measures you describe in bold seem prudent and reasonable to me. My only concern is the perception of what constitutes "pollution". Your example is great because nitrogen in waterways is a genuine problem. The epitome of ridiculousness, to my mind, is the development of pharmaceutical antibiotics to prevent methane production in cow's guts. This research is actually being funded in New Zealand.

by Kate | 16th Mar 23, 11:52pm 1678963940

Good point. I read that as air, freshwater, oceans/marine and soil/land pollution - not atmospheric.

Point is - in combatting pollution (such as the example you gave of nitrogen pollution to waterways) - less synthetic nitrogen fertiliser in many cases means less cows anyway! It's a two-birds-with-one-stone approach. Same goes for areas with high air pollution - lower than and you have fewer CO2 emissions.

The science to me is much more reliable and much easier. This idea of lowering potential future temperature rises on the planet via reducing atmospheric carbon - goodness me, could we have made it any harder and any less visible (in terms of positive progress/results)? And what really bugs me is that all this projecting/projections, etc. etc. are taking money away from work-on-the-ground pest and pollution control measures.

by IT GUY | 16th Mar 23, 1:05pm 1678925122

I can smell burning Nash … I mean slash…,,

by Rumpole | 16th Mar 23, 2:00pm 1678928446

How about burning Nash with Slash?

by Jack Lumber | 16th Mar 23, 7:34pm 1678948441

What people don’t realise is the volume passed in this week carries forward to June auction. However at the next auction the market needs to take the whole volume @9million tonnes above the reserve price or else it all passes again and that goes to the third auction etc until the 4th auction where there would be 18 million units to pass the reserve. At say a reserve price of $70 this is $1.3 billion cost. If this doesn’t clear that volume never comes to market again. At the auction this week coverage, total volume bid for, was only just the volume offered - 4.5 million. Who’s going to front up for 9 million? Get the problem emitters now have.

This will make the CCC happy as it reduces the registry overhang and price will rise fast next year as the market is short and will be seriously short. Alongside that auction volumes fall every year going forward so unless we stop emissions it will cost more.

So the fail is good news for price pushing change as if the market passes all year it will short going forward itself unless we all change - which is the intention of the ETS.

The markets working as intended but we don’t like the change as we are happy to reduce our emissions but not my emissions. It’s not my problem.

This is not financial investment advice😂

by Kate | 16th Mar 23, 11:57pm 1678964255

I think we can bet the specuvestors are right up with the play. My guess, they'll 'game it' until the government is forced in to a rules change. Seen it happen before.

by Jack Lumber | 17th Mar 23, 8:23am 1678994622

The reason it failed is “speculators” have withdrawn. Less bidders is less liquidity in the market. Without more bidders it becomes moribund until the emitters just need to buy. Every market has speculators, so called, and without them risk is not priced. People speculate everyday in virtually every market in the world - that’s how markets operate and function. Show me any market with a smooth curve and no fluctuations. Earlier speculators who bought at $80 plus have been burnt. That’s markets and their loss.

Theres nothing wrong with what happened and it’s simply saying there’s to much supply, as the CCC has said many times, this is being sorted out by the market. As supply is used up the price will rise and this in turn will force more change as the cost of fossil fuel rises. The ETS is simply overcoming the extra volume the Government put in and correcting.

In fact this maybe the kickstart the ETS needs to really become effective.

by Kate | 17th Mar 23, 11:26am 1679005607

Every market has speculators, so called, and without them risk is not priced.

It's an interesting postulate of post-modern capitalism. Mispricing of risk is also a common outcome.

by Jack Lumber | 17th Mar 23, 1:24pm 1679012690

Exactly and thats how we learn in all things in life and has been happening since the first trading between humans started and will continue until we disappear from the planet. What we havnt done is price in externalities well, at all, and the ETS is the first time we have done that.

by Kate | 18th Mar 23, 12:06pm 1679094375

But we could price in externalities (i.e., atmospheric pollution) via a carbon tax - no need to establish a trading (i.e., offset) scheme which can be 'gamed' by speculators in the 'market'.

https://www.newsroom.co.nz/why-we-cant-plant-our-way-out-of-climate-change

by jeremyr | 16th Mar 23, 9:24pm 1678955051

Big takeaway from this policy bonfire is......

i) Big expensive policies would have had absolutely no effect whatsoever. Who knew ? They were really important and beneficial previously. What changed?

ii) It is more important that Labour and the Greens desperately cling to power, at all costs...even at the expense of the climate and the climate emergency. Gee, I thought we were all going to die soon if we didn't buy a silly EV and start eating mung beans. Seems it is not the case., at least not until after the election anyway. It must be more important that we continue to increase emissions under Labour than reduce them as we were under National, I guess.

Anyhoo, we now know, if Covid comes along and everyone gets a cold or the government is at risk of losing the election, then the poor old climate just has to get over itself.