An Effective ETS Is the Pink Slip for Other Subsidies

Insights Newsletter
12 October, 2018

Minister for Climate Change James Shaw this week announced that a package of incentives to buy electrical vehicles will arrive soon. The package will join other climate change measures, including a recent proposal to tighten up New Zealand’s Emissions Trading Scheme (ETS).

The principal benefit of an ETS is the discovery of least-cost ways to abate emissions. A 2013 OECD study showed it can cost 17 times more to abate a tonne of carbon by using government subsidies than by simply relying on emissions trading.

But an ETS works only if its emissions cap is binding. Currently, New Zealand’s ETS cap is soft, in part due to free allocations of New Zealand Units (NZUs) – emissions rights – to selected industries. This explains the limited evidence, so far, for the effectiveness of the ETS.

The Government’s proposal will change this. An August consultation paper outlines a raft of changes to the ETS, including rolling five-year caps on emissions that will steer New Zealand towards zero net emissions by 2050. Agriculture will remain outside the ETS for now.

The ETS is valuable as a means for New Zealand to meet its international obligations at least cost, and so these changes should be welcomed.

But if the ETS becomes binding, with emissions determined by the number of NZUs issued, then measures like EV subsidies cease to have any effect on overall emissions.

Consider a family’s decision to trade in their gas guzzler for an electric vehicle. Their carbon footprint will be smaller, but total emissions will not change. The emission credits that would have been purchased with their petrol do not disappear. They will be released on to the market for purchase and use elsewhere.

It might be argued that a government could cut the number of NZUs by an amount equal to the emissions avoided by a subsidy-induced increase in EV uptake. True. But the government could just buy back or otherwise reduce the number of NZUs available and let participants in the ETS find their own best ways to cut emissions. The trading scheme can do that at a far lower cost per-tonne.

With a tougher ETS, other emissions policies, including EV subsidies, will do no more than raise the costs of abatement. That might be a source of aesthetic benefit for those who like seeing electric cars. But it will not help the environment.

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