Defining the Election Issue: National and Green climate policy

At its AGM last weekend, the Green Climate Protection Package was rolled out.

–    It contains the over-riding goal of net carbon-neutral economy by 2050, with a National Carbon Budget comprising a series of five-yearly budget components to get to that goal.

–    There will be an independent Climate Commission to advise the Government on both budget and policy.

–    The policy will be two inter-related policy mechanisms: an economic instrument and a suite of complementary measures.

–    As the economic instrument, the failed ETS will be phased out and a climate tax will apply to all emissions, except that with agriculture it will initially only apply to dairy. All revenue thus raised will be recycled back to households through income tax relief and to businesses and farms through corporate tax relief. The dairy farms will be able to use a green farm certification scheme to claw back some of their tax liability.

–    The complementary measures will include a set of specific incentives in green energy, green transport, green finance and green farms and forestry.

This marks the Green Party out as the only party contesting the election with a comprehensive and effective plan to protect the climate. Given this is the most challenging issue we have ever faced, it’s not a bad idea for the other parties to respond.

National cabinet minister Tim Groser responded this morning, on RNZ. It is not difficult to rebut the five substantive critiques he advanced. They were as follows:

  1. Our plan would do nothing to change consumer behaviour but would put ‘vulnerable parts of the economy’ at risk.

Wrong: the Green plan will commence the transformation to a decarbonised economy within a time-frame that averts dangerous climate change; while protecting consumers (through an income tax-free threshold) and businesses and farms (through a 1% company tax cut). Individual businesses and farms that still believe they face financial hardship would be free to apply for special consideration. Those applications would be handled with full public transparency.

  1. Climate change is a ‘very large international problem’ that needs a global solution. But ‘people of this extreme position’ overlook the fact that New Zealand is of tiny economic and political significance and it is only the large emitters in aggregate that are going to make the difference.

Misleading: each country, and especially each rich developed country, has a legal obligation under the UN convention to reduce emissions. That was signed by a Jim Bolger’s National Govt. in ‘92. John Key’s Govt. under Tim Groser’s ministerial proclamations, is welching on that obligation. Each country, large and small, is obliged to do its fair share. New Zealand currently is not. We did not adopt this craven attitude when we sent our troops to Gallipoli.

  1. New Zealand is only one of a small group of countries that place a price on carbon; some 97% of emissions remain outside the price mechanism.

Misleading: Under the UN convention, the rich developed countries are to take the lead ahead of the developing world, in reducing emissions, until there is a global agreement in place that includes obligations for all. That global agreement will not enter into force until 2020. Between 1992 and 2020, it is the rich countries that must reduce. The fact that most emissions are outside the European trading system does not change that.

  1. New Zealand has one of the most efficient dairy and pasture-based economies and we should be encouraging our farmers to do more, not less.

Misleading: it is precisely because we have one of the more efficient livestock economies that we must commence the move to low-carbon farming. NZ agriculture is capable of responding to a price signal that disincentivises carbon pollution and promotes productivity.

  1. New Zealand’s ETS is working ‘only very slowly’ because international carbon prices are so low; it requires the international community to get its act together on climate policy, first.

Ironically true: New Zealand could have ‘greened’ its ETS independent of the international system, but this Govt. chose not to. That is why we need now to phase out the ETS and introduce a fiscal package that will be effective in reducing emissions and fair between sectors.

30 thoughts on “Defining the Election Issue: National and Green climate policy

  1. Tim Groser says: “Our [the Greens] plan would do nothing to change consumer behaviour…”

    Kennedy says: “WRONG”

    But then fails to explain why this part of Tim’s statement is wrong.

    I happen to agree with Groser on this point, and would be interested to hear just how consumer behaviour will be changed.

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  2. Is it just ‘rearranging deckchairs on the Titanic’ ? I’m not convinced that the ‘Captains’ of industry & the current Govt. politicians are doing anymore than just that. BUT any ideas by the Greens (or others) to move in a direction of sustainability & reducing the global addiction to fossil fuels.. is JUST FINE with I & I

    kia ora Kennedy

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  3. dbuckley
    Consumer behaviour will be changed because they will lose their job. That’s been the Australian experience of the effect of their Carbon Tax.

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  4. @dbuckley There is abundant evidence that before it was trashed by National’s policies, the ETS increased the rate of new forest planting and decreased the rate of deforestation in New Zealand. When National allowed unrestricted imports of “hot air” carbon credits (known as ERUs from AAUs) which lowered the price of credits to ineffective levels, these trends reversed.

    You might argue that a tax will not be able to achieve the same ends as an ETS, but there are whole armies of economists who would not only disagree with you, but also would argue that a carbon tax would be more efficient and effective than an ETS.

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  5. How does a change in the price of a thing fail to change the consumer’s use of it?

    Seriously, are we questioning basic economics here, the part that even I agree the economists have right?

    If you tax it, it costs more to do it. You find ways to avoid the tax by doing less of it, you have to pass on the costs you can’t avoid. The consumer will tend to use the least expensive options he/she can find. The operation of “the invisible hand” is never questioned except when Greens use it.

    Why is it so hard for people to believe that we actually DO understand this stuff? Are the lies so deeply ingrained in people’s minds that they cannot believe that Greens would use any free market principle?

    it is only the large emitters in aggregate that are going to make the difference

    Wrong – it is EVERYONE in aggregate. We cannot expect the large emitters to do it all while we do nothing at all.

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  6. How does a change in the price of a thing fail to change the consumer’s use of it?

    When the consumer has little or no practical choice.

    The consumer will tend to use the least expensive options he/she can find.

    Absolutely.

    Price signals work where the consumer has choices.

    Seriously, are we questioning basic economics here, the part that even I agree the economists have right?

    The economists got it perfectly right. They understand elasticity.

    I say again: Price signals work when consumers have choices.

    Either: the carbon tax signals are so small as to be insignificant, in which case there will be no change in consumer behaviour, or they will be sufficiently large to cause disruption to peoples lifestyles, in which case the next government along will do an Australia and remove them.

    What the Greens appear to be proposing is, to quote Tony Abbot, a “Great big tax on everything”.

    I honestly thought the Green party had more intelligence than to think that a “Great big tax on everything” is a good idea. I’ll explain why in the next post.

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  7. Here’s the real problem I have with both the ETS schemes, and carbon taxation:

    BOTH SCHEMES LEGITIMISE EMISSIONS

    Once the carbon charge of whatever form has been paid, then clearly you’ve paid for the right to emit.

    I don’t know what the Green Party and its members think, but I am an environmentalist, and I believe we need to reduce carbon emissions. I believe that having schemes like the one proposed whereby for just paying another 25 bucks I should get to emit another Tonne of CO2 ad infinitum, or until my wallet runs out, whichever occurs sooner, is just flat out wrong. This is exactly the same (and thus just as wrong) as Tetzel selling indulgences centuries ago.

    We (the Royal “we”) need to address the issue of emissions directly, not fudge the issue using a derivative, and hoping that “the market” will sort it out.

    Some things, markets are very good at, others much less so.

    Honestly, is this the best the Green Party can do?.

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  8. The market invariably provides choices dbuckley… you are not providing me with any reason to believe other.

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  9. @dbuckley – I tried to amend my last comment and the system wouldn’t let me. Here is the edited version:

    @dbuckley If you include tax rebates for forest sequestration then new forests can remove “legitimised” GHG pollution from the atmosphere. If you think that this is insignificant then consider these points:

    There is more than twice as much C fixed in organic matter in the biosphere as C in the atmosphere.

    If NZ chose to we could be fully GHG neutral for between 60 and 100 years by establishing a further 9% of our land area in plantation forest.

    If the world chose to, then according to FAO figures, regenerating approximately 50% of the area that humans have deforested would fix enough atmospheric CO2 to make the difference between our current 400 ppm and pre-industrial levels of around 280 ppm. Ocean storage and release needs to be considered in this scenario, but the reduction would be very significant.

    A well-functioning ETS (which we currently don’t have) would directly link polluters with those who were going to clean up their messes. The linkage would be less direct with a C tax, but still there.

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  10. I disagree. There isn’t an absolute ban on emitting CO2, cannot be because for many things there is no method of preventing SOME emissions. Yes, it is OK to emit IF you pay for the damage you cause. $25 is small beer. In Sweden it is upwards of $100 IIRC.

    OK… describe how such a regulation would work and how it would be realistically different than direct state control of the economy.

    Not arguing we can’t do it though, just that politics is the art of the possible and in this country and this time what you appear to be advocating simply isn’t.

    So as a way to go into THIS election, what you propose is simply a non-starter.

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  11. After agriculture, the vast majority of New Zealand’s emissions are from energy, either for power, or for transport.

    Emissions from electricity generation is something that could be subject to political interference, and thus could be significantly reduced.

    A big chunk of the emissions are from transport, and transport and vehicle policy are subject to government interference. Start the process of getting rid of older vehicles, that is government doable, have road designers think about optimising for carbon emissions. Incentives for non-commuting. There are many opportunities where a government can make matters better without pissing people off.

    There is a chunk from industrial process, its less than 10%, but still a big enough chunk that there could be things done to address it, think joint industry and research collaborations for example.

    There are things that can be done at a central level that can acheive big number savings. Things that directly impact CO2 emissions. Long term and permanent reductions.

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  12. The demand for electricity is not inelastic. Put the price up and the demand will fall. Electricity consumers have choices. They can cut back on their electricity use by switching to alternative fuels, such as wood pellets or solar water heating panels – even solar photovoltaic. They can also cut back on their usage by switching to more efficient appliances or improved insulation. Now I admit that not all electricity consumers will be in positions to make these changes, but some are.

    But it is not just about the electricity consumers. The electricity generators also have choices. Increase the tax on gas and especially coal, and renewables become more attractive. Even burning wood instead of (or along with) coal becomes more attractive – and this applies to all coal burners not just the power companies. If an electricity generator perseveres with their fossil-fueled generation, they will find themselves priced out of the electricity market more and more as the price of renewable generation doesn’t increase (much) with increases in CO2 charges and most of the renewable generation (must run) will go first. (Concrete and aluminium prices will go up a bit pushing up the price of construction of renewable generation, and some CO2 is released by geothermal plants.)

    The CO2 tax will also encourage the use of more efficient vehicles, and encourage switching from petrol and diesel to CNG and LPG or electric vehicles or PHEVs.

    And remember that the CO2 tax is just part of the policy announced.

    Trevor.

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  13. Unusually, Trevor, you are wide of the mark.

    For your first point on elasticity there is bucketloads of research, even if one doesn’t have access to specialist journals, a simple google search will find many studies and meta-studies. Electricity is “relatively inelastic”, in that it price elasticity is less than one, typically around 0.2(something).

    Some consumers will be in a position, as you note, to respond to price signals by doing what could be called the right thing. Which is good, but glazes over the fact that the majority will not be able to make significant capital investments to reduce their bills, they will just have to put up with bigger bills. Or turn off the heat, which would be a poor, but for some, an inevitable outcome.

    For the second point, generators could choose to respond to the carbon tax, or they could just pass the tax on to their consumers. What do you think would happen? The structure of the NZ electricity marketplace hides those carbon charges away from most consumers, excepting those large users that deal directly with generators not retailers.

    One possible outcome could be a dramatic rise in consumer electricity prices to fund the construction of new renewable generation resources. The generators would actually all be happy with this, as by increasing turnover it increases their profits to their shareholders, even at a time when demand for electricity is relatively flat. And the price rises wouldn’t be their “fault”; they are complying complying with government will, so they have to raise prices dramatically.

    Point three about more efficient vehicles, yeah, sure, for those who can afford it.

    But what you have done is completely vindicated my stance. Sure, you can try to influence behaviour by price manipulation using taxes, but you could also just fix the problems directly as I have outlined. Why the hell would you try to fix something by means of a derivitive, and piss the people off, when you can just fix it directly and not piss the people off so much?

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  14. DBuckley…

    Compare Genesis to Meridian as my supplier… Meridian supplies electricity from hydro and wind, in theory then, not affected by any part of the tax. No?

    It will have a price advantage and customer demand happening out the ying-yang. The part-privatization of the energy market was a mistake, and in fact the bulk electricity generation SHOULD be under direct government control, but what we have is this bastardized market and if we have to work with it (and we do for at least a while) then we work with it.

    That is a bottom line issue for most customers. We have choice of supplier, and the choice does matter. The choices are NOT simply to pay up or freeze in the dark, because we have vendor elasticity as well.

    As for the vendors, the Greens already have a plan to help control their prices to the consumer. Protested mightily because it might reduce the mighty profits that might be expected if the government had things all its own way. Those “profits” come from someone, somewhere, and the ability of Nationalistas to imagine that they appear from thin air is a corollary of their ability to imagine that the money in the bank doesn’t.

    pppfffhhht.. The point is that I do have a choice of vendor. The second point is that there would still have to be government intervention to ensure that pricing stays under control, and that emitting generation will not be real profitable.

    We can build all the electric public transport we like. People only get on when there is a clear price advantage to it.

    Tax makes that advantage clearer, and there are a lot of people who can make that choice fairly easily.

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  15. Compare Genesis to Meridian as my supplier… Meridian supplies electricity from hydro and wind, in theory then, not affected by any part of the tax. No?

    No.

    Don’t confuse Meridian the generator that (mostly) generates electricity from renewable sources, and Meridian the retailer that you get your juice from, noting that all retailers sell electricity with exactly the same generation mix. The juice you buy from Meridian is no more or less green than that your neighbour buys from Genesis, owners of Huntly.

    So it is true that Genesis the generator may pay far more carbon taxes than Meridian the generator. But because the way the electricity market works, the wholesale price of electricity (including ETS or carbon taxes) is nicely divorced from the actual cost of production.

    Yes, our electricity market is a terrible system if you want to use pricing to influence behaviour. Actually, its terrible in many ways, but is a not an uncommon system around the world.

    The point is that I do have a choice of vendor.

    You do indeed have a choice of electricity retailer. But you don’t have a choice of electricity. You can’t choose to buy “greener” electricity. The difference in pricing between retailers is down to how they choose to position themselves in the marketplace.

    (And your downtick isn’t me!)

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  16. dbuckley – be careful using overseas study results in a New Zealand context. Here electricity is a more common energy source for water heating and space heating. Overseas gas or oil are commonly used for both, while electricity tends to be used more for cooling, for which there is little alternative. And of course electricity has no equal when it comes to lighting or powering electronics, which make up more of the demand for electricity overseas than in New Zealand.

    In addition, overseas accommodation is usually better insulated…

    Trevor.

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  17. dbuckley

    Getting rid of older vehicles and replacing them is short sighted. There is a lot more to it than blaming vehicle age.
    The carbon footprint of recycling materials, transporting the scrap, rendering it, mining some new materials and producing a new vehicle delivered is horrendous.

    Using vehicles less and having less need for transport of common goods on the other hand moves towards a more sustainable model.

    Tractors are a good example of vehicles that can still function well to serve a purpose when decades old. They are made to last so save precious resources.

    Cars have become a fashion item and people buy into the consumerism with a host of industry provided reasons / excuses. Case specific judgements are better along with looking at more sustainable systems, using less of everything. You save most fuel by organising how things are done.

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  18. And what direct fix does dbuckley have in mind to get Fonterra off coal for their milk drying operations? A CO2 tax at least gives Fonterra a direct signal that will make them look at their coal usage and explore ways to reduce it, whether by using electricity, burning wood or installing solar thermal panels. They may find other options too. Governments are not particularly good at picking winners – better to let the industries do that themselves by giving them the right financial incentives or disincentives (taxes).

    Trevor.

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  19. The wholesale price of electricity is not completely separated from the actual cost of production. It is set by the offered price for the last required generation to meet demand, with must-run generation offered at virtually zero cost. If a CO2 tax pushes up the cost of generating with gas and coal, then the generating companies will offer the gas and coal fired generation at higher prices, often pushing up the wholesale price, but not if that generation is not required to meet demand. If the average wholesale price goes up, then the economics of renewable generation become more attractive, both to the existing players and to new players such as lines companies. New renewable generation will run ahead of fossil fueled generation as in general it will be offered at a lower price (zero if it is not despatchable) thus tending to cap the wholesale price and reduce fossil fuel usage. Even the despatchable renewable generation (such as Meridian’s hydro lakes) will be offered at a low enough price to keep it running as this generation doesn’t earn any money from spilled water or feathered wind turbines.

    Trevor.

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  20. DBuckley – I may have no particular say in where the electricity that actually comes into my house is actually sourced, but I DO have control over who I pay.

    That choice gives Meridian a market advantage. When Meridian the generator company sells power into the grid, it is power that costs them less owing to their not having to pay the tax. This makes them more profitable. The fact that they are also a retailer obtaining power from the grid, does not negate that savings.

    The people who are proposing this are well aware of the electricity market and how the application of the tax needs to be specifically controlled to ensure that the outcome is workable.

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  21. Trevor notes:

    dbuckley – be careful using overseas study results in a New Zealand context

    Yep, thats a fair cop, guv.

    I don’t disagree any of the rest of your post, but would argue that the list of uses you state for electricity would make demand less elastic, rather than more.

    We don’t need more stories of people being hospitalised (and dying) because they cant afford heat. We’ve had enough of that.

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  22. John W – Again, I agree with pretty much your entire post, except the first line!

    Yes, the overall environmental impact of the car is horrendous, but that is not the topic at issue, what is being discussed is CO2 emissions. Modern cars have emissions that are staggeringly lower than older cars. Additionally, older cars tend to be not so well maintained.

    I agree driving less is the best approach, and have already suggested ways of achieving that.

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  23. And what direct fix does dbuckley have in mind to get Fonterra off coal for their milk drying operations? … better to let the industries do that themselves by giving them the right financial incentives or disincentives (taxes).

    Again, no substantive disagreement with your argument, other than the first question is do Fonterra care if an additional tax is imposed? Does any business care?

    For any company, if they are able (financially) to do it, then just not caring and passing on the tax cost down the value chain is the path of least resistance. It requires no management practice changes, no capital investment, nothing. If you were a business manager, why would you not do that?

    The only reason you would not do this is if it will affect the bottom line. This might be because you market will not stand the increase in price from the tax change. It might be because your competitors choose to react to the signal and make their product more competitive to the market than it was, though you might ask why such a business didn’t make the change already, without the need for additional tax, as they would be onto a bigger winner.

    As I keep saying, price signals do not universally work as many assume, and neither is all demand elastic.

    You already have the right answer in the statemet:

    better to let the industries do that themselves by giving them the right financial incentives…

    Incentives work much better than taxes. And they have the highly desirable attribute of not passing on tax down the value chain. And, as I’ve noted above, governments arranging funded joint research and industry projects is a discreet way of influencing behaviour with money, rather than just a straight “subsidy to the polluter”.

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  24. When Meridian the generator company sells power into the grid, it is power that costs them less owing to their not having to pay the tax. This makes them more profitable.

    Logically, yes.

    However, we know that there is already a vast disparity between wholesale electricity prices and retail prices, yet we also know that the genetailers report quite reasonable returns to the market. The Left-leaning parties have argued that this is some sort of a rort, and retail prices are already far too high. The truth is that by chosing how to acount for their costs, the genetailors can continue to justify they are not making enough money.

    As support for this, the disparity of generation cost of thermal to hydro is almost two orders of magnitude (see MRP prospectus), yet the thermal heavy companies don’t report profits dramatically lower than the hydro heavy companies. They are all much of a muchness. With input costs nearly two orders of magnitude different, how can that not be reflected in the profits?

    Thus it is my opinion that an additional tax will not upset this applecart. The cosy arrangements will continue to operate.

    This, of course, is also the reason the govnernment rearranged the generation plants around prior to the sell-off, so that no one generator had all the “bad” plants whils others had all “good” plants, to prevent what should have been the script happening, namely that Genesis could be sent to the wall by its competitors.

    How could the govnernment interfere to make the existing system better without thinking a tax might be the answer: They could alter the dispatch process so that greener generation plants are favoured. This would result in the change necessary, and better than that, competitive pressures between genetailers of differing generation mix would prevent new plant costs just being passed along to the consumer as across-the-board price rises.

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  25. dbuckley
    Thanks for your reply.

    The carbon footprint of new car production is complex and tends to be greater than the lifeline emissions, depending on the total distance traveled.
    For some of the expensive vehicles the footprint is many times operational emissions.

    New vehicles also tend have a much shorter lifespan than many older models by design. The complexity of electronics need diagnostic systems than are seldom kept available for more that a few years. Expertise to operate the diagnostic also gets lost. The life of parts availability also is shrinking. Simpler vehicles have a better chance of a longer useful life for a number of reasons.

    Production of tires, lubricants, windscreens, paint, parts and many small accessories and consumables; are fairly consistent in potential carbon footprint over recent decades but later cars tend to have more complexity and gadgets.

    Safety is often used as a reason for “upgrading the national fleet”. If you buy this then priorities do come into the test. Speed is the biggest killer.
    Higher speed also consumes more fuel, tires, road surface; creates more wear, is linked with more accidents and damage to people, property and the environment. If safety is a driving concern then slower is better.

    The most efficient diesel motor for small plant power generation still remains unchallenged since 1932. They are still being replicated and sold widely around the world. Simple, low speed, long wearing, all parts unchanged since 1932 and available cheaply from many makers. More kilowatt hours output per litre than any more modern rival. Hence they retain value.

    Looking at each case for vehicle replacement would seem an important starting point. Scrapping and replacement is an expensive business environmentally.

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  26. dbuckley – the reason that companies don’t change to low or zero carbon energy sources without an ETS or CO2 tax is that they don’t have any incentive to do so until the ETS or tax shifts the balance away from the fossil fuels.

    With respect of the demand for electricity being inelastic, I would agree with you when it comes to electronics, fridges, freezers, lighting, etc. These are the main electricity loads overseas. However for water and space heating – the big part of domestic loads in New Zealand – there are alternatives, and insulation improvements can decrease the amount of energy used for heating, whatever form that takes.

    Trevor.

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  27. We get to build up our industry, make some stuff rather than importing it, and clean the air up besides? Why doesn’t everyone understand this?

    http://www.nytimes.com/2014/06/06/opinion/krugman-the-climate-domino.html?_r=0

    Oh… wait… I keep forgetting we’re an isolated island economy with no power to do anything or be anything but a plantation for the richer countries that own us. That’s what National aims for us to be. We can aim higher than that.

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