05 April 2011

Submission to the NZ ETS Review 2011

I am a bit puzzled that the usual ENGOs (Greenpeace, Oxfam, Forest and Bird) don't have any thing on their websites about the NZ ETS Review 2011.

Its the one chance for the public to tell somebody hopefully arms length from Nick Smith that the New Zealand Emissions Trading Scheme is crap!

Here is my submission. Please feel free to copy and change and submit it. The deadline is 5:00 p.m. Wednesday 6 April 2011.

ETS Review 2011 Consultation
Ministry for the Environment
PO Box 10362
Wellington 6143
By email to etsreview2011@climatechange.govt.nz

6 April 2011

Submission to the NZ ETS Review 2011

Dear Sir/Madam,

I attach my submission to the NZ ETS Review 2011. I am addressing only Question 12.d. of the Issues Paper; "Should the ETS design be changed in order to strengthen the incentives for domestic abatement? If so, how"?

The NZ ETS has exceedingly weak incentives for domestic abatement of greenhouse gases (GHGs).
Firstly, this is because the NZ ETS does not cap or limit GHG emissions in any compliance period. The NZ ETS is not a "Cap-and-Trade" emissions trading scheme as understood in the environmental economics literature (N.B. refer to Footnote 1).

The single most important change that should be made to the design of the NZ ETS to strengthen the incentive for emissions abatement is to include a real “cap” or limit on greenhouse gas (GHG) emissions made within New Zealand.

Economists have stated that emissions trading will result in the least-cost solution for reducing pollution (Footnote 2). However, that conclusion is always based on the premise that emissions trading is within a fixed limit. As the NZ ETS does not have a fixed cap, it cannot be considered to be the the least-cost solution. The uncapped NZ ETS is not economically efficient.

Therefore I request that the Review recommend that the NZ ETS design be changed by including explicitly stated legally enforceable absolute limit or cap on the volume of emissions of GHGs emitted and for the number of units issued.

The second important cause of the NZ ETS's exceedingly weak incentives for domestic abatement of GHGs is the issuing of emissions units into the market by free allocation largely to emitters.

The Garnaut Climate Change Review noted that units allocated for free are not 'free'. The cost is imposed elsewhere in the economy, typically on consumers, who do not make direct decisions to invest in either clean renewable energy plant or carbon-intensive energy plant. Garnaut considers that free permit allocation has several disadvantages; high complexity, high transaction costs, value-based judgments, and the use of arbitrary emissions baselines. It acts to shield emitters from the incentive of the carbon price

Garnaut prefers auctioning of emissions units to emitters to provide greater transparency and accountability and lower implementation and transaction costs as governments retain control over the permit revenue (Footnote 3). Auctions of units are more flexible in distributing costs, they provide more incentives for innovation, and they lessen political arguments over the allocation of economic rents.(Footnote 4) Finally revenue from unit auctions would offset a significant proportion of the economy-wide social costs of a cap and trade scheme.(Stavins 2001, Footnote 1)

Therefore I request that the Review recommend that the NZ ETS design be changed by ending free allocation of emission units in favour of regular periodic auctions.

Footnote 1
Three examples from the literature that define “Cap-and-Trade” emissions trading as including an absolute cap are as follows.
“A cap-and-trade system constrains the aggregate emissions of regulated sources by creating a limited number of tradable emission allowances, which emission sources must secure and surrender in number equal to their emissions.”
(Jaffe,J, Matthew Ranson,M, and Stavins, R.N, (2009) 'Linking Tradable Permit Systems: A Key Element of Emerging International Climate Policy Architecture', Ecology Law Quarterly 36:789

“In an emissions trading or cap-and-trade scheme, a limit on access to a resource (the cap) is defined and then allocated among users in the form of permits. Compliance is established by comparing actual emissions with permits surrendered including any permits traded within the cap.” (Tietenberg T (2003) 'The Tradable-Permits Approach to Protecting the Commons: Lessons for Climate Change', Oxford Review of Economic Policy 19:3, pages 400-419, http://oxrep.oxfordjournals.org/cgi/reprint/19/3/400?ijkey=324rjCyD25Jfk&keytype=ref)

“Under a tradable permit system, an allowable overall level of pollution is established and allocated among firms in the form of permits. Firms that keep their emission levels below their allotted level may sell their surplus permits to other firms or use them to offset excess emissions in other parts of their facilities.” (Stavins, R.N. (November 2001) 'Experience with Market-Based Environmental Policy Instruments', Discussion Paper 01-58, Resources for the Future, Washington, D.C. p 4 http://www.rff.org/documents/RFF-DP-01-58.pdf)

Footnote 2
The American economist WJ Baumol gave a mathematical proof that for a given fixed pollution volume, and assuming competition and varying costs of abatement of pollution, trading in pollution rights would result in the least-cost solution for reducing pollution to the fixed volume.
Baumol, W.J. and Oates, W.E. (1971) “The Use of Standards and Prices for Protection of the Environment”, Swedish Journal of Economics, 73: 42-54 http://www.jstor.org/pss/3439132
Baumol, W. J. (1972) "On Taxation and the Control of Externalities", American Economic Review 62 (3): 307–322, http://www.jstor.org/stable/1803378

Footnote 3
Garnaut, Ross (2008). "Releasing permits into the market". The Garnaut Climate Change Review. Cambridge University Press. ISBN 9780521744447. http://www.garnautreview.org.au/chp14.htm#14_3

Footnote 4
Kerr, S; Cramton, P, (1998) "Tradable Carbon Permit Auctions: How and Why to Auction Not Grandfather". Discussion Paper 98-34, Resources For the Future

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