Morgan Foundation's Climate Cheats II: Who’s the Real Cheat Here? The Dozen Dirty Now thats a title!

Geoff Simmons and the Morgan Foundation have done it again! They have just released a sequel to 'Climate Cheats', the fantastically-named 'Who’s the Real Cheat Here? Climate Cheats II: The Dozen Dirty Businesses'. Simon Johnson breathlessly reviews Climate Cheats II and concludes that while it's about time we had some transparency over Government and corporate shenanigans with emissions trading, we mustn't forget that these are symptoms of the root problem - the uncapped design of the New Zealand emissions trading scheme.

Shock Newsflash Horror! The Morgan Foundation and Geoff "Wild-Shirt" Simmons have done it again! They have just released another tell-all critique of corporate emissions trading shenanigans! A sequel in the franchise they started in April 2016 with the report Climate Cheats. As we know, 'Cheats I' outlined this sad course of events:

• the 'flood' of low-cost and low-integrity Russian and Ukrainian emissions reduction units into the NZ emission unit market
• which then crashed the domestic emission unit price
• which allowed NZ emitters to meet emissions trading obligations for next to nothing
• which allowed the Government to own surplus (but dodgy) units
• which meant Paula Bennett could claim 'form over substance' compliance with climate charge targets out to 2020
• not withstanding the real increases in both gross and net NZ emissions of greenhouse gases.

Weighing in at a thankfully concise 16 pages, the wonderfully named 'Who’s the Real Cheat Here? Climate Cheats II: The Dozen Dirty Businesses' starts with a simple question. Which companies had the most dodgy Russian and Ukrainian emission units? Well, here they are.

Simmons and co then note that Minister Bennett has refused requests to cancel the surplus dodgy units the Government holds, giving the excuse she is 'seeking advice' (That would seem to be a perpetually applicable excuse!). So they ask 'who owned and used dodgy emission reduction units?' The dirty dozen corporates, of course.

The report then discusses three types of liability (physical, liability and transition) that may fall on companies who used the emission reduction units. To paraphrase, Simmons is thinking 'did they really think this would never come back and bit them?' And he is making the point that if Government is failing to act ethically, then why don't we shine a spotlight on our corporate citizens and ask them to shoulder some of the responsibility for the dodgy unit fiasco?

Simmons assigns highest culpability to New Zealand Steel and Fonterra. Because they are emitters who received generous free allocations of NZ units but who also owned dodgy emission reduction units. Referencing a blogger (meaning me!), the report notes New Zealand Steel booked $4.4 million Australian dollars of profit from emissions trading that is probably from arbitrage trading of their free NZ units while also owning dodgy units.

Five forestry companies are on the dozen list. Some sympathy is due to some of them as the unit price crash devalued their allocations of units. But none is due to any foresters who carried out 'forest re-registration arbitrage' in the ETS. This was exiting and re-entering the same forest in and out of the ETS several times. For each ETS 'exit', the forester would 'square-up' the refund of carbon liabilities with emission reduction units costing several cents each. For each 're-entry' to the ETS, the forester would be given an allocation of free NZ emissions units worth a few dollars each. The result being instant no-effort windfall profits. The Government took far to long to clamp down on this practice.

Finally, energy companies get their turn in the spotlight. BP, Chevron, Z Energy, Contact Energy and Genesis Energy all owned and used some dodgy international units. Did these companies price their products to NZ customers on the basis of the higher NZ unit prices or the lower dodgy unit price? The Morgan Foundation approached the energy companies for comment which is in an appendix. All give worthy statements saying they followed the rules and of course they put customers first. However, Mobil shows up the fine words of the others. Mobil never owned any dodgy international units and managed to supply fuel just as competitively as the others.

Climate Cheats II concludes by suggesting that the companies who owned dodgy international units and lowered their costs (as well as those who made windfall profits) have two options to put things right.

1. They could voluntarily cancel NZ units to match the dodgy units used
2. They could alternatively pressure Paula Bennett to cancel the surplus units the Government holds.

With NZ emission unit prices now hovering between $17 and $18 per tonne, the latter option will hurt much less than the former.

In summary, it's hard not to like a Morgan Foundation report that references me! But leaving that bias/good taste aside, Climate Cheats II is a concise readable summary of the abject state of New Zealand's emissions targets and trading policies and practices. As Kevin Anderson would say, we need to see clearly where our rose-tinted spectacles have brought us. Climate Cheats II mostly does that.

However, if anything, the report, by focusing on the top dozen owners of the dodgy international units, underplays the persuasiveness of the ownership and use of those international units. Most entities with emissions trading accounts owned some dodgy units. In 2013, more than 400 entities (out of 496 account holders) owned some share of the almost 35 million emission reduction units in private hands. You can check this with this Google sheet of Kyoto Units obtained from the Emission Unit Register at the EPA.

Finally, I have one concern which is perhaps more about how 'Climate Cheats II' will be received rather than what message it has. It seemed to me that the media response to initial splash of 'Climate Cheats I' (they loved the emotive framing - 'fraud!' - 'cheating!') really missed the fundamental point that I think both reports support, and that other assessments of the ETS support, that an emissions trading scheme that has no cap on emissions, that earns no revenue and that isn't economy-wide, is an excuse and rationalisation for doing nothing and not an effective mitigation policy at all.

New Zealand emissions trading scheme you are the weakest international link Goodbye

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.

Geoff Bertram puts the Cap back in Cap and Trade

Speaking of the economist Geoff Bertram, as I was in the previous post, here he is on 10 June 2011 writing a letter to the Editor reminding the Wellington Fairfax-owned newspaper The Dominion Post that the New Zealand Emissions Trading Scheme (NZ ETS) does not have a cap so it's not a Cap and Trade emissions trading scheme.

OPINION: I was sorry to see that The Dominion Post failed to do the most basic homework on how New Zealand's emissions trading scheme works.

In the box on A4 on Tuesday, the paper reported that "the Government sets a cap on how much carbon can be emitted for different sectors". Alas, our Government does no such thing.

The ETS is not a cap-and-trade scheme because it puts no cap on greenhouse gas emissions at either sectoral or national level. Because no cap exists, the scheme is basically a money-go-round, with emission units traded in a policy vacuum.

Roll on a proper carbon tax, with the money recycled to protecting household budgets and promoting renewables.

Supporters of serious climate- change policy just have to hope that the Australian Government will manage to push through its carbon tax without too many of the special-interest subsidies and exemptions that make New Zealand's ETS so wasteful and ineffective.

GEOFF BERTRAM

Climate Change Research Institute, Victoria University

Geoff Bertram is completely correct. Here is the chapter and verse on the absence of a cap in the NZ ETS.

Ministry for the Environment Fact Sheet 16 (2008) stated There is no cap on the emissions that occur within New Zealand. That was referring to Labour's Climate Change Response (Emissions Trading) Amendment Act 2008.

Ministry for the Environment Emissions trading Bulletin No 12, INFO 441 (September 2009) states "The Bill (the Climate Change Response (Moderated Emissions Trading) Amendment Act 2009) changes the allocation provisions of the existing (Climate Change Response Act 2002) from allocating a fixed pool of emissions to an uncapped approach to allocation. There is no longer an explicit limit on the number of New Zealand units (NZUs) that can be allocated to the industrial sector"

Coming Clean - New Zealand's Emissions Trading Scheme Explained

There is a new video available on-line explaining the NZ Emissions Trading Scheme.

Its called Coming Clean - New Zealand's Emissions Trading Scheme Explained and the film maker is Lindsay Horner.

Its very good. It hammers the key points well;

• that the NZETS will increased emissions of GHGs as it lacks a real cap on greenhouse gas emissions that is an essential part of a textbook 'cap-and-trade' scheme.
• that relying on post-1990 forestry carbon credits to match growth in GHGs since 1990 is the same as borrowing on a credit card, as the forestry carbon credits will have to be surrendered when the forests are eventually logged.

Coming Clean - New Zealand's Emissions Trading Scheme Explained from Lindsay Horner on Vimeo.

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
http://www.boalt.org/elq/documents/elq36-4-01-jaffe-2009-1209.pdf)

“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

Recapping the cap-less cap and trade scheme

Lets recap the post of the other day about how the NZ ETS has no cap.

'Cap and Trade' emissions trading schemes have fixed volume caps on emissions, according to the economics literature (such as Jaffe, Ranson and Stavins (2009), Tietenberg (2003) and Stavins (2001)).

The New Zealand Emissions Trading Scheme has no cap or limit on the amount of international carbon credits that can be imported by emitters.

The New Zealand Emissions Trading Scheme has no cap or limit on the amount of NZ Units that will be allocated to emitters.

Conclusion.

The NZ ETS has no Cap. It is not a cap and trade scheme. It will not reduce NZ's emissions of greenhouse gases.

The NZ ETS has no cap. Its not a 'Cap and Trade' scheme.

Why is the NZ ETS the World's Worst Emissions Trading Scheme?

The number one reason is because the NZ ETS lacks the most crucial feature of a 'cap-and-trade' emissions trading scheme, a fixed cap or limit on emissions.

Here are some definitions of cap and trade emissions trading schemes taken largely from peer-reviewed journals.

“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.”

Judson Jaffe, Matthew Ranson and Robert N. Stavins (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 Tom (2003) 'The Tradable-Permits Approach to Protecting the Commons: Lessons for Climate Change', Oxford Review of Economic Policy 19:3, pages 400-419.

“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, Robert N. (November 2001) 'Experience with Market-Based Environmental Policy Instruments', Discussion Paper 01-58, Resources for the Future, Washington, D.C. p 4

These definitions all include a cap on emissions. The cap is perhaps the single most important element of a cap and trade scheme.

Neither the 2009 National Government version of the NZ ETS, or the 2008 Labour version puts a cap on emissions within New Zealand.

In 2007, the Ministry for the Environment's report Framework for a New Zealand Emissions Trading Scheme stated; "Domestic emissions that exceed New Zealand’s allocation under the Kyoto Protocol (including units issued for removals by forest carbon sinks) must be matched by emission units purchased internationally from within the Kyoto cap on emissions."

In 2008, the Ministry for the Environment Fact Sheet 16 stated;There is no cap on the emissions that occur within New Zealand'

In other words, although the Labour NZ ETS had a fixed limit on the number of NZ Units that were to be issued, there would no limit on the number of 'Kyoto' units that emitters could buy on the international market and use in NZ.

The National NZ ETS has no cap either on international 'Kyoto' units that may be imported into NZ or on the volume of NZ Units that will be gifted to emitters.

Ministry for the Environment Emissions trading Bulletin No 12, INFO 441 (September 2009) states "The Bill (the Climate Change Response (Moderated Emissions Trading) Amendment Act 2009) changes the allocation provisions of the existing (Climate Change Response Act 2002) from allocating a fixed pool of emissions to an uncapped approach to allocation. There is no longer an explicit limit on the number of New Zealand units (NZUs) that can be allocated to the industrial sector"

Conclusion.

The NZ ETS has no Cap. It is not a cap and trade scheme. It will not reduce NZ's emissions of greenhouse gases.