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"

Report on the New Zealand Emissions Trading Scheme

Finally I have got past the chartjunk and I have read the Report on the New Zealand Emissions Trading Scheme that Minister for Climate Change Issues Nick Smith released on 1 August 2011.

Perhaps the first point to make is that the NZ ETS has now been though a complete compliance period, the six months from 1 July 2010 (when energy and industry entered) to 31 December 2010, where both buyers (emitters) and sellers (foresters) of emissions units were in the NZ ETS market. So we should be able to make some type assessment about how it is working.

The same underlying data, emissions units issued and surrendered in the 2010 compliance year, has already been available from the "central bank" for emissions units - the NZ Emissions Unit Register, run by the Ministry of Economic Development. The Climate Change Response Act requires certain information on emissions trading to be disclosed annually. The Ministry for the Environment's Report on the New Zealand Emissions Trading Scheme is really this same trading information with some, ugh, "100% Pure" photo shoot pictures, quite a few junk charts and several text-boxes.

The MfE report and Dr Smith's press release received varied media coverage. The best reporting, with no junk charts, is Brian Fallow in the Herald.

Dr Smith's narrative is that the NZ ETS is going well and Fairfax/Stuff repeated this angle, as did the National Business Review and even Reuters said the NZ ETS was working as intended. The Sydney Morning Herald said "performed to expectations."

In terms of raw numbers, there 96 mandatory "participants" (emitters) in the NZ ETS at 31 December 2010, of which 76 are in the energy sector. There were 1,216 voluntary participants, of which 1,206 were in the forestry sector; forestry having entered the NZ ETS from 1 January 2008 mainly in terms of sequestering carbon in forest carbon sinks. In the six months from 1 July to 31 December 2010, 12.8 million NZUs were gifted to participants by "free allocation"; 9.4 million NZUs were transferred to mostly to foresters for forest carbon sequestration and 8.3 million units were surrendered to the Government (Surrender means to obtain units equivalent to a participant's GHG emissions and to transfer them to the Government's account at the NZ Emission Units Register).

We may then ask "So what?" in response to these raw facts. Well, lets think how the NZ ETS performed according to the expectations of someone who has written a book on the NZ ETS - The Carbon Challenge: the economist Geoff Bertram. In the book, Bertram analysed the NZ ETS as a market for emission units/carbon credits and as a market it can be understood in terms of supply, demand and price.

The supply of NZUs into the market for the six months from 1 July to 31 December 2010 was 22.2 million NZUs, made up of NZUs gifted to companies by "free allocation"; 12.8 million NZUs, and NZUs transferred for forest carbon removals; 9.4 million NZUs.

The demand from the market participants (the emitters) is the 8.3 million units surrendered in 2010. The NZ Emissions Unit Register report tells us that the 2010 year GHG emissions were 33.4 million tonnes and the NZ ETS-liable emissions from 1 July 2010 were roughly half that at 16.3 million tonnes. Remember Nick Smith's 1-for-2 deal to surrender 1 unit for 2 tonnes of GHGs? That explains why only 8.3 million units were surrendered, when 16 million tonnes of GHGs were reported.

For me the critical issue here is that supply (22.2 million units) exceeded demand (8.3 million) by 13.9 million units (or by 267%). There were 13.9 million units left over after emitters satisfied their 2010 NZ ETS surrender obligations.

As we know from basic economics, when supply exceeds demand, the price drops. The MfE report and Dr Smith's press release make no mention of the NZ ETS carbon price. However, the reliable Westpac carbon update provided this chart which shows the declining price of NZUs in 2010-2011.

The excess 2010 units have no expiry date and will carry forward to 2011. In 2011 and 2012, as well as starting with excess units, the 2010 template will be repeated for 12 months not six. More units will be allocated for free to industrial emitters and more units will be given to pre-1990 foresters as compensation, and to post-1989 foresters for carbon sequestration. The 1-for-2 deal carries on as well to 2013. These features are embedded into the structure of the NZ ETS and will ensure that for the rest of the Kyoto Protocol commitment period to 2012 that the NZ ETS market will be over-allocated with NZUs which will trade at a discount to other internationally marketable Kyoto emissions units.

Geoff Bertram and Simon Terry made a number of predictions in The Carbon Challenge. Here's one.
"In the New Zealand scheme, arbitrage between the NZU and the Kyoto currencies sets a ceiling on the carbon price, with no quantity limit. Local emissions volumes will change only insofar as the price of the Kyoto currencies constitutes an incentive to change behaviour; and NZUs will be used to cover liable emissions only insofar as they are a cheaper alternative to Kyoto currency units" (p 58).

My conclusion is that, contrary to Dr Smith's narrative, the MfE report on the NZ ETS is completely consistent with Geoff Bertram's prediction that the NZUs would be over-allocated, would be priced at a discount to international units and as a consequence the NZ ETS will not provide a sufficient price incentive to reduce GHG emissions.

How to chart the NZ Kyoto Protocol commitment

The post about Dr Nick Smith's junk chart has been on Hot Topic NZ, the Oil Drum Oz and NZ and hat-tipped on No Right Turn

Okay, so what would a good chart of New Zealand's greenhouse gas emissions and New Zealand's compliance with the Kyoto Protocol look like?

We mulled over that issue last year when we wrote a how to book on carbon forests.

I came up with this chart as a first draft.

Clunky and black and white. Add colour.

Paul Kennett said "hmmmm" and asked me for the data and he came up with this.


Not surprisingly, Paul's version appeared in the published version of The Carbon Forest (available now at the Kennett Bros!)

The NZ ETS Review 2011 and the Minister's Chartjunk

This evening I was intending to carefully read the Report on the New Zealand Emissions Trading Scheme that Minister for Climate Change Issues Nick Smith released today and write a considered review.

However, I only got as far as Nick Smith's forward on the the third page when I got stopped in my tracks by Figure 3, a misleading piece of chartjunk if I ever saw one, about New Zealand being on target to meet its obligations under the Kyoto Protocol. Here it is.
The chart legend says it shows "Kyoto net emissions (actual emissions)". This parameter trends upward to 2007 and then in 2008 and 2009 it suddenly drops below the blue line of NZ 1990 emissions. Thus showing we are meeting our emissions reduction commitment that we signed up in the Kyoto Protocol. Its enough to make you proud to be a Blue-Green.

This chart is junk because it misrepresents the underlying data on greenhouse gas emissions. Back to the legend: "Kyoto net emissions (actual emissions)". Why does it say "actual emissions" in brackets? Because Smith would like you to think that. Lets look at a real chart of real New Zealand greenhouse gas emissions.

This shows total real emissions up to 2007 and predicted emissions 2008 to 2012 - the green line. It looks nothing like Fig 3. The actual and predicted trend does not show a return to 1990 volumes of emissions. However, that legend also said net emissions, that is total or gross emissions in any year less carbon absorbed by forests. Maybe Fig 3 is based on net emissions.


The trend in net emissions (total less forest sink removals) or the blue line shows an even steeper rate of increase than the total emissions. So how can Fig 3 show that New Zealand reduced emissions to 1990 volumes? Two more clues are in Figure 3. The title is "Kyoto net" and there is a note under the data source says "Kyoto net 2000-2007 values are backcasted". So the Fig 3 data is not just "net", it is also "Kyoto net" and "backcasted". What does ''backcasted" mean? Another chart shows how Smith gets to Fig 3 from the real total and net emissions data.


Greenhouse gas emissions, as defined for compliance with the Kyoto Protocol, are gross from 1990 to 2007, and once the Kyoto commitment period starts in 2008, an Annex B country like New Zealand can meet its target by deducting removal units issued for carbon sinks - so Kyoto-defined emissions go net from 2008. Hence the red line. The removal units issued for afforestation (the increase in carbon stock in a forest planted since 1990) appear as if from nowhere in 2008 and disguise the growth in both the gross and net emissions.

This isn't new information. In 1997, Simon Upton, the Minister for Climate change in Jim Bolger's 1990's National Government spoke of New Zealand's position at the UNFCCC talks; "if sequestration is treated in the way New Zealand has long been advocating, then the major contribution we expect to make to removing carbon from the atmosphere..will earn us 'credits' ".

Interestingly, Upton had this cautionary note: "It might be suggested that New Zealand's interest in sinks stems purely from a desire to secure for itself a large buffer that would allow for significant growth in greenhouse gas emissions". Upton believed that would not be a credible policy.

However, since Upton's day, the chartjunk that is Figure 3 indicates that New Zealand's climate change policies have consistently been all about providing exactly that buffer to allow for significant growth in greenhouse gas emissions while claiming to have mitigation policies such as the NZ ETS that match our much-abused clean green overseas image.

Lomborg 101

If you have ever wondered who Bjorn Lomborg is and where he is coming from, I have just read a very good analysis which I thoroughly recommend. It is:

A Critical Review of Bjorn Lomborg’s Cool It and of Media ‘Complicity’ in Climate Contrarianism. By Michael Svoboda, 12 May 2011.

As an engaging and charismatic communicator, Bjorn Lomborg has few peers addressing climate change. But an analysis of his Cool It documentary, now available on dvd, documents long-standing shortcomings reporters should consider so stories of personal courage and conviction don’t displace sound science journalism.

Michael Svoboda reaches this conclusion on Lomborg, a warning to journalists.

This record of persistent and consistent misrepresentation points to a challenge the media face in covering a strategic communicator, of reporting on someone who systematically spins a complex topic that is rife with uncertainty — in part by accusing everyone else of “alarmism.”

A trans-Tasman test on agricultual GHG emissions

Apparently the new President of Federated Farmers, Bruce Wills (no relation) intends to be less confrontational and more collaborative than his predecessors when engaging with the environmental concerns of 'urban' New Zealanders. Bruce Wills also says he has a strong interest in the environment.

However, Wills thinks that the lesson of the Australian carbon pricing scheme, announced last Sunday, is that New Zealand should not tax livestock emissions. Agriculture is due to enter the NZ Emissions Trading Scheme on 1 July 2015.

Here is a chart for Bruce which explains why Australia can leave agriculture out of its carbon price scheme and also why New Zealand can't.



Thats right. In 2009, agricultural GHG emissions were 48% of New Zealand's GHG emissions, and 16% of Australia's emissions.

The 'Clean Energy Future' scheme

I have to admit I did rush to conclude that the Australian carbon pricing scheme would be a "leapfrog" ahead of the NZ Emissions Trading Scheme. Okay, I admit I generally think the NZ ETS is worse than nothing as a policy to reduce GHG emissions. So of course the Australian scheme must be more effective!

Now I have actually read Julia Gillard's carbon pricing proposal I can offer a slightly more considered opinion. The carbon price scheme has a name which we should be using; Securing a Clean Energy Future. The full document is Securing a Clean Energy Future, The Australian Government's Climate Change Plan, Commonwealth of Australia 2011, ISBN 978-0-642-74723-5.

First of all, the 'Clean Energy Future' is not a carbon tax. It is a cap and trade emissions trading scheme with a safety valve. Page 25 says "Large polluters will report on their emissions and buy and surrender to the Government a carbon permit for every tonne of carbon pollution they produce." Thats very much an emissions trading approach, but with a fixed carbon price for three years. The price is $AU23 per tonne from 1 July 2012, then $AU24.15 in 2013-14 and $AU25.40 2014-15 (p 26). From 1 July 2015, the carbon price will float within and upper and lower ceiling with the Government setting an overall 'Cap' or limit on GHGs (p 27).

The GHGs covered are; carbon dioxide, methane, nitrous oxide and perfluorocarbon emissions from the aluminium sector (p 28).

There will be 500 sources of emissions, which will be companies or sites with direct greenhouse gas emissions of 25,000 tonnes of CO2-e a year or more, Sectors covered will be; stationary energy, waste, rail, domestic aviation and shipping, industrial processes and fugitive emissions (p 27). But not farming or land transport fuels.

So how comprehensive is 'Clean Energy Future'? To me, the comprehensiveness of a carbon tax or an emissions trading scheme is a good metric of likely effectiveness. And its a metric to make comparisons between policies.

Lets say the comprehensiveness is the proportion of total GHGs emitted that is either taxed or included in an emissions trading scheme. 'Clean Energy Future' claims half to two-thirds. The report states that more than half of Australia's GHG emissions will be directly covered by the scheme, and almost two-thirds of GHGs will be included when other measures are included.

'Clean Energy Future' includes an appendix of forecast revenues. In the year to 30 June 2013, the 'Clean Energy Future' scheme will earn $AU 7.74 million (Appendix C, p 131). At the fixed price of $AU 23 per tonne, that gives 337 million tonnes of GHG (by CO2-e) that is taxed or priced. Thats 60% of Australia's 2009 GHG emissions (565 million tonnes) priced in 2013. That seems not a bad start, given that Geoff Bertram and Simon Terry have calculated that the NZ ETS, after free allocation, delayed start dates, only prices 3%, (12 million tonnes out of 378 million tonnes) of New Zealand's GHG emissions between 2008 and 2012 (Bertram and Terry 2010, The Carbon Challenge, p 111).

But is there any free allocation of carbon permits to emitters in the 'Clean Energy Future' scheme? Yes, if you look carefully there is.

The revenue forecast in Appendix C lists costs of $AU 2.85 billion for "Jobs and competitiveness program" and $AU 1 billion for "Energy security". Table 15 on page 114 notes that "Jobs and competitiveness" invloves the free "allocation of permits ...to new and existing entities undertaking an eligible emissions-intensive trade-exposed (EITE) activity". Table 16 Energy Security p 116 indicates that "Energy security" involves "allocation of permits and cash estimated at $5.5 billion over six years to assist highly emissions-intensive coal-fired generators" and "payments for the closure of around 2,000 megawatts of very highly emissions-intensive coal-fired generation capacity by 2020".

So of the $AU 7.7 billion collected from the 500 emitters in 2012-2013, possibly some $AU 3.85 billion will be rebated to the dirtiest and most carbon-intense emitters, as long as they are trade-exposed. The definition of emissions-intensive-trade-exposed isn't exactly tied down and has a number of parts. One is being imports or exports as greater than 10% of production. Also, rather like the NZ ETS, any assistance to emitters will phase out at a very gradual 1.3% a year (Table 15, p 114).

Lets assume that 100% of these two categories is spent on free allocation of permits or is just given as a subsidy to some of the 500 emitters. If we have 337 million tonnes of GHG emissions (by CO2-e) that is priced, and subtract 167 million tonnes for the gifting and assistance ( $AU 3.85 billion divided by $23AU = 167 mt) we get 169 million net tonnes of GHG emissions priced in 2013 under the 'Clean Energy Future' scheme. Thats 30% of 2009 GHG emissions of 565 million tonnes.

Okay, I am comparing 2013 for the 'Clean Energy Future' scheme with 2008-2012 for the NZ ETS, but 30% coverage of GHG emissions beats 3% of GHG emissions hands down. The 'Clean Energy Future' scheme is more comprehensive than the NZ ETS by a factor of 10, 30% of GHG emissions priced vs 3% priced. That certainly is a big "leap frog" ahead by our trans-tasman cousins, I would say.