NZ ETS agricultural special pleading

An agricultural commenter has hit back at the NZ Emissions Trading Scheme Review 2011 and the New Zealand Herald editorial Farmers must share burden on emissions' for saying that there should be no further delay of the 2015 date when agricultural emissions will enter the New Zealand Emissions Trading Scheme (NZ ETS).

The Herald editorial had the temerity to comment on the government's "extraordinary generosity to farmers" in changing the "modest impositions" of the NZ ETS on agriculture so that it "will become truly timorous".

David Anderson, who is described as a former editor of Rural News and a communications consultant in "teh" (sic) agribusiness sector, has just had an opinion piece in the NZ Herald (27 September) arguing for a further delay in agriculture's entry into the NZ ETS.

Just as a brief re-cap, in the Clark-Cullen Labour Government's original version of the
NZ ETS, agriculture was 'last in', with unit surrender obligations starting on 1 January 2013; i.e. after the end of the 2008-2012 Kyoto Protocol first commitment period. In November 2009, Nick Smith and National changed the start or entry date to 1 January 2015 and confirmed that it would be processors and not individual farmers who would have the obligation to report emissions and surrender units. That was done in the Climate Change Response (Moderated Emissions Trading) Amendment Act 2009

As we know, Federated Farmers can be a bit emotive about the NZ ETS, with past President (and now ACT Candidate) Don Nicholson) describing the NZ ETS in 2009 as the road to hell paved with good intentions.

So lets have a look at David Anderson's arguments. The first argument is;

Why would we want to unfairly penalise New Zealand's agriculture sector - and one of the few sectors with the ability to help the country out of the current economic hole - by imposing taxes when our international competitors are not doing the same?

Because agricultural GHG emissions are the New Zealand's largest source of emissions! It's not that hard to understand.

In 2009, agricultural GHG emissions were 32.8 million tonnes (mt) of CO2-e out of a total of 70.6 million tonnes or 46.5 per cent of New Zealand’s total greenhouse gas emissions. The energy sector emitted 31.4 mt (44.4%). Industrial processes emitted 4.3 mt (6.2%). Waste emitted 2.0 mt (2.9%). Solvents and other products emitted 0.03 mt (0.04%) according to the Ministry for the Environment Greenhouse Gas Inventory 2011.

Other developed countries who have signed up for the Kyoto Protocol obligations just don't have agriculture dominating their GHG emissions like New Zealand. For example, here's a chart comparing New Zealand and Australian agricultural GHG emissions.



Lawyer Toni Moyes points out in a 2008 paper in the Ecology Law Quarterly, 35:4, pp. 911–966; Greenhouse Gas Emissions Trading in New Zealand: Trailblazing Comprehensive Cap and Trade that New Zealand is "fundamentally different" from European countries where carbon dioxide from the energy sector emits 80% of GHG emissions. Moyes concludes "Thus, if non-CO₂ gases were excluded, the NZ ETS would ignore over half of the problem. Likewise, sectors typically excluded from ETS must be included in the NZ ETS in order to address the majority of emissions. The NZ ETS would be far less effective if agriculture, the single biggest emitter, was ignored." I could not put that better. It is not "unfair" to include agriculture in the NZ ETS, it is essential.

Also, I have to point out that Anderson completely omits to mention the fact that agriculture, once it does enter the NZ ETS, will have (arguably) the most generous free allocation of emissions units of any sector of the economy. Under an ETS, emissions units must somehow get into a trading market. They may be either auctioned to emitters (obviously most wealth-enhancing for the tax payer) or "grandfathered", allocated for free to existing emitters. New Zealand has chosen to 'gift', or allocate for free, all domestic NZ units.

According the Ministry for the Environment, free allocation of units to agriculture will be 90 per cent of the emissions baseline and will phase out at 1.3 per cent per annum from 2016. The baseline will be the industry average emissions per unit of output. The allocation will be uncapped, meaning that there is no set limit on the number of units that may be allocated. Further, there are NO eligibility tests or thresholds for agricultural allocation, meaning that all agriculture participants will be eligible for an allocation.

So the entry of agriculture to the NZ ETS in 2015 will be cushioned by 90%. Or the GHG price signal will be reduced by 90% (compared to other sectors) down to 10% via free allocation. The free allocation percent will be based on "average output", which will be gazetted in regulations. Any processor who does 'better than average' will be in for a windfall gain. Again this is hardly the imposition of an unfair tax.

Number two argument is:
I don't see how handicapping our main economic driver will reduce international greenhouse gases. Surely all that will do is shift the production of these agricultural greenhouse gases from New Zealand to another country?

This is the carbon leakage argument. That businesses and their emissions will relocate to other jurisdictions to escape a carbon price.

Dr Jan Wright, the Parliamentary Commissioner for the Environment, pretty much shot to pieces the agricultural carbon leakage argument in her submission on the 2009 amendments to the NZ ETS.

Dr Wright noted that National was proposing to base allocation of units to agriculture on the industrial allocation model in the Australian Carbon Pollution Reduction Scheme (which was in 2009 only a proposal and which was withdrawn in 2010).

"There is no justification for treating allocation to the agricultural sector the same as industrial processes, either here or in Australia. The impact of the ETS on agriculture is very different to that of industrial process sectors. Productive agricultural land can not be shipped offshore...Carbon credits should not be allocated to prevent an unlikely event."

The nail in the coffin is from Suzi Kerr, an economist who has specialised in permit trading. She had this to say in her submission to the NZ Emissions Trading Scheme Review 2011:
."A small, but crucial, point on agricultural emissions is that all available empirical evidence suggests that leakage of land and production out of the agricultural sector in response to greenhouse gas costs would be small. This evidence is summarised in Kerr and Zhang (2009).

Number three argument is;
It has always argued that it's crazy for New Zealand farmers to be hit with the costs of an ETS when they had no way of mitigating these

This is the 'Agriculture can't mitigate' argument. As blogger Idiot/Savant said in his blog No Right Turn, this is simply untrue. The Sustainability Council wrote a report A Convenient Untruth in 2007 that argues that there are significant mitigation options for agriculture.

Anyway, Anderson almost immediately contradicts this statement in the next paragraph when he states

"There is already evidence - which is also noted by Caygill's Review Panel - that the agriculture sector is reducing its greenhouse gases (my emphasis). Emissions per unit of product from agriculture have fallen by about 1.3 per cent a year over the past 20 years - due to improved management, animal genetics, pasture and crop genetics and technological changes. Opportunities for further reductions included the use of forestry on marginal or erosion-prone land, nitrification inhibitors, and "good practice" management techniques that increase productivity."

Its great that agriculture is reducing emissions! Those responsible deserve all credit for it. However, the advocates of agriculture such as Anderson need to be reminded that reducing emissions is the same as mitigating them!

Anderson's fourth argument is that "critics and environmental doomsayers" are "making claims about farmers being subsidised". And that it is unfair and selective to say farmers are getting a free ride.

Look, as far as I'm concerned, we all have an obligation to do something about climate change. New Zealand's climate change policy reflects that. NZ has emissions reduction targets and climate change policies and commitments under the Kyoto Protocol and the UNFCCC. All of us share the responsibility of making NZ's emissions reductions policies work. If we leave out agriculture, the sector of the economy that is the biggest emitter of GHGs, then that is unfair to everyone else.

The NZ ETS Review 2011: Clear signals for business as usual

Minister for Climate Change Issues Nick Smith has finally released the delayed report of the NZ Emissions Trading Scheme Review 2011. The 98-page report is titled Doing New Zealand’s Fair Share, The Emissions Trading Scheme Review 2011.

The review panel chaired by former Rogernome David Caygill gave their report to Smith on 30 June 2011. Two and half months later and one week into the Rugby World Cup, Smith has let the report out into the world.

From the title of his press release, Slowing of ETS recommended by Review Panel, I think Smith is pretty happy with the report. It also uses some of Smith's favourite phrases; such as "Doing our fair share" and balancing the environment and the economy.

"The Panel acknowledges there needs to be an appropriate balance between managing these short-term costs and providing a clear long-term direction. Given the current international uncertainty and the challenging state of the economy, this means there should be measures in place which ensure the increase in the costs of the ETS occurs at an appropriate pace."

If you don't want to scroll through another 98 pages of blue-green flannel just like that, the best short sweet on-line summary to read is this Reuters factbox.

For me, these recommendations are the guts of the ETS Review report (as numbered in that report).

Agriculture's planned 2015 entry to the NZ ETS should not be delayed (4.1). At least they didn't cave in to Federated Farmers. But there is a big but to this.

The important issue of the lack of a real cap on emissions is just kicked for touch and left for future reviews (3.15)

The issue of high volumes of subsidised allocation of free emissions units to industry is just kicked for touch (3.9).

Remember that the NZ ETS includes a $25 fixed price option for buying emissions units until 2012? This is limited to energy, transport and industry. This option would have acted as a maximum limit on unit prices, except for the fact that NZU prices were never more than $25 in 2010.

The report recommends keeping the fixed price option/price limit out to 2017 and increasing it by $5 each year (2013; $30, 2014; $35, 2015; $40, 2016; $45, 2017; $50).

I am very skeptical that actual NZ units prices will reach these levels. The Euro-zone debt crisis has just contributed to the recent collapse of the international carbon price. The international carbon price is the dominant driver of NZ unit prices. It is pure speculation that actual NZ prices will be any where near the proposed price ceiling.

Remember Nick Smith's two for one deal for 2010 to 2012? Where emitters can can emit two tonnes of greenhouse gases and surrender one emission unit? In other words it halved the emitters obligations to surrender units. The report recommends extending this to out to 2015. So 2013 would be the "three for two" deal, 2014 would be the "five for four" deal, before finally going to one tonne to one unit deal in 2015. So in carbon pricing we look to simplistic sales slogans. Only in New Zealand.

And I said there was a 'but' for agriculture. On entry in 2015, the report recommends that agriculture should be eligible for the two for one deal until 2016. Then three for two deal, the five for four deal, before finally going to one tonne to one unit in 2019. Oh I forgot to mention that from 2019 there would still be 90% allocation of free units declining at a linear rate of 1.3% each year.

Summary

I must admit I am completely underwhelmed by the report, its analysis and it's recommendations. I didn't think it was possible to further dilute the carbon price signal in the NZ ETS with more exemptions. I didn't think it was possible to make the NZ ETS sound even more like a bad used car parts advertisement. But I am wrong on both counts.

Charting unexplained territory in the NZ ETS Report

So far, I have posted on the comprehensiveness of the NZ ETS vs the Australian Clean Energy Future ETS, the Kyoto chart junk in the Report on the New Zealand Emissions Trading Scheme, and the over-supply of the New Zealand Units in 2010.

This post mixes two of these ideas; searching out bad charts and looking again at the supply side of the NZ ETS market, how many New Zealand Units were allocated for free to emitters and businesses.

The Report on the New Zealand Emissions Trading Scheme provides in Figure 5 a pie chart of the number of New Zealand Units (NZUs) surrendered by emitters.


Although the pie chart is Kaiser Fung's least favourite type of chart, this pie chart isn't too bad. There are a manageable number of categories; only five; and no 3-D effects. The key point is clear from the pie chart, that about two-thirds of NZUs surrendered were purchased from foresters. Also the chart follows the Ministry for the Environment usual practice of providing the original data underneath so you can make your own chart.


I did a bar chart of the data, re-labelling the "Other" NZUs as "Free NZUs".


The free allocations of NZUs are shown in another pie chart, Figure 8.



The allocations to industry activities (the pie slices) are charted not as as numbers of NZUs as in Figure 5, but as proportions. The proportions are noted as percentages on each pie slice. There is no table of data accompanying the chart. This is clearly inconsistent with Figure 5. Why doesn't the pie chart show either the actual total number of NZUs allocated, or the number allocated by activity? The total number of NZUs allocated for free in 2010 is not disclosed anywhere else in the Report on the New Zealand Emissions Trading Scheme. There is another chart, Figure 11, that appears to show free NZU allocations to each industry sector.



Maybe these add up to the total "pie" in Figure 8. I added them up. 1.76 million NZUs given to industry, plus 6.9 million NZUs given to pre-1990 forest owners plus 0.69 million NZUs given to fishing quota holders, equals a total of 9.35 million NZUs.

However, the total number of NZUs allocated by free gifting between 1 July 2010 to 31 December 2011 is 12,776,026, according to the Ministry of Economic Development Chief Executives report. So there appears to be a gap of 3.4 million gifted NZUs, not disclosed in The Report on the NZ ETS.

Is this a big deal? I think it is. Dr Jan Wright, the Parliamentary Commissioner for the Environment, describes free allocation for what it is; a subsidy to industry

In her submission on the 2009 amendments to the NZ ETS, Jan Wright said;

Allocation is costly. Each credit that is given away rather than kept or sold is a real dollar loss to the taxpayer. And there is another cost: it lessens the incentive to invest in low-carbon technology and emissions reductions. Generous and unlimited allocation that is promised to last a long time –whether or not it actually does - removes the push to transform to a low carbon-intensive economy.

To me presentation is an unsatisfactory level of disclosure of information. I am struggling to find an explanation for this other than to obscure the amount of subsidies funded via NZUs to emitters such as Comalco. I leave the last word to Jan Wright.

The principle of Parliamentary scrutiny in the Public Finance Act should also apply to allocation. Given the large taxpayer expense, the reason for allocating to a particular sector should be transparent.

The NZ ETS Report disclosure does not meet this standard of transparency.

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.