How to make the Emissions Trading Scheme bulletproof

New Zealand’s Emission Trading Scheme (ETS) is pretty good but could and should be made bulletproof, according to Dr Eric Crampton, chief economist at the New Zealand Initiative.

Speaking at GasNZ’s annual Matariki function, Crampton said any other alternatives risked breaking political support for net zero carbon long before the target was reached.

The Zero Carbon Act’s target of net zero by 2050 enjoyed strong cross-party support, he says.

Designed to help New Zealand reach its net zero emissions target, the ETS has been core to New Zealand’s climate response.

Crampton said getting to net zero required steadily reducing the number of New Zealand Units

“A tonne of carbon dioxide permanently sequestered from the atmosphere is just as good as a tonne of carbon dioxide that is not emitted – so long as the accounting is right,” Crampton says.

“Every tonne of greenhouse gas emissions, whether from cars, industrial heat, or power generation, brings the obligation to surrender an NZU to the government. Only biological emissions from animals in agriculture are left out.

“If you’re able to sequester a tonne of carbon dioxide, you can get an NZU for doing so.”

These units did not affect net emissions; one tonne of emissions into the atmosphere is matched with a tonne of emissions pulled from the atmosphere. 

Currently the government also creates credits out of thin air – the NZU – that it auctions and that it allocates to industry each year.

“But this needs to stop,” Crampton says.

Parliament’s commitment to net zero meant that by 2050 every tonne of emissions must be matched by at least one tonne of removals – carbon captured from the air and stored.

At that point, carbon captured by trees – or by any number of other technologies developed and recognised by the ETS – would be the only source of new credits.

To reduce market uncertainty and make the ETS truly effective, Crampton’s recommendations included:

Setting the quantity

Crampton advocated setting a fixed number of unbacked ‘from-thin-air’ units that can be issued by governments between now and 2050.

Those units, plus currently outstanding ‘from-thin-air’ units, would be the ‘hard and known’ cap on net emissions.

Cross-party agreement on the quantity would make the system more durable, he says.

“At the same time, the government could provide a guarantee to buyers of NZU.

“If a future government issue exceeded the hard quantity on units, NZU holders would be eligible for compensation.

“Parliaments cannot bind future parliaments, but they can make some actions more expensive,” Crampton says.

“With a hard, fixed quantity of units set, carbon budgets become far less important – at least for the sectors covered by the ETS.

“Together, these changes would move us a lot closer to a bulletproof Emissions Trading Scheme.

“Getting it right matters if New Zealand is to stay the course to net zero.

“Carbon prices, through the ETS, let each of us – whether as households or as businesses – simply adjust to changing prices as best suits our own circumstances,” he says.

“It helps us find the most cost-effective ways of reducing net emissions, rather than guess at whether a regulation will cost two times or 20 times as much as the going carbon price.”

Setting a carbon dividend

Currently, the Government used ETS revenues for industrial subsidies, as well as upgrades to some public buildings.

“It should stop doing that,” he says.

“If those investments are worthwhile, they should be made by the business that enjoys the benefits, or paid for by the ministry whose buildings need refurbishing.”

The Government should instead take every dollar earned when it auctioned ETS credits and distribute it to New Zealand households as a carbon dividend, Crampton says.

When carbon prices rose, New Zealanders would get a larger carbon dividend – at least while the Government continued auctioning substantial numbers of credits.

“In Canada the carbon dividend results in the vast majority of households getting more back as a carbon dividend than they pay in carbon taxes,” Crampton says.

“Why? Because the richest households spend more on everything, including goods that contain carbon taxes.

“So when carbon tax revenues are split equally among Canadians, a small number of rich households pay a lot more than they get back, and everyone else gets more back than they pay in.”

A carbon dividend would mean that carbon prices could be allowed to rise, he says.

Link to a video of the presentation or to the slide presentation