On 7 June 2013, the New Zealand Green Party convened a conference in the Legislative Council Chamber called “Meeting the Challenge: A strategy for a New Zealand Climate Policy.” It featured an outstanding series of presentations and constructive conversations covering science, policy and the role of business and civil society. Below is an elaboration of my contribution to the session on “Policy Mechanisms: Market, fiscal and complementary measures – optimal mix?”
I am speaking from my experience having moved to New Zealand to work on the carbon tax and then helping to design the New Zealand Emissions Trading Scheme. Where we are today is certainly not where we thought we would be back in 2008 when the scheme entered into law. I would like to offer seven points to contribute to the discussion.
1. We are now connected by a new global currency called carbon dioxide equivalent.
We are beginning to understand that we live in a world where every action that we take – whether we turn on a light bulb, turn on a heater, drive a car, plant a tree, pour a concrete foundation or eat beef and rice for dinner – is connected globally by a new currency called carbon dioxide equivalent. Not only are we connected to each other, but we are also connected to past and future generations. It is an extraordinary realisation that what we do as individuals today is impacting – albeit in a very small way – on all other life on the planet today and in the decades to come. Humanity has never understood its connectedness – or its interdependence – in this way before. In my view, it is inevitable that our global economic system will evolve to reflect this. We are in that transition now.
2. When it comes to our emissions, there is no free lunch.
All of our emissions have a cost. We can pay to reduce our emissions or we can pay for the impact of our emissions. There are obviously distributional issues around who bears the costs of emission reductions and climate impacts, and when. Economists are telling us that globally, the cost of inaction is far higher than the cost of reducing our emissions. If we are smart, we will harness these costs as price signals to change emitting behaviour.
3. The atmosphere doesn’t care where emissions and emission reductions occur – but governments, businesses and communities do.
Based on the science, we need to make all of the emission reductions we can as quickly as we can and wherever we can. In my mind, it makes sense to do this at least cost. The NZ ETS was designed to be agnostic about whether New Zealand invests in emission reductions domestically or overseas. To me, the moral outcome is maximising emission reductions globally at least cost, and it is not a moral issue what share of emission reductions occurs domestically as long as all emission reductions have environmental integrity.
However, the important question then becomes how we define “least cost.” When we invest in domestic emission reductions, we capture all of the local benefits of those investments, which can be economic, environmental and social. Those benefits need to be accounted for when we determine what constitutes “least cost.” Perhaps there is some theoretical “ideal balance” between investment in domestic and international emission reductions, but if there is, I doubt that government will know where that balance lies. I also suspect it will change continually over time and across sectors.
When we talk about climate policy, we are really talking about policy for stationary energy, transport, forestry, agriculture and waste. If we decide that we want particular policy outcomes in those sectors and setting a particular emission price will help us with achieving those outcomes, then we may want to limit unit imports (i.e. overseas investment in emission reductions) as one means of controlling that price. But I personally do not see such a limit as a moral issue.
4. Tax or trading?
I have worked on both. While it is true that in their purest form they have some conceptual differences, these days we can design a tax that works like trading and trading that works like a tax. I have reached the conclusion that the “what” is far less important than the “why.” And this is where we are struggling.
I will share with you the best analogy I have found so far for describing an ETS. If you think of the economy as a piece of music, then the carbon price is the harmony with the environment that we have been missing, and an ETS is the soundboard that we use for mixing the music. We can boost the bass, tweak the treble or add a synth note. The ETS changes how we distribute costs across taxpayers, emitters and consumers. The ETS architecture that we have is perfectly sound. But we have to know what kind of music we want to make, and that is where we have lost our way. The ETS we have is a powerful instrument, but the government has never turned up the volume. And by withdrawing from the second commitment period of the Kyoto Protocol, the government has just unplugged the soundboard from the electrical socket.
I really hope that we will not waste any more time debating taxes versus trading. The NZ ETS architecture was designed to be adaptable and we can adjust it to deliver whatever outcomes we decide we want for emission pricing and policy certainty in the New Zealand economy.
5. A blunt instrument will not deliver precise outcomes.
If we want to achieve specific policy, economic, environmental and social outcomes, then we cannot rely solely on a blunt price instrument. We will need to use a variety of instruments, such as regulations, fiscal measures and facilitative initiatives, that can operate in concert with a price on emissions. Certainly when officials originally designed the NZ ETS, they never expected it to be New Zealand’s only climate policy.
6. We must include adaptation in our policy portfolio.
We need to develop a collaborative approach to adaptation that brings together central and local government, business and communities to decide what steps we want to take to safeguard the value of our past infrastructure investments and what pathway we want to take for future investment. This approach must include discussions with the insurance industry; if governments and communities do not agree on the way forward, then our choices may end up being decided by insurers. At the recent climate conference in Palmerston North, there was useful discussion about how to develop adaptation pathways with triggers as an alternative to demanding long-term commitments up front. This is an issue of great importance to the Wellington City Council.
7. There is no point in debating solutions until we understand our needs.
The topic of this session is choosing the optimal mix of policy measures. In my view, we cannot even begin to make those decisions until we have a shared vision for the kind of low-emission future we want for New Zealand. In the international negotiations, Parties have recommended that countries prepare Low-Emission Development Strategies. New Zealand has not chosen to do this so far, but I am wondering if this might actually be a really good idea. We are facing a future of emission constraints and climate impacts, and New Zealand’s economy is emissions intensive and climate vulnerable. We need to have a courageous conversation about how we want to meet the needs of New Zealanders in the future. How do we want to shape the development of our stationary energy, transport, forestry, agriculture and waste sectors in an integrated way so that we can continue to thrive as a country? This conversation is not just about defining our responsibilities, but about creating opportunities for New Zealand.
The conference we are having today is helping us to start that conversation. I look forward to the next stage of the discussion.