Matt Burgess presents at the 2021 New Zealand Economics Forum
At the New Zealand Economics Forum 2021, held at the University of Waikato, Matt Burgess participated in a panel discussion on Economic policy and the environment - challenges and opportunities.
You can read Matt's full speech below.
Speech to Economics Forum
Today, I want to boil down the emissions problem to its basics, and then consider the report by the Climate Change Commission.
The overarching ideas are the value of one objective and the cost of trying to do too much.
On complicated issues, it can help to find a question that cuts through the complexity.
For housing, that question is “Will this policy make it easier to build a house?”
For climate, the question is “Does this policy cut carbon competitively?”
The ‘competitive’ part is important, because we have choices about how and where to bring down emissions.
New Zealand has set emissions targets, under the Paris climate agreement and to net zero emissions by 2050. We should meet those targets because we are a good international citizen.
These are net emissions targets, which means gross emissions from your car or livestock, minus removals by forests, for example.
The great thing about our emissions targets is that they take away the complexity to leave us with just two things: number of tonnes, and a date. That’s our obligation.
Carbon dioxide is like a commodity. It has a definition. You can measure it. You can attach an instrument to it, and then tax it, or cap it. You can trade the instrument to work out where to cut emissions for the least cost.
And we should cut emissions for the least cost, because the benefit to climate change from reducing or removing a tonne of emissions is independent of how and where that happens.
In other words, a tonne of carbon is a tonne of carbon.
Paying $10 to reduce a tonne of carbon when you could pay $1 lowers national income by $9, on average.
Emissions policies vary enormously in their effectiveness. In some places, the government pays less than $70 to reduce each tonne of emissions. In other places, it pays more than $30,000.
Which means second-best policies are lot less effective than first-best.
That in turn means there is a big emissions penalty if non-emissions objectives are allowed to enter decisions on climate policy, getting in the way of first best policies.
The Climate Change Commission is a good example of this problem.
I will get to the Climate Commission’s draft report. But before that, I want to talk about the power of a systems approach to lower emissions. Specifically, the power of emissions accounting.
To illustrate, I’m going to borrow an example from the Commission’s report.
The Commission worries that forest fires mean that trees may not be a permanent store of carbon. That is a perfectly reasonable concern.
But imagine you have an accounting system which tracks the emissions from forest fires, and arranges for emissions to come down by an equal amount somewhere else in the economy.
That accounting system would mean forest fires have no effect on overall emissions.
Which would mean the Climate Commission doesn’t have to take into account forest fires in its models and recommendations.
A good accounting system can take flammable trees and effectively turn them into a permanent carbon store.
We already have an emissions accounting system that can do just that. It’s called the Emissions Trading Scheme, and it can force compensating reductions in emissions elsewhere when forest fires happen. (There have been recent rule changes for adverse events in the ETS)
This principle of forest fire neutrality applies more generally. In fact, the ETS can simplify things right across the economy for the Climate Commission.
That is one of the problems with Commission’s whole approach. It is focused on the forest fire not the accounting.
The Climate Commission’s report was released nearly five weeks ago. It does two things.
It proposes emissions budgets for the economy over the next 15 years.
And it proposes a plan for how and where emissions should come down.
The Commission is an advisory body, and this is only its draft advice. But the government has already said it will accept whatever the Commission gives it.
If you haven’t looked at what the Commission is proposing to do, I suggest you do, because it is proposing fundamental reforms in transport, energy, forestry, industry, and public transport. It wants us to walk 25% more and wants to re-shape cities to make that happen.
Rod Carr, the chair of the Commission, said the plan is bigger than the 1980s reforms. He’s right.
I believe the Commission has made a fundamental mistake by choosing to pursue non-emissions objectives at the expense of its core task, which is to lower emissions.
We know the Commission has done this because its analysis shows it.
The Commission says with current policies and a carbon price of $50, New Zealand gets to net zero emissions in 2050.
But the Commission wants to do a lot of other things with EVs, native forests, gas connections, circular economies, and so on. As a result, the Commission says we will pay a carbon price of $250.
Which means 20% of the cost of the Commission’s plan will lower emissions, and 80% will be spent on other things.
Paying five times more to get to net zero emissions puts our emissions targets at risk.
Let’s dwell for a moment on that finding that New Zealand could get net zero at a carbon price of $50. That is big news. It means net zero is within reach.
The ETS price is $39, forward prices are $45, not far below $50.
It is probably a stretch to say we are on track with our current policies. But it is fair to say we have the tools we need and are in control. We have choices.
Choices make the Commission’s plan to transform the economy optional.
We could do none of the Commission’s recommendations, and fully meet our obligations, according to the Commission’s analysis.
What should the Commission do?
It should focus on the accounting. Strengthen the ETS, wrap it in checks and balances to give us the earliest possible warning of problems.
Second, the Commission should be smarter with how it uses other policies. Rather than use policy to throw everything, the Commission should use policy to plug gaps or fix what breaks.
So drop the complementary policies, all of them.
The Commission’s strategy overlooks the rather important fact that complementary policies cannot reduce overall emissions if the ETS has capped emissions. You can only cap emissions once.
The Commission should recommend we go as far as possible with the ETS. If it runs into problems, look at the case for complementary policies at that time.
Until then, you are already doing everything you can to reduce emissions using the ETS.
We need a Climate Commission which treats emissions as core business, and does not try to do everything.
That does not mean other issues like exotics versus natives, or particulates, are unimportant. Of course they’re important.
But those problems already have owners in the public service in the Department of Conservation, MPI, and the Ministry of Health. These outfits specialise in those issues.
It seems absurd to bundle emissions with land use or health and expect a good result.
We can ask the Commission to do one thing, emissions, and we should because that gives us the best chance of reaching our emissions targets.
I have three takeaways in conclusion:
First, we agreed to cut emissions. We did not agree to drive EVs. There’s a huge difference between those two things.
Second, carbon is a commodity and our targets are clear. So how are we not taking a systems approach to lower emissions? And how is ad hoc political whack-a-mole still on the table as an emissions strategy?
Finally, a systems approach doesn’t have to be the ETS, but we should go with the ETS because its good and it’s established. For nearly twenty years, MfE has built the ETS, they know what they’re doing, and they need your support now that the ETS is under attack from the Climate Commission.
Submissions to the Climate Commission close on 28 March.
Thank you.