ETS Tinkering: Willis Plunging Into Waters Too Deep For Her

Published: Thu 23 May 2024 10:20 AM
The price signalling that ETS auction floor and CCR settings might be lowered is redolent of economic, political, legal and climate risks. Minister of Finance and Associate Minister of Climate Change, Nicola Willis, appears oblivious to all these. Her grab for money from ETS auction proceeds, even if it emasculates the ETS in the process, is like legislating to take money from the church poor box. It is a short term high but ultimately the congregation will stop giving and the poor (read future generations affected by climate change) will go hungry.
Last year the Labour/Greens Government, like the Climate Change Commission (CCC), saw a problem of oversupply of NZUs which it believed was going to depress the NZU price long term. They wanted to fix that, but they made several mistakes.
First, they refused to grandfather existing rights, not recognising that forestry is a long-term investment so there must be certainty of returns.
Second, they compounded that mistake by not adopting the price controls recommended by the CCC. It, after all, is tasked with telling us how we meet our domestic and international obligations to be net carbon zero by 2050 and, so far as known, no-one has explained why they are wrong in doing this.
Third, there was no proper empirical basis to support the then Government’s perceived fears of future oversupply of NZUs. They may have been right, but you can’t upset a market you are trying to improve without being certain of what you are doing.
Last, Labour/Greens failed to understand that any price signalling has to be carefully thought through. The Government might set the market rules, but it doesn’t make the market. Give the impression that the rules are liable to be changed at the Government’s whim, and to the detriment of existing NZU holders, and the inevitable outcome will be to depress the price as investors, fearing future tinkering, sell out.
The rest is history. Following publication of the proposed changes in 2023, the price tanked from $88/NZU to $35, the opposite of what the then Government was apparently hoping the review would do, i.e., restrict future supply and increase the price.
The price limped back to around $70/NZU after then Climate Change minister, James Shaw, was successfully judicially reviewed for not following the recommended CCC’s price settings. The ETS reforms signalled in the May 2023 papers were then quietly dropped and the incoming Government moved to assure the market it was not going to interfere with the ETS market rules. But the market never fully recovered.
Willis has learnt none of these lessons. In the short time since a drop in the auction price floor and the CCR was proposed, the market has divined that she does not want a properly functioning ETS market, only to take what she can get. The ETS price has already dropped $10/NZU in a week. Everyone understands there will be no bids at the June auction because the floor, above which bids are allowed, is $64/NZU while the current secondary market price is around $48/NZU.
The only way to deal with the low NZU price, short of what Willis proposes, which will just drive the price lower, is to address oversupply and stop interfering with the market rules. But, unlike the Labour/Greens, the Government needed (and still needs) at the very least to grandfather existing forests from any changes and not spook the market.
Shorting the market by reducing the auction price floor, is a game Willis can’t win. When she goes low the market will go lower. Ultimately the Government ends up with peanuts in the race to the bottom. As against this, Willis risks all the gains New Zealand achieved from the EU Free Trade Agreement because weakening of our climate goals is a ground to cancel that agreement. So much for any economic basis for this proposed change and the touted economic competence of the current government.
The next challenge to this proposal will be legal. In not following the recommendations of the CCC, the Minister (Simon Watts) will have to be careful he does not depart from strict legal process, or he will likely be judicially reviewed, as James Shaw successfully was in 2023. You can see how this would go: how could the Minister form the view, on reasonable grounds, that his decision to reduce the price floor and the CCR could be consistent with the Zero Carbon Act?
There are solid grounds for Waitangi Tribunal review as well, given its linkage to the EU Free Trade Agreement and the latter’s requirement that the Government comply with the United Nations Declaration on the Rights of Indigenous Peoples. It may end up being years before Willis can get her hands on some shekels from ETS auctions.
Then there are the political costs. Governments inevitably burn political capital, so they have to carefully pick the issues they are prepared to do so for. Just six months ago this Government was promising “a strong and stable Emissions Trading Scheme. It is important to have market stability … and give businesses certainty and confidence. Our government is committed to restoring credibility to the ETS and it remains the Government’s key roll to reduce emissions” (Watts, 6 December 2023). “We would all have a good understanding of the ETS and its intent to send price signals that are intended to cause individuals and businesses to change their practices and explore using low-emissions technologies” (MacLeod 30 April 2024). “… the Government is committed to meeting New Zealand’s climate commitments and sees market mechanisms as its key to delivering emissions reductions” (Willis, 10 April 2024).
The opposition is going to treat these comments as an albatross around the Government’s neck. Is it worth political capital in giving them this cheap advantage?
Last is the climate cost. Everyone knows emasculating the ETS is going to cost us economically because it increases the NDC deficit but will also cost out children and grandchildren because of the social and environmental costs of not taking climate change seriously.
Willis’ comment that the CCC is not a deity is cheap. But until she comes up with a better explanation of how we are going to meet Zero carbon by 2050 all she is really saying is: the CCC might be responsible telling us how we meet net carbon zero but I don’t see why I have to be bound by any obligation to do so. Does the Minister of Finance and Associate Minister of Climate Change really think that? If so, it’s the taking money out of the poor box mentality. Not only is the Government not going to help future New Zealanders, but its going to dry up the very thing that is intended to do so. That’s not what young and swing voters want to hear.

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