The Government has acted against the advice of the Climate Change Commission in retaining tight price controls on the Emissions Trading Scheme
James Shaw said on Thursday it was disappointing the Government overrode his advice and the views of the Climate Change Commission in order to keep the price of carbon low, though he acknowledged he has to back Cabinet’s decisions.
Price settings for the Emissions Trading Scheme (ETS) were quietly announced after markets closed on Thursday evening, before a statutory end-of-year deadline.
Cabinet documents show that Shaw pushed for the Climate Change Commission’s ambitious advice on the settings to be adopted in full.
Instead, Cabinet accepted parts of the advice and shied away from any changes to price controls in particular, making it almost certain the soft ceiling on the carbon price will be breached next year and add another 8 million tonnes of carbon units to the market – the equivalent of more than three extra years of burning coal and gas at Huntly power station.
The lack of any change will make it cheaper for businesses and industry to emit greenhouse gases, at least in the short-term. The oil and gas lobby group Energy Resources Aotearoa welcomed the decision.
“The transition to net zero by 2050 is a marathon, not a sprint. New Zealand is playing its part, but we need to ensure we don’t move so fast we leave our most vulnerable people behind or undermine the international competitiveness of our business sector,” CEO John Carnegie said.
“A stable, predictable ETS is a critical lever to deliver a just transition, and we applaud the Government for preserving this in today’s announcement.”
This was the first year the Government had to take the advice of the climate commission into account. Shaw said he worried the decision to ignore that advice could set a precedent.
“I’m also worried that it reduces the relevance of the commission,” he added.
The commission had advised reducing the number of New Zealand Units (NZUs) available for auction by 2.68 million per year below current expected levels. Each unit allows a company covered by the ETS to emit one tonne of greenhouse gas.
Cabinet went with a more moderate approach, cutting the auction allowance over the next four years by an average of 1.25 million units a year.
This was relatively minor, compared with the deviation from the commission’s advice on price controls. As it stands, there’s a hard floor for the auction price (meant to be $32.10 next year) and a soft ceiling ($78.40 next year), which if breached releases millions of extra units into the market to lower the price.
The ceiling – called the cost containment reserve (CCR) – has been breached three times and fully emptied in both years it has been in operation.
The commission advised this was because the trigger price is seen as a “‘target’ or anchor for price expectations”.
To rectify this, the commission proposed a two-tier trigger price, starting at a whopping $171 and $214 from next year.
“The CCR is intended to only be triggered in rare or exceptional circumstances, and our recommendations reflect this intent. We expect the increased trigger prices to add considerable headroom to allow for price discovery, rather than unduly influencing market price expectations.”
It also advised the floor should rise to $60 from next year.
Instead, Cabinet decided to stick with the status quo with a slight adjustment for inflation. This makes it almost certain the CCR will be breached and emptied of its full 8 million units next year, as the current market price of $86.00 is above the trigger price of $80.64.
Shaw said a report that will be tabled in Parliament on Friday – required whenever Cabinet deviates from the commission’s advice – will explain that ministers were concerned participants would still see the sky-high $170+ trigger prices as a “target”.
If the carbon price rose to those levels, the impacts on households and businesses would be significant. Fuel prices would jump by about 25c per litre and residential electricity prices would be 3-6 cents higher per kilowatt hour than with no emissions price. However, neither the commission nor Shaw (in the Cabinet paper) thought the price would rise that high.
“It is essential to remember that the CCR trigger price should not determine the secondary market price for NZUs. Although there has been a history of the upper price control being seen as an expectation of NZU prices, this is not how the CCR was designed,” Shaw wrote.
“Setting the CCR trigger price at the levels recommended by the Commission should act to remove this ‘magnet’ effect.”
After markets reopened on Friday morning, the NZU spot price cratered to $75.00.
The Climate Change Minister also offered middle-ground options for price controls but Cabinet chose to keep the status quo.
If the CCR is breached, units released will have to be “backed” either through the Government directly buying and retiring units produced by foresters or through reducing future auction volumes by the equivalent amount.
This either costs the Government a significant amount of cash ($840m at a carbon price of $80) or has the effect of keeping emissions higher for longer and then requiring a more rapid, steeper descent in later years.