Climate Change Minister Simon Watts delivering New Zealand's statement on climate change at the UN COP28 conference in Abu Dhabi last December.

The Government now faces the prospect of having to watch another tax raise the price of petrol when, only six days ago, it abolished the Auckland Regional Fuel tax.

Prime Minister Christopher Luxon argued that the regional fuel tax imposed costs on lower-income people with less fuel-efficient vehicles  and that it was a regressive tax.

However, yesterday’s advice from the Climate Change Commission to start reducing the number of Emissions Trading Scheme (ETS) units on sale will inevitably push the price up.

The whole idea of the Emissions Trading Scheme is that the market price of ETS units should be high enough to force emitting industries to reduce their emissions rather than buy the units.

Any increase in ETS unit prices will impact the price of fossil fuels like gas, diesel and petrol. Companies selling fossil fuels must purchase ETS units on the basis of one unit for each tonne of Carbon Dioxide that their fuels will release into the atmosphere.

The practical implications of this were yesterday immediately seized on by the Taxpayers’ Union, which said the Commission’s advice, if accepted, would continue to keep carbon prices arbitrarily high, pushing up prices for consumers.

The only consolation for the Luxon Government might be that the current situation is partly the fault of the Ardern Government, which artificially depressed ETS prices at the end of 2022 because of “cost of living” (i.e. political ) pressures.

Under the NZ ETS, certain companies and entities must hand in ETS units to the Government for their year’s emissions. 

The Government can issue units in several ways. For example, they can be bought from Government auctions created by forestry, and in some circumstances, a fixed number are available for free as industrial allocation.  

For the scheme to work well, units available must decline in line with the declining emissions reduction targets. 

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“We have expected for some time that there is a surplus of New Zealand Units (ETS units) already in the market, and this represents an oversupply,” said Climate Change Commission chair Dr Rod Carr yesterday.

“Recent data and updated analysis suggest that the surplus is larger than we previously assessed and that the change in our assessment is material.

“The outcomes of all four government auctions in 2023 – which were declined with no units sold – support this conclusion.” 

“This unit surplus will not self-correct.

“It is critical that the Government adjust the NZ ETS unit volume limits as soon as possible to draw the surplus down and bring the settings back into alignment with emissions reduction goals.”

“There is scope to do this while keeping the current price control settings essentially the same in real terms.” 

“This step will help the NZ ETS reward investors, producers, and consumers for actions that contribute to meeting Aotearoa New Zealand’s emissions reduction goals,” Dr Carr says. 

That last sentence is key. Any reward for investors could come only from an increased price.

The High Court reversed the Labour Government’s 2022 decision not to raise the ETS trigger and floor prices

 last July.

Consequently, the ETS price has now largely recovered to $69, though it is still not back at its 2022 peak of $88.

Ministry of Business, Innovation and Employment data suggests that at the beginning of the year, when the ETS price was about $70, the ETS component of petrol was around 16 cents a litre.

This Climate Change Commission table from 2022 models how the ETS component of petrol would change as the ETS price changed.

Emissions Trading Scheme potential price impact

Emissions price
$50$75$100$150$200$250
Diesel cents/litre15.423.130.746.161.576.8
Petrol cents/litre13.420.226.940.353.867.2

It would seem that if the emissions price were to reach $100 a unit before the next election in 2026, which, because of the surplus units, withdrawal would seem possible, then motorists would be paying 10c a litre more than they are now.

The Auckland Regional Fuel Tax is 11.5 cents a litre.

However, the Climate Change Commission set out a list of alternatives that could relieve pressure on the ETS. However, all would present political problems for the coalition.

It said unit limits in the ETS could be adjusted to reflect sizeable emissions changes resulting from other emissions reduction policies.

“These are where there is a material shift in emissions by ETS participants, and the reduction in unit limits could be made without increasing pressure on others in the scheme,” it said.

“One of several such examples is the action by NZ Steel in partnership with the Government to introduce an electric arc furnace to replace coal as a fuel for part of its manufacturing at Glenbrook Steel Mill.

“This is expected to reduce that company’s greenhouse gas emissions by 0.8 million tonnes annually from 2027, which will be a permanent reduction to its demand for units in the ETS (this shift away from coal will halve their use of units).”

However, the National Government dismissed the government funding for that furnace as  “corporate welfare” during the election campaign.

The bigger question is what to do about forestry.

The Commission said: “A key improvement would be for the Government to make clear statements about its goals for reducing greenhouse gases (at their source) and its goals for using forestry to absorb some emissions.”

Feedback from the Commission’s public consultation found that very little planning was occurring for forest planting from 2025 onwards.

The Commission said there were several factors leading to uncertainty in the industry.

However, there is also opposition from within the National caucus to increased forestry planting.

Wairarapa MP Mike Butterick was one of the founders of 50 Shades of Green, a rural protest group opposed to pine forests being converted to farmland.

All of this, particularly the need to reduce the number of ETS available for sale, led to the Commission warning the Government that income from ETS auctions could be unreliable.

“Over recent years, the cash proceeds from ETS auctions have been a source of income to Government,” it said.

“The reliability of this income is uncertain.

“Selling units by auction is unlikely to generate steady funds in coming years, because the number of units auctioned is already set to decline in line with targets, and because the auction unit levels is the only setting that Government can adjust to keep permitted emissions in line with the country’s targets.”

That will trouble Finance Minister Nicola Willis who has forecast $1.2 billion from the ETS auctions to help pay for her tax cuts.

The Government is thus in a bind.

It could encourage more deals like the NZ Steel one, but that would be embarrassing politically; it could encourage more forestry but risk a backlash from its rural base, which would leave it having to reduce the number of ETS units on sale and live with the price rises that will cause.

Prime Minister Christopher Luxon has made it abundantly clear that the Government will not back away from its commitment to the climate change goals set out in the Net Zero legislation it supported in Parliament.

“I want to be really clear on how we achieve our goal is a matter for debate, but committing to it is not,” he told the Blue Greens Forum last month.

“The goals have been set.

“And I want to reassure you all that our government takes those very seriously, and our responsibility is to put New Zealand on track to achieving the goals and commitments that we have collectively made over a number of years.”

Labour’s Climate Change spokesperson, Megan Woods, claimed yesterday that she was deeply concerned National was not serious about climate change.

But National might actually be able to claim some political high ground on the issue because the current situation is aprtly the product of Labour’s decision to ignore the Climate Change Commision’s advice in 2022.

Climate Change Minister Simon Watts alluded to this at the Bklue Greens Forum.

“That Paris Nationally Determined Contribution (for 2030) target is critical not only because it is so soon—just over 70 months away—but also because we haven’t inherited a viable plan from the previous government to get us there,” he said.

And at the UN COP28 conference in Abu Dhabi last December, he said New Zealand remained resolutely focused on transitioning to a low-emissions future, supporting Pacific resilience, and collectively decarbonising the global economy.

“New Zealand has an ambitious NDC to reduce net greenhouse gas emissions by 50 per cent below gross 2005 levels by 2030,” he said.

“We are committed to achieving this, and our 2050 domestic net zero target, by tackling the key drivers of emissions and working with the private sector so they make transformative investments.”

These are brave words that will be severely tested politically as the full implications of what the Climate Change Commission recommended yesterday begin to be realised.

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