The Emissions Reduction Plan: What taxpayers need to know

On Monday James Shaw unveiled his long-awaited Emissions Reduction Plan (we’ll call it the ERP).

The good news is that it’s far from the radical plan of central economic control proposed by the Climate Change Commission’s “big kahuna” report. We opposed that plan very loudly and helped thousands of New Zealanders swamp the consultation process with opposition.

The bad news is that it’s simply more of what we’ve come to expect from this Government: big politically-driven spending announcements wrapped up in the rhetoric of “climate action”.

The ERP raids $2.9 billion in revenue from the Emissions Trading Scheme (ETS) and spends it on handouts to big business and fat bribes for middle class households buying electric vehicles. For context, $2.9 billion is about $1,500 of spending for every Kiwi household.

The elephant in the room is that because of the way our ETS works, most of this spending will do nothing to reduce our emissions. More on that below, but first, the headline announcements from today:

Cash for Clunkers

A new “Cash for Clunkers” scheme will see buyers of EVs or hybrids get a big subsidy in return for scrapping their old petrol vehicles. In fact, during the policy’s trial the subsidy works out (on average) as more than $12,000 for every scrapped vehicle!

This is classic middle class welfare dressed up as climate action. The policy will primarily benefit New Zealanders who are already in the market for an EV – and these buyers don’t tend to be low-income. In fact, scrapping petrol cars will drive up costs for the poor due to reduced supply in the used car market. And of course, the new subsidies and costs come on top of the “feebate” scheme (i.e. the ute tax) which already hammers the less well-off.

James Shaw also announced a target for New Zealanders to drive less in total – 20 percent fewer kilometres by 2035, to be exact. Question: if we’re all expected to be driving non-emitting vehicles, why do we also need to drive less?

Boilers for Big Business

Shaw has announced he’s sloshing another $650 million into the ‘decarbonising industry’ corporate welfare fund.

This is the same pot of money that we exposed in a recent Taxpayer Update, which has handed millions to the likes of Silver Fern Farms, ANZCO, and DB Breweries so that they can upgrade their heating systems. Smaller competitors never seem to get a look in.

Regardless, as we have previously pointed out, the funding is redundant: based on the Government's own numbers, big businesses already have a strong enough incentive to replace coal boilers and avoid ETS levies.

The fund (also known as the GIDI fund) is a classic case of a left-wing Government cosying up to big business under the pretence of “green” policy. Browse the handouts so far: Round 1, Round 2, Round 3.

The Elephant in the Room

The vast majority of interventions announced this week will fail to reduce emissions.

That’s because, outside of agriculture, our emissions are governed by the Emissions Trading Scheme – not by ad hoc government interventions.

The ETS caps total emissions and allows private businesses to bid for the right to produce emissions by purchasing carbon credits. Each year the cap shrinks, so fewer carbon credits are released to the market and in practice it becomes more costly for businesses to buy the right to produce emissions.

While the scheme itself may sound complicated, the upshot for New Zealanders is simple: energy and fuel becomes more costly each year, and households and businesses are free to decide for themselves how to cut emissions in ways that are most affordable for their circumstances. Left to their own devices businesses will, for example, replace coal boilers with electric heating systems to save on ETS levies.

When the Government then comes along with expensive additional policies to reduce emissions in say, the transport sector, total emissions remain unchanged. People switching from petrol to electric vehicles simply free up carbon credits for the rest of us to burn. It’s called the “waterbed effect”: if you try to lower a waterbed by pushing down on one spot, it’ll just pop up somewhere else.

The beauty of the ETS is that it’s designed to limit the Government to using a single tool – reducing the overall cap on carbon credits – to cut emissions. The problem is that this Government is wilfully ignoring the way the ETS works so that it can give handouts to middle class households and big businesses, and encourage “behaviour change” that appeals to its supporters’ ideological instincts.

As the United Nations’ Intergovernmental Panel on Climate Change put it: if a cap-and-trade system has a sufficiently stringent cap then other policies such as renewable subsidies have no further impact on total greenhouse emissions.

Of course, James Shaw knows how the ETS works, but he’s exploiting confusion over the policy to maximise his number of feel-good announcements and photo-ops with electric vehicles, cycleways, and school children.

Will National at least be honest with taxpayers?

We know that Christopher Luxon understands the ETS. His new economist Matt Burgess wrote extensively about the waterbed effect in his previous role at the New Zealand Initiative think-tank.

The risk is that Luxon will support the Government’s Emissions Reduction Plan anyway, locking a future National-led Government into a path of wasteful, pointless climate spending. He might think that New Zealanders are too simple to understand the ETS – and he might just be wary of being seen to oppose “climate action”, even when that action is costly and completely ineffective.

At the Taxpayers’ Union, we feel it’s our duty to be up front with New Zealanders. When we already have an ETS, a separate “Emissions Reduction Plan” is the emperor’s new clothes.

It’s not enough for National to quibble with the details of the ERP. They need to reject outright the entire approach of intervening in sectors already covered by the ETS.