Taxpayer Talk - podcast by the New Zealand Taxpayers' Union

Taxpayer Talk: The dangerous folly of the Climate Change Commission

March 22, 2021 New Zealand Taxpayers' Union Inc.
Taxpayer Talk - podcast by the New Zealand Taxpayers' Union
Taxpayer Talk: The dangerous folly of the Climate Change Commission
Chapters
Taxpayer Talk - podcast by the New Zealand Taxpayers' Union
Taxpayer Talk: The dangerous folly of the Climate Change Commission
Mar 22, 2021
New Zealand Taxpayers' Union Inc.

The Climate Change Commission plans to up-end our economy with a highly political, centrally-planned regulatory agenda. Jordan is joined by Oliver Hartwich, Executive Director at the New Zealand Initiative, to untangle this mess.

Support the show (http://www.taxpayers.org.nz/donate)

Show Notes Transcript

The Climate Change Commission plans to up-end our economy with a highly political, centrally-planned regulatory agenda. Jordan is joined by Oliver Hartwich, Executive Director at the New Zealand Initiative, to untangle this mess.

Support the show (http://www.taxpayers.org.nz/donate)

Jordan Williams:

In January, the Climate Change Commission released what is arguably the most important document released by a government in decades. It calls for a transformational and lasting change across society. The report is the draft advice to the government on how to get New Zealand to net emissions on a pathway to zero by 2050, with draft emissions budgets out to 2035. 

The government has basically committed to implement whatever the recommendations of the Climate Change Commission are. It's 800 pages long, insanely complicated, and hasn't had nearly the analysis of even, say, an annual government budget. So I'm sitting down now with Oliver Hartwich, who's one of the New Zealanders who has trawled through the 800 odd pages. He's executive director of the New Zealand Initiative think tank. Thanks for joining us, Oliver.

Oliver Hartwich:

Well, thank you for having me.

Jordan Williams:

If we could just start, how did you come across this issue, why is it important for Joe Taxpayer to be sitting up and taking notice of this?

Oliver Hartwich:

Well, climate change is one of the biggest policy challenges of our time. The government has committed to lead the country towards a net zero future, so they want to reduce our current emissions to a net zero by 2050. Indeed, we as a country, we have committed to that goal in international agreements. 

So the question's now how do we get to that target and how do we get there in the most efficient way? On that hinges a large chunk of the New Zealand economy because basically any sector of the economy, any household that uses energy, is affected by this. So this will actually affect all of us, this will affect us for decades, so it is really important to get that one right.

Jordan Williams:

Our opponents or people that are specialists in this particular climate change cause will accuse anyone taking on the Climate Change Commission as closet deniers or something like that or fronts for big business, for example. How do you respond to those allegations?

Oliver Hartwich:

Well, first of all I would say that we are taking our obligations as a given. I mentioned we have obligations under the Paris Agreement, we have committed to that path. The only question we have now is how do we get there in the most efficient way. There's no point actually trying to re-litigate the science. I'm not a scientist, I'm not going to engage in a scientific debate on the pros and cons of climate change or whether it's real or not, that's not the issue anymore. We have committed, so really the only challenge for economists like myself is to figure out how do we get there? How do we make sure we are fulfilling these international obligations at the least possible cost?

Jordan Williams:

So surely then if we agree on the goal, reasonable minds can differ on the pathway. Give me a summary of why you think the Climate Change Commission's got it wrong in this draft advice?

Oliver Hartwich:

Well, I think the Climate Change Commission overlooks that New Zealand has already made a strategic decision on climate change. That strategic decision takes us back to the Clark government. So in the final years of the Clark government under environment minister David Parker at the time, New Zealand introduced an emissions trading scheme. 

Now, at the time there would have been other options, of course. So countries wishing to cut their carbon emissions can do it in a variety of ways, so you can introduce a simple carbon tax where you have a tax per tonne of carbon dioxide, you could do that. Subsidise renewable energies or energy efficient measures. You could regulate, so you could actually bend stuff that is very pollution intensive, or indeed you could introduce an emissions trading scheme with a cap. 

The New Zealand government under Helen Clark with David Parker as minister are responsible, introduced an ETS and put us on that path. Now, once you're on that path, you have to actually play according to the rules of an emissions trading scheme, and unfortunately the Climate Change Commission now comes up with policy recommendations that we think are incompatible with that given, chosen path of the ETS.

Jordan Williams:

So just take me back through, give me the ETS 101. I'm a bush economist, I follow the economic pages in the newspaper, but that's about it.

Oliver Hartwich:

I think you're a lawyer, right? Lawyers don't-

Jordan Williams:

- Retired lawyer. We hear a lot about the emissions trading scheme and the price of carbon under it. Just give us a 101 on how that works and why that's better than the government, say, banning electric vehicles?

Oliver Hartwich:

Okay, well let me give it to you in the simplest terms and just give you an example. Say you have an economy currently emitting 100 tonnes of carbon dioxide. Now, the government comes in and says, "Let's deal with that problem and reduce the emissions through an emissions trading scheme." So the government would, for example, issue 90 certificates worth a tonne each. So everybody who's emitting in that economy would now have to make a choice, do we want to purchase emissions certificates or do we want to become a little bit more carbon efficient and reduce our emissions output? But basically because the government has kept the total number of emissions certificates at 90, the economy in that example would emit 10 tonnes less in the next year.

So what happens in such an emissions trading scheme setting then is that companies would try to figure out how much does it cost us to reduce our emissions? And the companies and households with the lowest cost of reducing emissions would start first. As the cap sinks, so from 90 tonnes in the example to maybe 80, 70, 60, of course it will become more rational to also go for emissions reduction initiatives that cost a bit more. But initially you would start with the lowest cost and then as the cap goes down you will then also go for other parts of the economy that are a bit harder to cut. That's the basic logic behind the ETS.

Now, the problem with the ETS or a design feature, rather, if you have an ETS, it doesn't matter what you do afterwards. So imagine you have an ETS, the ETS produces carbon emissions by 10 tonnes and you start subsidising stuff in the economy, you start subsidising for example renewable energy. Well, that wouldn't do anything because you have already predetermined the outcome. So the outcome, the cap, would be 90 tonnes next year. Well, okay, you start subsidising renewable electricity for example, and what you do is you reduce the price of the emission certificates. That price will fall, the total amount of emissions will not change. Or if you say ban cars with an internal combustion engine, well can do that too, yet you wouldn't change the total amount of emissions because the certificates previously used by petrol and diesel cars, they would now be used by other households and factories. The total output, again, wouldn't change because we have predetermined that in the cap.

So the feature of the ETS is that you cannot logically combine an ETS with other measures, and this is not something particularly new, this is not something unique to our position, it's actually established wisdom in economics and supported now even by the Intergovernmental Panel on Climate Change, and one of their big reports dating back to 2014, the IPCC actually said that expressly, that once you have decided to go for an ETS, which is a very efficient way of cutting emissions, you cannot possibly combine it with anything else. So the IPCC said that, a number of European government agencies and advisory councils to economic ministries have said that. This is established wisdom in economics and unfortunately the Climate Commission ignores that, the Climate Commission pretends as if the ETS didn't exist and proposes to introduce all sorts of other measures.

Jordan Williams:

So they want to replace the ETS, do they?

Oliver Hartwich:

No, that's the funny thing about the Climate Change Commission, they acknowledge that the ETS exists. They even say in one of the chapters, if you want to look it up that's chapter 17, page five, the Climate Commission actually acknowledges that once you have an ETS, non-ETS measures do not change the carbon output, they only change the certificate price. It's in the Climate Change Commission's report. And yet, the rest of the document almost pretends that the ETS doesn't exist and proposes all sorts of measures, for example on electric vehicles, that are simply not compatible.

Jordan Williams:

So let's draw this out. One of the proposals that the Climate Change Commission suggests is to ban the traditional internal combustion engine vehicle by, is it 2030?

Oliver Hartwich:

Mm-hmm (affirmative).

Jordan Williams:

So what you're saying is that that would simply send emissions elsewhere?

Oliver Hartwich:

That's exactly right. The commission and many politicians of course believe that the ETS doesn't really work because we haven't seen a massive transition to volt electric vehicles just yet. I would say that actually that, that we haven't seen this transition to electric vehicles only demonstrates that the ETS works as it's designed. Because let's face it, a normal family car emits about two or three tonnes of carbon dioxide per year. Now, you currently purchase a certificate that allows you to emit one tonne of carbon dioxide for about $39 on the market. Now, motorists of course pay for that through their fuel prices. What many motorists probably wouldn't be aware of that each time they fill their car they implicitly buy these certificates.

Jordan Williams:

Is that 1 cent a litre or something isn't it?

Oliver Hartwich:

It's a bit more than that, but the thing is actually if you just calculate what it comes down to in a year, if a car emits two or three tonnes, if the price is currently $39, it might be 50 in a few years time, we're talking about somewhere between say 100 or 150 dollars a year for the carbon certificates for the typical kind of family car.

Now, no family is going to make the transition from a normal petrol engine to an electric vehicle for $150 a year, keeping in mind of course that electric vehicles are often quite a bit more expensive. So it is actually a function of the system that at carbon prices as low as today, we're not seeing a massive change towards electrification in transport. Politicians are now saying well, we haven't got the kind of transition we would like to see, simply ignore the fact that transport emissions are not a low hanging fruit, there are other ways in which you can cut emissions much more efficiently at a much lower price, and that's where we should start.

Jordan Williams:

But they would say though that the fact we haven't seen that quick transition in transport would suggest that the ETS isn't working or the ETS price isn't high enough.

Oliver Hartwich:

Well, transport's time for electrification for moving off petrol and diesel will come, it's just not there yet because it is not a low hanging fruit. The function of the ETS is to start cutting emissions where it's cheapest, and then as the price of the certificates goes up we will then move to other ways of cutting emissions, but the starting point has to be somewhere else. The starting point should be coal, for example, where it's relatively easy to cut a large chunk of emissions at a relatively low cost. There's where we would start, and then over time once we have exhausted these opportunities in transformation from coal to other fuel sources, we can then talk about transport, but transport simply shouldn't be the priority. It's not worth it.

Jordan Williams:

So many critics of the Climate Change Commission have basically made that argument that the report is, for lack of a better term, central planning. It picks and chooses what these budgets inherently are done on a sector by sector basis. Is that fundamentally your point, that that should be left to the ETS to find that low hanging fruit that may not necessarily be as visible as people driving electric cars, or is it that they get the selection of industries wrong?

Oliver Hartwich:

Well, it's precisely that point that the Climate Change Commission tries to plan. They issue carbon budgets for basically every part of the economy and try to fine tune where emissions are going to be cut in the future, but our criticism actually goes beyond that because the commission still pretends that whatever they're proposing is compatible with the emissions trading scheme. Well, in our view it simply isn't and electric vehicles are the best example for that.

So if you look at electric vehicles as I just explained, they are not the lowest hanging fruit, you wouldn't start there. And yet the commission actually prioritises electric vehicles and say we should actually have that transition happening basically over the next decade.

Jordan Williams:

How would they get there? Is that a different emissions trading price for transportation?

Oliver Hartwich:

Well see, that's the thing that we simply cannot know because the commission is refusing to release the model, the commission is refusing to release the underlying-

Jordan Williams:

What do you mean the model?

Oliver Hartwich:

Well, they have modelled all of this of course. They say they have done a general equilibrium model, that's what economists call it, and based on that modelling they have come to the conclusion that transport should go ahead, that transport emissions should fall swiftly, and that we should have this transition towards EV in the next decade.

Well, the thing is actually we would like to figure out how the commission actually got to that conclusion, because as I just explained earlier we don't see the case for this rapid electrification of transport. So the commission would have to make some really heroic assumptions to arrive at the conclusion that actually transport should lead the way. We can only speculate what assumptions they have used, but I think one way to get to their conclusion would be to say well, maybe it doesn't cost us anything to cut emissions in transport, maybe we actually gain from it. That sounds crazy, of course, because we know it's not true. International evidence points to transport costing about $1500 a tonne if you want to cut it that way.

Jordan Williams:

Sorry, so for every tonne reduced?

Oliver Hartwich:

For every tonne reduced, international evidence suggests you're talking about $1500. Now, of course that doesn't make any sense to do it that way if you can purchase a tonne of carbon dioxide on the carbon market for $39.

Jordan Williams:

When you say purchase you mean someone else cutting?

Oliver Hartwich:

Exactly. So you would purchase a certificate on the carbon market, New Zealand unit, that costs you $39, and $39 is significantly less than $1500, and therefore it would make more sense to just purchase a certificate and shred the certificate because that way you also reduce one tonne of carbon dioxide in emissions, whereas if you're going that path of electric vehicles for example, that would probably cost you around 1500.

Now, the commission probably assumes that the cost is much lower, otherwise they couldn't justify the quick transition of transport. We suspect what they might have even assumed is that we'll have a so-called negative marginal abatement cost in transport. That means-

Jordan Williams:

So the person with the electric car makes money out of it.

Oliver Hartwich:

Exactly. You can probably get to that assumption if you think about only the running costs of a car. So if you're filling your car with diesel or petrol of course, that costs quite a bit, as we all know. Whereas if you just recharge your electric vehicle, that is significantly cheaper. If you only look at the running costs of your vehicle, you might come to the conclusion that you're better off driving an EV, but you only get to that conclusion if you completely ignore the upfront capital cost of buying an electric vehicle.

So we would like to see what assumption the commission has actually made, whether they were actually ignoring the capital costs and only went for the running costs of vehicles, because if they made that assumption they would probably get to the recommendation that they put forward. The problem is of course, we don't think that is the right way to calculate the costs and benefits of EVs.

Jordan Williams:

I don't want to spend the whole interview on electric vehicles as much as I love electric cars, but this is a reasonable question, what has the commission said when you asked them that?

Oliver Hartwich:

Well, it's not just us again. It's many other organisations also asking the commission to please release the data, release your assumptions, release your model, and so far all of these requests, and many made under the Official Information Act, have fallen on deaf ears. The commission has initially refused to release the modelling saying that there's a lot of proprietary data in it, so data that they purchased from an American university.

Jordan Williams:

But this is too significant.

Oliver Hartwich:

Yes, of course.

Jordan Williams:

As they describe it in the report, or the commissioner. This is, they argue, as big a transition as the reforms from the '70s through the early '90s. I think there was a reference to, it was equivalent to the post war economic transformation, and they won't... I mean, one of the things that really caught our attention here at the Taxpayers' Union was this claim that the cost of these measures were only 1% of GDP. That, as a non-economist, that really jumped out to me when you look at work by the NZIER and others suggesting that actually it's going to be north of 20% of GDP.

Oliver Hartwich:

That's correct.

Jordan Williams:

I'd love to know how they get to one.

Oliver Hartwich:

Yeah, we would like to know that too. Since you mentioned NZIER, that was a study commissioned by the Ministry for the Environment in 2018, and it was the question of how much would it cost us to achieve net zero by 2050? NZIER's answer, also based on general equilibrium modelling, was up to 22% of GDP. That's a significant chunk of money. The Climate Commission pretends that we can achieve that very same outcome for less than 1%. Now, the thing is if they had told us it would cost us 7 or 8 percent, I would have probably given them the benefit of the doubt. I would have said okay, maybe you can come to some different... It would certainly be significant, but really, less than 1%? That really stretches credulity a bit.

Jordan Williams:

Factoring population growth, it's basically making us 10% poorer.

Oliver Hartwich:

Yes. Well, back to the model. The model they said they couldn't release because they purchased some of the data that they put into that and these are confidential data and proprietary data from an American university. Thanks to the work of Kate MacNamara at the New Zealand Herald, we now know that that was trade data purchased from Purdue University at a cost of $6000. It can't be that much data that they put in, and that's the only proprietary data they have. All the other assumptions that the commission has made-

Jordan Williams:

Why don't we just buy the data?

Oliver Hartwich:

Well, that probably wouldn't get us anywhere if the data remains copyrighted, but what I'm saying is that's just the trade side of it. Everything else that the commission fed into the model is genuine New Zealand data, it's their own assumptions, it's probably stuff that they got from other government departments like the Ministry of Transport, or indeed Treasury, and therefore this data should be released.

Oliver Hartwich:

And in fact, it is, I think, unprecedented that we see a radical transformation of the New Zealand economy as proposed without releasing the assumptions, without releasing the calculations, without releasing the model. It is just not good policy making. Imagine that in the future, the minister of finance would present us with a budget which of course implements many of the policies proposed by the Climate Change Commission, but the minister himself wouldn't have seen the assumptions upon which all of this is based.

Jordan Williams:

But surely Treasury's seen it? I mean, that was my next question was going to be. If this is so bad, why aren't Treasury blowing the whistle on it?

Oliver Hartwich:

Well, we would like to see what Treasury has advised, and we have sent an Official Information Act request in Treasury's direction as well. We wanted to see what Treasury put into the Climate Change Commission's report and modelling, and so far we haven't received that either. And by the way-

Jordan Williams:

Are we going to get this information before submissions close? I just don't see how you go out to public consultation, you've got to front up with your assumptions on something as dramatic as this.

Oliver Hartwich:

Well look, together with 13 other organisations, we argued and we sent a joined letter to the Climate Change Commission in February saying this is ridiculous, this process. You give us six weeks to go through a report of more than 800 pages, you haven't released the modelling, you haven't released the assumptions. At the very least you should give us an extra two weeks to really prepare our submissions.

Oliver Hartwich:

The commission, after some public pressure, and it was reported in the Herald, they gave us the extra two weeks and we, at that time, said, "Okay, these extra two weeks give us enough time to lodge another Official Information Act request, because they've got 20 working days of course to respond to that." So we said to the commission, "Okay, we now know from the Herald that the only data that is really proprietary which you cannot release is the trade data from Purdue. Fine, but everything else is not, and therefore you have 20 working days to give us the data that you have used on electrification of transport," and by the way that would actually get us right to the end of the consultation period, probably just three or four days before that period ends, so it would give us at least a chance to incorporate that into our submission.

Oliver Hartwich:

Now, we're still waiting, that's three weeks ago that we made that request, we haven't heard back from the commission. In fact, we had some really interesting exchanges with the commission's chair, Rod Carr in parliament. He was asked in select committee about electrification, marginal abatement cost for electric vehicles, and at the time he said in parliament-

Jordan Williams:

When you say marginal abatement, you mean the cost per tonne?

Oliver Hartwich:

The cost per tonne to reduce emissions in transport. And Rod Carr in parliament, in select committee, said, "Well, that doesn't really exist, we haven't used it." Only a few days later of course, on the Climate Change Commission's website, they reveal that these marginal abatement costs indeed exist within the commission but then they say, "We haven't really properly used them and we're not going to release them anyway." So it's a bit weird. The other thing that we now know is-

Jordan Williams:

This is bizarre.

Oliver Hartwich:

It is bizarre.

Jordan Williams:

Bizarre for significant economic policymaking.

Oliver Hartwich:

It gets worse. It gets worse because last week interest.co.nz reported that the commission has not committed to releasing data and modelling in July. Now, the thing is, first of all, the current consultation period ends on the 28th of March. The commission then is bound by law to report back to parliament in May, mid-May. The government will then basically accept whatever the commission proposes because that's what the government told us before they even released the document, and only months later in July will we finally find out what the commission assumed. What it also tells us of course, if the commission now says we're going to release this stuff in July-

Jordan Williams:

Why not do it now? They've done the work.

Oliver Hartwich:

Exactly. That means that it is possible to release it, that the whole song and dance about proprietary data doesn't really make any sense because if the commission tells us today that a July release is possible, and not stop a proprietary data, that means this release would be possible today and not in July.

Jordan Williams:

I think we're going to have to talk offline about judiciously reviewing. This is really the realm of the ombudsman but they take six months-

Oliver Hartwich:

But frankly I think it's scandalous. It is a scandal that the New Zealand public doesn't know the basis, the foundation, the assumptions behind one of the single biggest shifts in New Zealand economic policymaking in decades. The public has a right to know, parliament has a right to know, and by the way parliament should also be annoyed with the commission for ignoring its mandate. So parliament actually established a commission with cross-partisan consensus, if you remember.

Jordan Williams:

Well, the whole purpose was to kick the politics out of it.

Oliver Hartwich:

Well, exactly. And parliament gave the commission a very clear mandate. The mandate is to drive New Zealand's net emissions down to zero, and the word net really matters because it doesn't mean that every single current emitter has to really go down to zero, it just means that as a country we have to go down to zero. That means we have to have the ability to trade, under the emissions trading scheme, we also have under the Paris Agreement the ability to trade internationally, and other countries are doing that. So Switzerland, for example, has an agreement with Peru, whereby Switzerland pays for emissions productions in Peru and gets the credit for that. New Zealand has exactly the same right to do that under the Paris Agreement, and yet the commission is ruling this out, saying we shouldn't have this until 2035.

Oliver Hartwich:

The commission is also saying we should cut gross emissions in certain industries, whereas parliament's mandate was to cut net emissions. So the commission's actually redefining its mandate, it's going beyond the clear mandate that it got from parliament and it's actually making up its own mandate as it goes along.

Jordan Williams:

Well, this is the definition of a command economy. I mean, it sounds like almost quota stuff. The next question I was going to ask was we've already focused that, transport and EVs, but agriculture's the one that our listeners will be really interested in. Tell us how this impacts agriculture?

Oliver Hartwich:

Well, to start with, the current emissions trading scheme covers 97% of the New Zealand economy. But it only covers 50% of emissions. The significant difference is that the 3% of GDP that are not covered are responsible for 50% of emissions and that's agriculture. Now, what the commission should have done in its analysis is it should have focused on the parts of the economy not covered by the ETS, because if you haven't got an ETS of course other measures make sense, but they only make sense for as long as there is no ETS.

Jordan Williams:

Because if you're making a genuine cut they're not just going elsewhere.

Oliver Hartwich:

Exactly. And ideally, because the ETS works really well as a scheme, the commission should have defined pathways for agriculture to come into the ETS. And of course the government has said it wants to bring agriculture in over time, at much reduced rates, and we believe that makes sense because the signal here matters. Even if you take agriculture into the ETS at a heavy discount, say they only have to pay 5% of the current ETS price, it would still send a signal to agriculture that that change is coming and that they have to find ways of reducing their emissions. For example, it could mean that some farmers will decide to go from livestock to horticulture. It could also mean that technologies to reduce the methane output of cows will become more affordable, once we have commodified carbon in agriculture. So that's where the commission could have played a useful role.

Jordan Williams:

In fairness, they do. I mean, one of their recommendations is to culturally dairy, sheep and beef numbers by 15%.

Oliver Hartwich:

Yeah, but once again that is a kind of central planning approach where they try to prescribe herd numbers, 15% fewer in the future. We don't think that's the way to go. Leave it to an emissions trading scheme for agriculture as well and farmers will make the right decisions on their own, you won't have to instruct them how many cows and how many sheep they're allowed to have.

Jordan Williams:

Yeah, well this is the point that we hear quite commonly, that this is a world problem. We produce per kg of meet, release carbon and anywhere else in the world, and yet we're going to be producing less milk, less meat, and basically shipping those emissions off to countries that are far less efficient than us.

Oliver Hartwich:

Yes, that's a problem, and that's why we probably have to think about how to deal with imported emissions. Say if you're producing concrete or cement in New Zealand and that is covered by an emissions trading scheme in the future, well you could actually drive that industry offshore and then import the same stuff without actually the certificates, and that wouldn't be right.

Jordan Williams:

Yeah. That was decided right at the beginning, do you have emissions schemes around the world that are producer based or...

Oliver Hartwich:

Or you could actually say that once you import stuff that's covered by the emissions trading scheme here, you would actually have to purchase the certificates at the border. That would only establish a level playing field and that is desirable to do it that way. It's also desirable of course to see what happens in other parts of the world and where their emissions trading schemes and their certificate prices go because you wouldn't want New Zealand to deviate too much from international carbon prices because otherwise you could see some leakage happening.

Jordan Williams:

That's a common concern that us buying carbon credits off Russia, for example, do we have any... can we have faith in other countries' systems that they are as robust as ours? And isn't there a legitimate point that the people that favour the gross emissions pathway would make?

Oliver Hartwich:

That is an extremely legitimate point because we have seen some dodgy schemes in the past, especially around Ukraine in the 1990s and early 2000s, if you remember that. What the commission could have done is for example they could have actually set up a proper monitoring body to make sure that whenever we buy certificates offshore these are genuine certificates, genuine savings, genuine reductions in carbon emissions and not some dodgy scheme of the kind that we have seen in the past.

Oliver Hartwich:

So that's a genuine concern, but the other one is of course you still want to make sure that we don't deviate with our own domestic carbon price too much from global carbon prices because otherwise you could see some big distortions, actually, in industries choosing one country over the other just based on that carbon price. And actually, within the current setup of the emissions trading scheme, we have a good mechanism to deal with that. We have actually kept our carbon price at $50 for the time being, it will go up by a maximum of 2% a year, and beyond that government is forced to trade in the other emissions trading schemes, particularly Europe, and purchase certificates so that we can cap the price at this level. That makes complete sense, the only challenge for us is actually that we have seen in recent weeks that the European carbon price has gone up quite substantially, so we never quite assumed that would happen in the same way so we'll have to probably rethink a little bit, but in principle you should link the New Zealand carbon emissions trading scheme into international markets as much as you can.

Oliver Hartwich:

You have to monitor the schemes you engage with for offsetting internationally are properly verified, and it is possible to do that. I mean take this Switzerland deal with Peru, that is independently monitored by international agencies because that is something that happens under existing international treaty law. So the whole international community has an interest in making sure that when two countries do deals like that they're genuine. So I think we've learnt from the mistakes in the past and New Zealand actually should play a role in this. By the way, what it would also do of course, it would enable us to go to net zero much faster than currently planned. I mean, currently-

Jordan Williams:

Sorry?

Oliver Hartwich:

Well, put it this way. So we are going to net zero by 2050. And by the way, even according to the commissions modelling, on a carbon price of $35 we are within six million tonnes by 2050 of that goal. If the carbon price goes up to $50 a tonne as the commission tells us, we actually reach it without any further intervention.

Jordan Williams:

With none of the central planning?

Oliver Hartwich:

With none of the extra policy intervention.

Jordan Williams:

Who says that?

Oliver Hartwich:

That's in the commission's report. You can find it actually in the commission's report, which makes the whole rest of the report a bit of a mockery because they tell us first of all we are on track at $35, we are within six million tonnes by 2050. At $50 we are net zero by 2050. So the commission tells us-

Jordan Williams:

Hang on, how could that happen? How can you have analysis saying we're on track, all we need to do is bump up the price, turn up the screws a little bit.

Oliver Hartwich:

Well, you can already see the transition happening. We talked to many of our members, and our members are telling us that the transition is already happening in New Zealand.

Jordan Williams:

Your members?

Oliver Hartwich:

Our members at the New Zealand Initiative are large companies and some of them are energy companies, but basically what we hear from them is that even the carbon price currently at $39 means that some companies will actually move from fossil fuel use towards electrification. So it's already having an effect, and therefore what the commission concludes that at $50 a tonne we'll get to net zero makes sense, especially once you take into account that we're going to plant trees. Don't forget, we've got a government target of a billion trees, and these trees actually suck carbon out of the air, which is a good thing. So we are on track of reaching that goal of net zero by 2050 even under current policy settings.

Oliver Hartwich:

Now, but we could reach it faster. Just imagine this way. We have seen international projects, forestation in the Amazon for example, where you can effectively remove a tonne of carbon dioxide for about a dollar or two US out of the air.

Jordan Williams:

By planting a tree.

Oliver Hartwich:

By planting a tree. For $2 a tonne, let's say even if it's $10 a tonne, we are talking about carbon emissions, net emissions, long lift gases of say around 40, 50 million tonnes. Well, imagine 40, 50 million tonnes times 2 or 10 dollars a tonne, you do the math. If we just invested the money into these forestation projects and paid other countries to now replant rainforests, for example, well we could achieve net zero by tomorrow by just entering into such a deal with a South American country like Brazil, in the same way that Peru does with Switzerland.

Jordan Williams:

That is a pet bug bear for many of our members, particularly in provincial New Zealand, the extent of pine plantation around the country. I think there would be a lot of people nervous to hear you say the solution is planting more trees.

Oliver Hartwich:

Yes, and I understand the concerns about that of course. What I would say though, it is again not for the Climate Change Commission to decide on where-

Jordan Williams:

[crosstalk 00:34:43]

Oliver Hartwich:

Well, no. It's not for the Climate Change Commission to decide where planting of pine trees is permissible or where it's desirable. If you are concerned about that you should actually deal with it in a proper department, which is probably the Ministry for the Environment, or DOC dealing with it, or MPI. These are the proper places in government that should make decision on land use. It's not the Climate Change Commission. In the same way, the Climate Change Commission goes beyond its function and its mandate if it tries to prescribe, for example, what transport in the future should look like, what urban form should look like.

Jordan Williams:

It wants us to increase our bike use by 90% or something?

Oliver Hartwich:

Yeah, that's right, and 25% more walking. So it tries to really go into urban planning now, it tries to prescribe how urban planners, which is actually a local government function, should design the cities of the future. Well, I would say leave it to the urban planners, they are the ones actually in charge of operating under the urban planning system. The Climate Change Commission has no right to interfere in that. All the Climate Change Commission should be doing is it should say, "Well, as long as it's covered under the ETS it doesn't really matter anymore what happens."

By the way, the thing is once we go to complete electrification of the fleet that the Climate Change Commission sees, what's the point of actually cycling more if all our cars are electric? What's the point of walking more? It doesn't make sense. That's what happens when you have a Climate Change Commission going beyond its mandate.

Jordan Williams:

It's wizardry, isn't it? It's ultimate command and control of not just the economy but lifestyles and all the rest.

Oliver Hartwich:

And that's what's so scary about it because it has a whiff of totalitarianism.

Jordan Williams:

I do want to tick off energy before we wrap this up on where to from here, but there'll be a lot of New Zealanders that saw one of the headlines on this was banning the gas barbecues. I mean, the gas barbecues as a proportion of emissions are absolutely minuscule, you don't burn as much in your barbecue as you do in even the car, and as you've explained the car is very small. But it just seems... it's one of these things that the media will highlight but it seems so unbelievable that you can relax?

Yeah. And yet that's actually the approach the commission is taking, it tries to prescribe that kind of stuff, thereby completely ignoring consumer preferences. I mean, the commission has absolutely no way to determine whether you like your gas barbecue more than I like my V8, but it's the emissions trading scheme that allows us to deal with that.

Jordan Williams:

The price is up.

Oliver Hartwich:

Exactly. Because we'll price this differently and if people actually really, really, really appreciate their gas barbecue well then they will be paying for that and the payment will see emissions cut elsewhere where people actually don't value the emissions as much.

Jordan Williams:

So I guess it's a political question, and that's for the purposes of... I mean, we're certainly going to be encouraging our members and supporters to make a submission and blow the whistle on how flawed this draught report is, but I guess what the real question is, is politically where does this end up, is this going to be dead on arrival like Michael Cullen's capital gains tax sort of way out, he went far too far, it was going to be the most extreme in the world. This seems pretty in the same sort of realm. Or is this, do you genuinely fear that this stuff is possible or likely?

Oliver Hartwich:

Well, let me give you two answers to this question. The first one is actually it should be dead on arrival because the whole process has been so shoddy, the economics are so flawed you could really drive a truck through them. It doesn't make any sense, plus the secrecy around not releasing the modelling, the data, the assumptions. It is just unheard of in policymaking, the public should revolt against it, the public should actually say no, we can't have this.

Jordan Williams:

But it's so complex, and the media environment is you're for us or against us, and if you're against us you must be some sort of closet denier or...

Oliver Hartwich:

Yeah. Well, I think if people actually understood what's going on there would be protests in the street tomorrow. However, I think it is still possible, though not desirable, that this will pass. The reason I say that is because coming from Germany, we've had a lot of folly in German energy policy over the last 25 years, starting with the Renewable Energies Act, and-

Jordan Williams:

This was the subsidies for wind?

Oliver Hartwich:

Subsidies for wind, I mean if you really want to see a completely broken electricity market you have to look at Germany, it doesn't get worse than that. Germany's a complete disaster zone, all sorts of policies introduced with the best intentions of trying to transform German electricity from coal and then nuclear power as well because they switched off the nuclear power stations after Fukushima 10 years ago, towards renewable, so basically wind and solar. None of this really works because they haven't got the economics right, plus they have an administrating scheme in Europe too, so the whole thing is not compatible.

Jordan Williams:

It's the same problem.

Oliver Hartwich:

It's the same problem and I first came across the incompatibility of the emissions trading scheme with discrete alternative policies in the early 2000s when the Advisory Council to the Federal Economics Ministry in Germany issued a unanimous declaration to the German economics minister saying, "Stop this, it's incompatible." That was around I think 2003 or '04, something like that. I thought, well, okay, this is basic economics. I mean, I started economics in the '90s and it's what we learned and it made complete sense.

Here we are again, almost 20 years later in New Zealand, making exactly the same mistake. The problem is, an answer to your question, will we stop it? Well, Germans are not inherently more stupid than other people, I would say, and yet this has been going on for 25 years and there are no protests in the street because the whole thing is a little bit complicated, it takes about five minutes of economics teaching to understand what's going on, and therefore the Germans are happily or not to happily paying the highest electricity prices in the world, the whole system is a complete disaster and nobody's ever going to change it. I want us in New Zealand to prevent that scenario, and that's why we have to stand up now.

Jordan Williams:

When I lived in Germany it was just blowing up in '09, 2010. The huge irony was of course they'd subsidised, shut down the nuclear, subsidised wind particularly. Of course, it doesn't blow every day, and as a result they ended up subsidising the coal stations to keep them here as backup for when the wind didn't blow. It was just totally backward.

Oliver Hartwich:

Even better, so on days when the sun doesn't shine and the wind doesn't blow, the Germans call this dunkelflaute. So there's a word for that in Germany now. A dunkelflaute day with no wind and no sun they import the nuclear power from France and the coal power from Poland. It's nice to have neighbours. New Zealand doesn't even have that advantage. In New Zealand, I mean last time I check we were a bunch of islands with no connection to international electricity grids. If we get this wrong there is no one there to bail us out.

Jordan Williams:

I think pumped hydro and all of those.

Oliver Hartwich:

Oh, we could talk about that too but that would be another podcast.

Jordan Williams:

We're certainly going to end up on the same sort of pathway. There is one though that really jumped out at me that your team highlighted. And that is that this... I think it's such a classic example of... I think it was late last year, the prime minister proudly announced the Ministry of Education is going to spend $50 million replacing or converting 90 coal boilers in schools.

It sounds great and it gets some good headline, big launch with the prime minister, lovely lovely. But of course, you point out, it reduces emissions by 33 tonnes, back of the envelope, that's just over 1500 bucks per tonne. You can compare the $1500 of taxpayer money spent to reduce those emissions, that's 40 times more expensive than as if they had just bought the carbon credits, but even worse because they've reduced the emissions, that reduces the price of the carbon emissions elsewhere and doesn't actually reduce emissions.

Oliver Hartwich:

Yeah. So there you've got the whole problem in a nutshell. So government's spending $1500 a tonne, cutting emissions by replacing school coal boilers.

Jordan Williams:

But they get good headlines out of it.

Oliver Hartwich:

Well of course they get good headlines because we've got a relatively economically illiterate population.

Jordan Williams:

Well, I think it's more the media cheering this along.

Oliver Hartwich:

Well, that might actually help. But the thing is actually, if you really want to cut emissions, you could purchase them for $39 on the emissions trading scheme. So you buy these New Zealand units and then you burn... Well, you shouldn't burn them because that's more emissions, but you shred them basically. That reduces a tonne of emissions at a cost of $39 where the government spends 1500.

The other thing that this example shows us, I mean cutting emissions by converting coal to something else should be the easiest way of cutting emissions because coal is such a dirty fuel. The government spends $1500 a tonne on coal. Just imagine how inefficient they would be cutting emissions elsewhere, I mean coal is the easiest to cut and the government actually bungles that one too.

The other thing then on top of all of that is of course it doesn't cut a single tonne of emissions anyway because we've got an emissions trading scheme. So it really shows you the complete absurdity of these policies, and by the way this is also perhaps an illustration of why bureaucrats or the Climate Change Commission or politicians don't really like the ETS, because if you have an ETS price of $39 a tonne and the government cuts emissions at $1500 a tonne, well what does it show us? It shows us that bureaucrats and politicians are inherently inefficient.

If you have this mirror of the ETS price held to you every time you come up with a fantastic policy idea of cutting emissions through replacing school boilers or whatever else that could come up in the future, well that's very blood unpleasant because politicians don't want to be shown up as incompetent and inefficient. But that's exactly what the ETS does and that's why we need to strengthen it and keep it.

Jordan Williams:

Oliver, I've got one final question for you and that is, that if you had the drafter's pen, or if you were the James Shaw or the prime minister making these sorts of decisions, let's assume, I mean based on what you told me it doesn't sound like the commission is either the sharpest tool in the shed or probably is perhaps, I'd venture to suggest, driven a bit by ideology rather than the economic common sense. What would you do if you had the political problem of having built up this wonderful commission that we're going to take the politics out, we're going to accept whatever the commission says, and they deliver this lemon. How do you sell to your own that politics is downstream in society and there's a hell of a lot of pressure on the prime minister to do something and be seen to be doing something. How do you deal with it, assuming that we can get cabinet's head around just how bad this is?

Oliver Hartwich:

Well, first of all I would bin the current report and the current draught carbon budget. I think the commission's report is simply not up to scratch, we have to start again in it. The next question is do we need a climate change commission in the first place? Well, I'd say we even have emissions trading scheme, and I wish that David Parker is the minister who gave us the emissions trading scheme under the Clark government, would just explain to his cabinet colleagues why he introduced it and why it still makes sense.

Actually, the government should just declare victory and say, "Look, we've got perhaps the world's leading emissions trading scheme, let's just get the ETS to do its job, because if the ETS does that we will get to zero carbon because that's a part of the system." Actually, James Shaw deserve some congratulations on this one because he, last year, introduced the binding cap. That was the one thing that was missing from the ETS that David Parker introduced more than a decade ago, James Shaw delivered that late or actually in the middle of last year and introduced a hard cap in the system.

So both Shaw and Parker should just say, "Look, we developed a fantastic system, it works, let's keep it that way, we don't need a commission to tell us anything else." If, however, you want to keep a commission for political reasons, give the commission a proper mandate. Tell the commission, "Your task is, for example, to check any other kind of policy other than the ETS for its efficiency, how much does it cost to reduce one tonne of carbon dioxide if we use that policy, for example, in agriculture where the ETS doesn't currently play a big role?" So that's what the commission should do.

For any other policy, also for stuff where it's covered by the ETS, if politicians now and then want to go for things that don't make sense, at least give us a cost for that one too. Also, when we're going for international offsetting, when we make deals with other countries for them to reduce emissions and for us to get the credit, the commission should make sure that these are genuine reductions. So that's where a climate change commission could potentially play a useful role, but with what they have delivered so far, it is political, it is not transparent, and it doesn't stack up to scrutiny.

Jordan Williams:

Oliver Hartwich, thanks for joining Taxpayer Talk. So you have until the 28th of March to ensure that you have your voice heard in the submission process to the Climate Change Commission, and here at the Taxpayers' Union, we have made it easy for you to have your say. Visit www.taxpayers.org.nz/climate, we've made it easy for you with a template submission that you're free to change, and links to our primary submission there. I hope that you have your say.