Insight: Why the ETS alone won’t get us to net zero emissions

I was part of the policy team that designed New Zealand’s emissions trading scheme (ETS) in 2007/08.

Thirteen years later, I am part of the Climate Change Commission team recommending a new path to net zero emissions by 2050. This path includes the ETS but it is clear that while the ETS has a vital role to play, it cannot do it alone.

When conventional markets ignore the climate costs of our choices as producers and consumers, they actively push us in the direction of dangerous climate change. 

For example, markets currently tell us that fossil fuels are relatively cheap when in fact they are costing our children and grandchildren a desirable future. 

The ETS helps solve this problem by putting a price on greenhouse gas emissions. The emission price used today is not the actual cost to society of those emissions. It operates at a lower level to move us toward our climate targets. It will rise over time as reductions become more difficult – or fall as cost-effective innovation arises or complementary policies drive change.

Following reforms last year, the ETS will now be more effective in helping Aotearoa NZ deliver on our climate targets. 

It finally has an emission cap – the foundation of a cap-and-trade system – as well as controls to prevent emission prices from getting disruptively high or low.  

However, the commission’s recent advice points to further work needed to strengthen the ETS through appropriate regulatory oversight, changes to free allocations and forestry, and strategic use of ETS revenue in line with a just transition.

A blunt instrument

Even with further improvements, the ETS – acting alone – will not be capable of delivering a successful low emissions future.

Additional policies are needed to secure equitable outcomes, overcome barriers to change that are not about price and coordinate research and investment at the frontier of innovation. 

The ETS is a blunt instrument. It incentivises emission reductions when doing so is profitable – regardless of other consequences to society, the economy and the environment. 

Those who can afford rising emission prices will force change on others who are less able to pay, potentially to the point where well-being is threatened. 

These types of outcomes raise fundamental equity concerns across sectors, regions and socioeconomic groups. 

Furthermore, emissions pricing will not automatically give effect to the principles of Te Tiriti o Waitangi and help heal past injustices while preventing future ones.

It is obvious that price is not the only driver of change in markets. 

Many already profitable emission reduction opportunities – such as efficiency improvements in energy, industry and agriculture – face barriers to implementation that are not about price alone. Emissions pricing will not fix split-incentive problems between home builders, landlords and tenants to improve energy efficiency. 

It will not help educate people about reducing emissions, provide technical support, overcome high up-front costs for new technologies or override entrenched habits and social norms. 

Emissions pricing will not coordinate transformation across sectors and supply chains or large-scale, long-term research and investment for innovation across the public and private sectors. 

It operates in the context of commercial investment horizons and discount rates that serve private rather than public interests and do not safeguard future generations. 

Single tool illusion

It leaves us vulnerable to becoming the dumping ground for the world’s remaining petrol cars and to increasing traffic congestion.

It rewards the fastest and cheapest forestry removals regardless of impacts on biodiversity, landscapes and communities. 

It does not apply foresight to manage risks from long term constraints on energy supply and land use or impending impacts from climate change itself, and the need to align mitigation with adaptation. 

This is why other jurisdictions with large-scale emissions trading systems have not relied solely on emissions pricing to deliver on their targets.

For example, both the European Union and California have positioned emissions pricing strategically within comprehensive policy packages for driving innovation and safeguarding energy supply, mobility and social security while reducing gross emissions within their borders.

This point was reinforced during the commission's webinar earlier this month featuring Jos Delbeke, who served as director-general of the European Commission's DG Climate Action from 2010 to 2018. He offered the following insight drawn from experience:

“We left the hope entirely that the carbon market alone can do the trick. That is impossible. We need a clever combination of policies. Of course, there are lots of people criticising the European policies for double regulation and things like that. That is why the commission ... invested a lot in a solid economic preparation of this kind of coherence of policy instruments. It is an illusion to think that one policy instrument like carbon pricing can drive a whole economy. That is not real life because in all sectors – of transport, buildings or industry – there are already regulations."

Times change

When NZ’s ETS was first designed, the government’s goal was least-cost compliance with a modest short-term target under the Kyoto Protocol that could be met through any combination of domestic and international action. 

Across successive governments, the ETS delivered on that goal – through heavy use of bargain-basement, low-integrity offshore mitigation, domestic forestry dominated by exotic species and insignificant change in domestic gross emissions. 

With the Paris Agreement, the goalpost for climate action has changed to decarbonisation in all countries at unprecedented speed to prevent devastating global outcomes. 

In Aotearoa NZ, emissions pricing still has an important part to play – and it will deliver on its full potential only if it is integrated with other policies to deliver a thriving, resilient and equitable low emissions economy for current and future generations.