Is doing nothing better than doing a little?

Apparently National has decided to allow coal and gas-fired power plants, in a reversal of the previous government’s decision. They have almost simultaneously discarded the obligation on fuel companies to provide biofuel.

In a way, Gerry Brownlee is right that “the ETS put a price on pollution, providing adequate incentives for power companies to invest in renewable generation.” The regulations did distort the incentives of producers to invest in green technology as Matt has previously written about. Removing the distortions and implementing a carbon market is probably the best way to ensure we reduce our emissions at a minimal cost. So why aren’t I happy about the government’s decision?

Well the first obvious point is that we don’t have an ETS. In fact, the implementation of the ETS has been pushed back after Rodney Hide’s rather effective negotiations with the new government. In the absence of an ETS is it still optimal to remove the direct regulation of energy sources? It’s hard to say when we don’t have price signals to help us estimate the least costly way of reducing emissions. However, if we do agree that we want to reduce emissions, then using the best guesses of experts to attempt to reduce them in an efficient fashion is better than nothing.

The steeper the trajectory along which we have to reduce our emissions to meet Kyoto obligations, the more painful it will be. Postponing any action because we are planning to implement a lower cost solution in the future is a risky strategy, since the costs increase as we wait. The government appears to prefer nothing as an alternative to doing something sub-optimal, but I’m not sure how that could be a second-best strategy. Perhaps someone with a more intimate knowledge of the energy sector can help me out?

  • Dave

    I don’t think the ETS implementation has been pushed back. Key confirmed on Tuesday that they expect to get the review of the ETS over before the planned implementation of the ETS for stationary energy in 2010. Labour are correct to say that the ETS review removes some certainty about its provisions, but the review is supposed to be over by September 2009 so it is unlikely to make a big difference to the number of power stations that will be built I would have thought.

  • I’m not going to start on thermal plants, except to say that timing is important, and that if there were a price on emissions now it is quite unlikely that new thermal (other than for security of supply) will be popping up or if there was an expectation that there will be an effective price constraint on emission in the near term for the stationary energy sector (say within about 1 year).

    It seems quite unlikely that liquid fuels will be subject to emissions pricing any time soon. They were originally destined to be introduced on 1 January 2009 but apparently in response to high fuel prices (remember them?) but in reality due to scaremongering and politicking, were delayed until 1 January 2011. I anticipate that liquid fuels will actually be included later, and that the government will slavishly follow Australia and do so by matching the price increase to cover permit costs by reductions in fuel excise taxes – which effectively do nothing since under each scenario the government contribution is effectively unchanged (ie instead of road funding being paid for by user pays, some of it is now used to fund NZ’s emissions liability with the gap being funded out of general taxation – exactly where the emissions liability would be funded from under the status quo).

    Biofuels don’t cost much more than regular fuels. Oil companies won’t invest in them at the moment because they don’t want to make the outlay in the capital – they aren’t quite competitive in NZ and oil companies require insanely high returns on capital to invest given the lucrative opportunities for thier funds worldwide. On the other hand, NZ has a lot to benefit at a pretty low cost in terms of security of supply, and more importantly the spur to R&D in cellulosic biofuels this will create. A tin-arse economic appraisal will say ‘don’t do it’ but particularly in the absence of any other emissions reduction measure, this is a good one to get the ball rolling.

  • John

    I assume we are talking about biofuels which don’t compete with food crops or destroy the natural capital (I heard Heather Roy in parliment..)?

  • Hi John,

    Yes that is correct. Biodiesel would be sourced mainly locally from tallow. Bioethanol – in the absence of any standards it is most cost effective from Brazilian sugarcane, which does not compete with food crops. This has been studied extensively. Luckily, we under a BSO would just regulate and not subsidise a particular type of biofuel (ie America and its corn industry) thus not leading to these very harmful distortions.

    The other benefit of the BSO is that under the (now repealed) legislation there would need ot be sustainability regulations passed within 6 months that would ensure that any biofuels imported ARE sustainable. With the repeal of the BSO law there is nothing to stop unsustainable biofuels being imported (you might have thought that provision could have been left alone by National, but I guess not).

  • Is it me, or is the discussion on liquid fuels a bit of a tangent from the initial post …

    You should do a post on the removal of the Biofuel legislation Danto3, and we should keep this one for a discussion about the general idea of banning some types of generation.

    On that note, I agree with Rauparaha’s post. Ultimately, I hope the ETS can be sorted out as soon as possible, which Dave seems to indicate it will.

  • George Bolwing

    All the indications are that the ETS will remain largely as it is. The National Party’s concerns, as set out in their minority report from the original select hearing committee, didn’t really go to the basic structure. I am pretty confident that will be an internationally-set price on marginal emissions of greenhouse gases.

    The thermal moratorium really was a silly idea.

    It was mostly based on a concern of David Parker’s that there would be a major discovery of natural gas in New Zealand and that the owners of this gas were stupid.

    If he was using an economic model, it was a closed-economy, static one. He was assuming that the owners of this gas could (a) not export it, so it would not be sold at world prices and (b) that owners would act as if they had only one option, which is to sell the gas as quickly as possible at any price.

    At least since Hotelling’s 1931 article “The Economics of Exhaustible Resources”, economics has known that owners of assets like gas fields have a choice: sell now or wait. It is really hard to see why the owner of a valuable asset would take such a short-sighted decision as to sell now at any price.

    The moratorium was also addressing a problem that New Zealand didn’t have.

    Our emissions profile is unique for an OECD country. Our largest and fastest growing sources of emissions are agriculture – split evenly between nitrous oxide from fertiliser and enteric emissions from ruminants (and here is a free bit of climate change trivia: the gas comes out in the form of burps, not farts) – and deforestation. We already generate over 65% of our electricity from renewable sources. Trying to get this up to 90% always risked high-cost approaches.

  • insider

    1) the BSO had actually driven out the major credible player looking at developing local fuels. They will be more in favour of the Nat plan as it proposes a tax rebate for biodiesel.

    2) It’s not necessarily true biodiesel would be locally sourced. That was a huge assumption in the BSO for which there was no great evidence. Barriers were quality, appropriate production facilities and access to raw materials in a competitive market and their suitability for fuel conversion. None were guaranteed. There was also a risk of becoming captive to local suppliers if you can get a scale advantage by importing? Why should there be an assumed wealth transfer to local producers anyway?

    3) The Nats have left the ‘sustainable’ clause in the Act. I suggest it was always going to be an issue and potentially full of holes. How is an Med official realistically going to decide whether a fuel is coming from former rainforest or acceptable cropland? It was going to be a lawyers’ plaything. ANd that’s putting aside the potential trade rules issues.

    4)Biofuels cost a lot more. They were also a very expensive way of mitigating carbon – about $80m a year to save $17m in emissions.

    5)Weirdly one of the main drivers of a higher BSO was the promotion of NZ corn ethanol grown in the Waikato. Wonder how that would have gone under the sustainability principles?

    oN THE THERMAL

  • DanT

    Glad to hear that that part of the legislation relating to sustainability was retained – my impression was otherwise. Glad to be corrected.

  • insider

    Dan

    I believe there was a media release specifically saying that and the amendment bill provisions seemed to be aimed at different sections.

    “I want to make clear that the Amendment Bill I have introduced today does not abolish present sustainability standards for biofuels being promulgated by the Government.” It was in Brownlee’s speech on the bill

    As for the thermal ban, wasn’t that just a massive vote of no confidence in the ETS? It too was full of holes which no doubt would have seen gas peaking plant mysteriously morphing into baseload once built.