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?