A note on delaying the ETS

Over at Kiwiblog and at the Herald, the idea of delaying the implementation of the ETS is raised.

No matter what Aussie is doing, we shouldn’t do this.  Why?  Delaying the ETS doesn’t delay our Kyoto liability – it just means that we will have higher taxes to pay for the pollution caused in industries that produce pollution.  The point of the ETS is to:

  1. Raise the funds to pay our Kyoto liability,
  2. Set the relative price of carbon production such that it incorporates the full social costs incurred (in this case, this is because we have a liability overseas – so the truth of “global warming” is irrelevant).

So although it might upset some businesses if we don’t delay implementation (in the same way it would upset anyone if you taxed them or took a subsidy off them), we have to look at the other side as well – delaying implementation implies higher income taxes.  Lets not ignore this.

  • swan

    Are we actually going to pay? Is anyone else paying? I was under the impression Canada was not planning on it. We are a sovereign nation after all.

  • @swan

    Policy should be based on the fact we are going to pay. If we aren’t going to pay we should just say so now – instead of fluttering around.

  • Couldn’t we just renege on Kyoto?

  • Ah, I ought to have refreshed. Agree: renege first if going to cancel.

  • @Eric Crampton

    That is what Swan just said in essence.

    I am assuming that we decided to join Kyoto and stay in it. Given that, lets not delay the ETS. If we are going to renege – just renege instead of creating uncertainty (which is what we are currently doing).

    Delay is the worst option in either case – either renege or get on with the ETS.

  • Assuming we couldn’t renege, what if the costs associated with setting up the scheme for 18 months were greater than the costs associated with socialising ETS charges?

  • @goonix

    Given that all the measurement has been done, and investment decision have been made on the basis of the introduction of a scheme I would say that the allocative efficiency costs of not running the scheme would be greater.

    Furthermore, if we add in the fact that it is very likely there will be a scheme after Kyoto – with US support (and thereby greater risks to trade if we don’t support it) – I would say that the relevant scheme would continue for more than 18 months.

  • I was basing the scheme only lasting 18 months on the fact that we ‘wanted out’. i.e. wanted to renege now but can’t due to the protocol.

  • @goonix

    Fair enough – that is why I tried to answer it along those longs in the first para. Second para was an attempt to describe why I don’t believe it will end at 18 months 😀

  • Miguel Sanchez

    Of course we’re not going to follow Australia’s example. It’s not an election year here.

  • Matt,

    I agree but two questions.

    As our Kyoto liability ends in 2012, in an ETS the best response for beyond 2012 if a post-Kyoto agreement is unlikely?

    Does the possibility we may have a Kyoto surplus affect the argument?

  • @Miguel Sanchez

    LOL

    @David Farrar

    Good questions for sure.

    Goonix effectively raised the first one when thinking about a time limit up until 2012/1 – so in my opinion (which could easily be debated against) doing it up until then makes sense.

    Doing it after Kyoto, if there is no argeement isn’t a good idea. Why? The purpose of the ETS is solely to set the relative price of carbon to the “social level” (and if set up effectively to ensure that any liability/profit incurred during the scheme is appropriately moved around). It is the external liability that makes this higher – if there is no liability there is no point. Even if we do believe in global warming, the effective solution has nothing to do with NZ directly, but through internation agreement – without that, NZ increasing the cost of emissions does nothing.

    “Does the possibility we may have a Kyoto surplus affect the argument?”

    It shouldn’t. Ultimately, the ETS is about setting the “relative price” at the right level. If we have a surplus, it is still in our interest to make everyone face the true cost of an individual carbon unit – as even in surplus territory 1 extra unit has the opportunity cost associated with 1 less unit of surplus to trade on international markets.

    The main difference SHOULD be the level of the transfer. This is where the design of both the Labour and National ETS have fallen down.

    I think Labour had it right on relative prices – but “transfered” a lot of revenue raised from the free allocation to the public when it should have gone to the businesses. National has tried to correct this injustice – but has done it by blunting the relative price signal instead of simply transfering the initial free allocation back.

    My ETS would set the relative price of carbon at the appropriate level, and then send the free allocation from the Kyoto protocal to the relative industries.

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  • http://www.nzherald.co.nz/politics/news/article.cfm?c_id=280&objectid=10641509

    Apparently the Government are looking at ditching the ETS beyond the first Kyoto commitment period if major trading partners aren’t in on it.

    Although the scheme has been ‘designed’, I can’t help but feel there are many ‘administrative’ features for which the costs are yet to be met.

    In conjunction, many sectors are only facing half of the costs of carbon anyway (i.e. the other half are being met by wider society), which implies that allocative efficiency costs would be relatively less.

    Matt – if you didn’t think the scheme would last beyond 2012, and given the design of the scheme as outlined, are you still be certain that the allocative efficiency costs would outweigh the establishment and operation costs of the ETS?

  • @goonix

    “Apparently the Government are looking at ditching the ETS beyond the first Kyoto commitment period if major trading partners aren’t in on it.”

    It is convenient that it is incredibly likely there will be a scheme with our major trading partners in it then …

    “In conjunction, many sectors are only facing half of the costs of carbon anyway (i.e. the other half are being met by wider society), which implies that allocative efficiency costs would be relatively less.”

    Yes the scheme is suboptimal. That annoys me 😀

    “Matt – if you didn’t think the scheme would last beyond 2012, and given the design of the scheme as outlined, are you still be certain that the allocative efficiency costs would outweigh the establishment and operation costs of the ETS?”

    I would be confident enough to NOT CHANGE current policy – which is that the ETS is coming into effect in July. Changing the scheme again will also punish those who have made investment choices based on the timing of the scheme after all.

    The burden of proof at this point is on those wanting to change, not those allowing the scheme to proceed as planned.

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