NZ ETS review and the Zero Carbon Act: theory vs reality

I’ve just been reading a response to the government ETS review that essentially ignores significant parts of the Zero Carbon Act framework, which was agreed on a bipartisan political basis. As a result the submission proposes a theoretical ETS solution that is rather disconnected from today’s reality.

The legal structure that we currently have is that the Zero Carbon Act sets targets and target pathways, and puts constraints on how these targets are to be achieved. The ETS sits underneath that, as a tool to support achievement of the targets, consistent with the constraints imposed by the Act. ?

I am absolutely of the view that the Zero Carbon Act can be improved (including to better align the budgets and ETS caps), but I don’t think it’s at all reasonable to propose that the Act’s fundamental structure of stepping-stone budgets could or should be discarded in order to make the ETS easier to operate. ??

A reminder of relevant aspects of the current ZCA architecture:

1. It puts in place 2050 targets, which will be reviewed every five years. The current targets in legislation were not recommended by the Climate Change Commission: these were initial settings that were put in place by parliament. The Commission's first review of the targets will be made in 2025.

-> The concept of a single ETS budget to 2050 based on these current targets as a once-and-forever solution is simply wrong.

2. It puts in place a series of legally-binding five-year economy-wide emissions budgets. The first three budgets are set, out to 2035. It is therefore not only the 2050 target that matters: each of the stepping-stone five-year emissions budgets must also be met. The logic, based on UK law, was that real-world experience shows long-term targets don't result in optimal short-term action, because the day of reckoning is so far distant. Binding interim milestones to guide short-term actions matter. This is also the same logic of the Paris Agreement's structure of successive five-year nationally-determined contributions (NDCs).

-> The mismatch between these five-year binding budgets and an ETS that allows time-flexibility causes complications. ETS units banked from previous time periods (i.e. the "stockpile") count in the ETS, but do not count in assessing achievement of the budgets (where actual emissions levels are the metric). Also, ETS proposals that would allow excess emissions now to be made up much later (e.g. by planting trees now that won't result in emissions reductions for a decade) don't help meet the budgets (and so don't meet the requirements of the Act). The main current solution to this is to supplement the ETS with complementary policies to ensure each budget is met (& complementary policies are of course also used for other valid reasons).

-> The same time mismatch is there for our Paris Agreement NDC, which is assessed based on actual emissions in the NDC period, so dropping the budgets in domestic legislation wouldn't make the problem go away.

3. It requires the budgets to be met through domestic emissions reductions and removals (unless there has been a significant change in circumstance vs what was expected when the budgets were set).

-> ETS proposals that allow unlimited access to offshore mitigation as a safety-valve for excess domestic emissions in the ETS are not consistent with the current Act, unless the "significant change" test is met.

4. It requires the Commission to advise on, and the government to take a view on "the proportions of an emissions budget that will be met by domestic emissions reductions and domestic removals, and the amount by which emissions of each greenhouse gas should be reduced to meet the relevant emissions budget and the 2050 target"... that is, there is not just a "net" target, the framework demands consideration of the roles of emission reductions, removals, and the contribution of various gases.

-> It is incorrect to claim that the Commission and government should only focus on “net” emissions and nothing else.

5. When ETS settings are updated each year, these must accord with the emissions budgets that have been set (i.e. the three budgets out to 2035), New Zealand’s Paris Agreement 2021-2030 NDC, and the 2050 target.

-> ETS design and settings to meet all of these targets are more complex than if you were to only consider the 2050 target. In particular, the short-term budgets must be met, and ETS settings must also accord with the more ambitious NDC target.