Controlling emissions
There are two basic ways a government can put downwards pressure on carbon emissions and let consumers find the best ways to adapt. One is to charge a fixed tax per kg of CO2 equivalent, the other is to fix a total cap on emissions and let consumers bid for the rights to use it. There’s a sense in which these are equivalent: if the price in a cap-and-trade system ends up being $X per kg, the emissions will be the same as if the government charged $X per kg and didn’t have a cap. A sufficiently flexible and adaptive version of either one could match the other. In reality they aren’t quite the same because governments want a simple and relatively predictable price or cap.
We’ve got a cap (more or less). One of the non-intuitive aspects of having a cap rather than a fixed price is that parallel efforts to reduce carbon emission don’t work the way you’d expect them to. If I replace my gas stove with an electric one, my kitchen will emit less carbon (modulo the impacts of making the new equipment). If everyone did it, everyone’s kitchen would emit less carbon (again, ignoring the impacts of making the new equipment). What would happen to NZ’s total carbon emissions? Nothing. We have a cap. Less of the cap would go on carbon coupons for burning natural gas; more of it would be available for cars or trucks or coal-fired power stations. The impact of our kitchen-renovation decisions would be cheaper emissions rights for other polluters, not lower emissions.
In principle, I could keep buying emissions rights for the natural gas I wasn’t using. That would turn my lower emissions into reductions for NZ as a whole. Or, the government could monitor the sales of induction cooktops and withdraw emissions rights to compensate (or, more realistically, track kitchen conversions through some sort of subsidy). But if nothing happens to the total ETS carbon budget, nothing will happen to total emissions. A big enough change in demand could change emissions — if cars were suddenly banned, the government might not be able to sell all its ETS coupons — but a modest change won’t.
When the government says that new subsidies for low-emissions cars will reduce carbon emissions by some large number, there’s a gap in the explanation. Having more low-emissions cars will lower carbon emissions by cars, but unless the government withdraws the corresponding emissions rights from the carbon budget, it won’t reduce carbon emissions in total. The reduction will go to lowering carbon costs for other polluters.
This, in itself, doesn’t mean the policy is bad; it just means the policy needs to be evaluated in some other way. Maybe subsidising electric cars will lower the cost of future emissions reductions. Maybe it will improve the political feasibility of reducing the total emissions budget. Maybe there’s some other big benefit that I haven’t seen. But it is a problem that the policy is being sold on emissions reductions and that there doesn’t seem to be media or political reaction asking exactly where these reductions are coming from given the ETS cap.
