A good project manager knows that unnecessary bells and whistles endanger a project's aims. Gold-plating a specification wastes resources and threatens a venture’s viability.

The same is also true of public policy. Like households, governments fight a perennial battle between unlimited wants and needs and limited resources. Mission creep only makes that struggle harder.

Nothing illustrates the problem of gilding the lily better than the Green Party’s Clean Energy Plan. Announced on Sunday, the plan aims to prohibit coal use by 2030, convert state housing to solar power, and subsidise a nation-wide rooftop solar power project.

But like Associate Transport Minister Julie Anne Genter’s strategy to get more electric vehicles (EVs) on the road, the policy suffers from the kitchen sink syndrome: an expensive yet redundant policy add-on that will achieve nothing.

Domestic transport already carbon neutral

To grasp why the Greens’ plan won’t work requires an understanding of the Coalition Government’s flagship climate change policy – the Emissions Trading Scheme (ETS).

Simply put, the ETS compels specified categories of emitters to offset their greenhouse gas emissions by purchasing certified carbon credits.

In the case of petrol and diesel for domestic transport, wholesale fuel suppliers must buy the carbon offsets. And they must purchase a tonne’s worth of carbon credits for every tonne of greenhouse gases created by customers using the fuel they import or refine.

Because the offset occurs upstream at the wholesale level, individual users of fossil fuels – private motorists, freight companies, public transport operators, airlines and so on – aren’t directly affected by the ETS. Instead, the cost of offsetting the emissions from a private car is built into the cost of the fuel paid at the pump.

The same is true for those using public transport: the cost of offsetting a passenger’s share of the emissions created by a bus ride to work is factored into the fare.

In New Zealand at least, carbon credits are not an abstract concept. The ETS requires those responsible for emissions to offset them with certified carbon credits called “New Zealand Units” (NZUs). Each unit represents a tonne of carbon sequestered somewhere else in the economy – for instance, by planting trees.

The ETS functions like a market. By imposing the costs of emissions on different sectors, the cost of carbon credits incentivises sectors to reduce their emissions if the cost of doing so is less than the cost of buying carbon credits. Where it is not, they can pay someone else to offset their emissions by purchasing an equivalent amount of NZUs.

Under the ETS, all relevant sectors of the economy must report their annual greenhouse gas emissions to the government. And all sectors apart from agriculture also have obligations to prove they are offsetting emissions with NZUs.

The government provides free NZUs to some emitters when international competitors do not face a similar price on their emissions. Even so, just over 50% of New Zealand’s greenhouse gas emissions are covered.

As the government requires more sectors to comply with the ETS, market dynamics mean New Zealand’s net carbon emissions will fall. As both the country’s international treaty obligations under the Kyoto Protocol and 2050 greenhouse gas emissions targets focus on net emissions – that is, gross emissions less carbon credit offsets – the ETS on its own will enable New Zealand to meet its greenhouse gas goals.

But even before those goals are met, the sectors already subject to the ETS – like domestic transport – are already carbon neutral. For every tonne of emissions from domestic transport, fossil fuel suppliers are required to buy a tonne of carbon credits.  There is nothing more the government needs to do to ensure these sectors are carbon neutral.

Combining at ETS with subsidies is gold-plating

Instead of the country’s flagship ETS policy, successive New Zealand governments could have chosen to tackle greenhouse gas emissions in a different way.  Indeed, there are exactly four options for reducing pollutants like greenhouse gases. They can be directly regulated. They can be taxed. Subsidies can be provided to pollutant-free alternatives. Or the cost of the pollutants can be internalised through a trading system.

Each option has its advocates and opponents, but the latter two (cap-and-trade schemes, like New Zealand’s ETS, and carbon taxes) have the most support globally. 

Regardless of which option is best, one thing is beyond debate. It is possible to combine environmental regulations, taxes and subsidies. They may not always be efficient but at least they will reduce the amount of pollution. But an ETS cannot be effectively combined with anything else. Since the “hard cap” in a trading scheme like the ETS already determines the final pollution outcome, adding subsidies is a futile waste of time and money.

And yet, this is exactly what the government was proposing with its policy to subsidise EVs. But, while a proposal to reduce the number of cars using petrol and diesel by switching to alternative fuels may sound good for the environment, an ETS means these measures have no direct effect on the country’s total carbon emissions.

The only effect such measures have are to drive down the price of carbon credits. Consequently, the ironic outcome of subsidy policies is to make it cheaper for everyone else to use fossil fuels, increasing demand for them. Every gram of carbon avoided by the subsidy will simply be emitted by someone else.

The New Zealand Initiative documented the mistake of adding subsidies to a carbon trading scheme in its 2019 report, Switched On! The same conclusions were earlier reached by the academic advisory council to the German Economics Ministry in 2004 and by the UK’s electricity regulator, Ofgem, in 2017.

Even the Intergovernmental Panel on Climate Change (IPCC), the world’s leading climate change organisation, supported this conclusion in its 2014 report: “[I]f a cap-and-trade system has a sufficiently stringent cap then other policies such as renewable subsidies have no further impact on total greenhouse emissions.”

While electric vehicle subsidies seem virtuous, an ETS leaves no place for ‘other’ carbon policies. Not for EV subsidies. Not for offshore oil and gas bans. Not for restrictions on the use of coal. Not for each item on the long list of other subsidies and regulations in the Greens’ misguided Clean Energy Plan. Each of them is a fool’s errand.

With resources stretched thin dealing with the Covid-19 recovery, New Zealand can ill-afford costly and pointless climate policy gold-plating.