Via The Standard it seems that the Government have released some details on New Zealand's emissions trading scheme. There's some pretty weird details in it.My first thought though is that for people that should be all too aware of the negative effects of rapid structural changes in the economy (eg), many on the left are pretty quick to criticise policies designed to ease the transition. We pollute a lot, and it's not something you can painlessly change over night.
In terms of the actual plan however, it's a little bizarre. Firstly, it's not really a true cap and trade scheme, because it has a cap on marginal emissions rather than an overall cap (if I understand it correctly) - it's kind of a cross between C&T and a carbon tax. The actual effects of this are a little hard for me to intuit - if any of my micro-economics-loving readers (eg paging Matt Nolan) are able to explain how this is going to work I would be most grateful. It feels like it should be distortionary but I can't quite get my head around it.
Secondly, they have a 'transitional fixed price' - apparently to ease businesses into the scheme. For an allegedly market-oriented party, price fixing is an odd tack to take, and I don't know any good justification for it in this case. Were I very cynical, I would suggest that National expect the market price would be lower than their cap - enabling them to increase the price paid to the firms they choose to hand out credits to, thus rewarding the favoured firms.
I am cynical enough to entertain this as a serious possibility, and the justification they give that it will help businesses 'limit costs' and thus 'enhance stability' is not all that encouraging. Surely the whole point of a scheme like this is to increase business' costs to adequately reflect the costs of carbon emissions to society. That brings me to another point, which is the scheme, when compared to previous efforts, will
... halve the price impact on households for fuel and electricity to 3.5c/l and 1c/kWh.Forgive me if I sound a little heartless, but the whole point of emissions trading schemes is to increase the costs of things like electricity! It's because of the externalities associated with these things that the market over-produces them in the first place. People that want to reduce carbon while keeping the cost of actually emitting it nice and cheap are simply deluding themselves, and a Government which thinks it can do so is destined to fail.
So I am pretty unimpressed with this scheme. Transitional effects are important - but if you want to reduce them you don't need to do so by giving away credits for free, or engaging in amateurish price-fixing. Simply make the cap start low and gradually increase it. Unfortunately it looks like Greg Mankiw's 'fundamental theorem of carbon taxation' is sinisterly accurate, that is,
cap and trade = carbon tax + corporate welfare.