After court loss, ministers lift the lid on the cost to pollute
The Government has backtracked on its decision to keep a tight lid on the carbon price, shortly after losing a court case to climate-concerned lawyers. The Zero Carbon Act is meant to remove carbon pricing from the swings of the election cycle, by requiring the government of the day to consider advice from the independent Climate Change Commission. But, concerned about the cost of living, the Government in December ignored the commissions recommendation to give the carbon price a longer rein. The move landed it in court , after Lawyers for Climate Action challenged the legality of the decision. Earlier this month, the Government admitted its process breached the Act. The carbon price tanked in the first half of the year, which experts attribute to the Governments failure to follow the commissions advice. But the market price rallied for a second time in July after the Government announced its backtrack. Following the change of heart, the penalty on greenhouse gas emissions from petrol, gas and coal would need to rise above $173 per tonne before price protections kick in (todays threshold is $80.64) a move in line with the Climate Change Commissions advice last and this year. Each year, the Government must make decisions about its Emissions Trading Scheme (or ETS), which requires large polluters to surrender one carbon unit for every tonne of carbon emissions. Before they decide how many units to auction, and what level of upper and lower price protections to set, ministers receive advice from the commission. Climate Minister James Shaw said the settings announced this week put the Government in lock step with the commission. Lawyers for Climate Action president Bronwyn Carruthers KC was pleased with the latest announcement, which would mean the ETS now aligns with national climate targets. We would particularly like to applaud the Governments willingness to front up to the mistakes that were made last December, and to correct them in a timely way, Carruthers added. University of Otago researcher Sebastian Gehricke said the settings are now much in line with the commissions advice. I am hopeful this is an indication that we can see more alignment of Government decisions with Climate Change Commissions advice, even when that decision is hard. We cannot price emissions without the cost of emitting activities increasing. The carbon market where polluters and traders buy and sell units responded positively to the announcement. On Wednesday morning, the carbon price jumped to $65 per unit, according to Jarden. Units had been selling for as little as $34 each earlier this month. Motu researcher Troy Baisden agreed it was good news. A low price to pollute undermines the incentive for polluters to ditch fossil fuels and switch to low-emitting technology, he said. There have been serious ramifications from the drop in carbon price... Emissions reductions come from the expectations of the price at the pump five, 10 or 20 years down the track. A functioning, effective ETS will reduce the national carbon footprint, he added plus cut the amount taxpayers must pay other countries to cut emissions on our behalf, allowing the Government to meet its 2030 climate pledge. Baisden said prices are unlikely to pop back immediately to $87 per unit the price people were paying late last year because there were a few outstanding issues the Government must make a call on. A Parliament select committee is yet to report on what will be done about the units provided for free to big emitters in globally competitive industries . The Government is also considering whether to put limits on forestry units to bolster the penalty paid by polluters. While this consultation may be destabilising the carbon price right now, Baisden said, in the long term, its good. How we got here The low level of the price lid was problematic in 2021 and 2022. When polluters bid above a certain price $50 in 2021 and $70 last year at regular pollution auctions, a pool of reserve units become available for sale. Although this backstop was intended to be triggered only rarely, the reserve pools sold out completely in the first two years, which will eventually allow 14m tonnes of additional emissions to be emitted than originally forecast. To fix the issue, the commission recommended last year that the pool of reserve units be split in two the first lot would be released if bids exceeded $171, and the second group when bids were above $214. The initial trigger price of $171 was more than double the original. That could have raised the cost of petrol, natural gas and coal-fired electricity. The commission also advised the Government to sell slightly fewer carbon units at auction. Although Climate Change Minister James Shaw backed the commissions advice in full, the Labour Cabinet led by then-Prime Minister Jacinda Ardern baulked due to the effect the recommendations could have on the price of petrol and other fossil fuels. But the Climate Minister and officials failed to objectively analyse whether Labours alternative settings aligned with domestic climate targets, a process required by the Zero Carbon Act. After the Government admitted its error in court, the High Court judge ordered it to reconsider this advice and make a new decision on the ETS settings. The settings announced this week echo the spirit of the commissions advice though the actual auction numbers and trigger prices differ. The Government agreed to split the reserve pool of units in two. It will put 32.6m units in the reserve between 2024 and 2028 (the commission recommended 32.5m units). But its chosen trigger prices are a couple of dollars higher in the next two years. While the commission recommended $171 and $214 this year, the Government set trigger prices of $173 and $216. The trigger prices will increase each year reaching $226 and $283 in 2028. The Government also reviewed the number of units available at auctions between 2023 and 2028. Since it thought the Government was unlikely to review its settings between 2023 and 2025, the commission recommended an ambitious drop from 2026, with just 10.6m units up for sale in 2028. However, ministers chose to more steadily decrease the number for sale from 21.9 million next year to 12.3m in 2028. Our weekly email newsletter, by the Forever Project's Olivia Wannan, rounds up the latest climate events. Sign up here .