Monday, September 06, 2004

Market culture

I've spent the last few days writing an assignment on New Zealand's climate change policies, and specifically on the "projects mechanism" of reducing emissions (and promoting renewable energy) by incentivising the market with carbon credits. This is only a temporary system, with the ultimate aim being to have emitters pay the full cost of their emissions through a carbon tax (thus allowing the market to effectively incetivise itself).

I was struck when looking at what other countries are doing on the same issue by how far New Zealand is from the international mainstream. Good old social-democratic Germany has set a renewable energy target and supports it with direct subsidies. Both the UK and Australia have followed suit on the target, but are enforcing it by regulation and a quasi-market mechanism; electricity suppliers must purchase a specified percentage of electricity from renewable sources (or tradable certificates saying that such electricity has been produced) or face legal and economic penalties. By contrast, we have adopted an extreme market route: New Zealand electricity companies are expected to provide renewable generation themselves, and it is only when this would not happen under "business as usual" that the government will step in to provide support (though in practice this means supporting projects that would properly happen anyway, to ensure that they happen sooner).

Partly this is for historical reasons; due to the unequal way in which generation assets were distributed during the reforms, a British/Australian style scheme would be seen as unfairly targeting the only significant privately-owned player in the market, Contact Energy (who got most of the gas plants on the basis that they were highly profitable). Partly it's due to the structure of the New Zealand electricity sector - the market framework makes market solutions the path of least resistance. But mostly, it's a matter of culture - Roger Douglas' lasting legacy has been to alter the thinking of policymakers, making them turn to markets and incentives first instead of regulation (alternatively, credit or blame could be assigned to Roger Kerr instead)

And on the other hand, markets are simply tools, to be assessed by their effectiveness in achieving the desired goals. Seen this way, New Zealand's efforts to reduce emissions can be seen as using the market as a tool to pursue green ends, with an obvious parallel to "third way" social policies (which use markets as tools to pursue social democratic ends).

And on the third hand, the problem of emissions reduction needs to be addressed from the demand side as well as the supply side, by promoting energy efficiency. And here it seems that politicians are taking a more traditional route, with the government openly speculating about promoting energy efficiency by tightening the building code to require double-glazing or solar water heaters. The problem is that it will only affect new houses - most of New Zealand's housing stock is old, uninsulated and draughty, and if we want to seriously improve our energy efficiency stats then something needs to be done about them. While demolishing Wainuiomata and rebuilding it from scratch has a certain appeal, realistically this means encouraging homeowners and landlords to install insulation. There are already some pilot projects to do this (some funded through the health budget on the basis that better housing will reduce health costs), but if we want to seriously reduce demand (and stop people from suffering from third-world diseases), then they need to be dramatically broadened. But then what would they look like? A market incentive, of course...