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International speaker: Integrating emissions pricing with other climate policies | Frank Jotzo
23 June 2022
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CHARLI: Kia ora koutou and thank you for joining us today for our second international speaker series for the year. We’re very pleased to welcome Professor Frank Jotzo for a session on integrating emissions pricing with other climate policies. Ko Charli Keeling ahau. I’m a Senior Advisor in the Communications and Engagement team here at the Commission, and I’ll shortly take us through how the session’s going to be run today. But first I’m going to hand over to my colleague Bevan to lead us into this session with a karakia. BEVAN: Kia ora tātou. Ngā mihi nui ki a tātou i runga i te pouaka whakaata reo nei, tēnā koutou katoa. Ngā mihi nuI ki a koe, Frank, te kaikōrero te wā nei. Anei hi karakia. [KARAKIA] E te hui nei Whāia te mātauranga kia mārama Kia whai take ngā mahi katoa Tū māia, tū kaha Aroha atu, aroha mai Tātou i a tātou katoa Tihei rā mauri ora So for those of us who speak English, that’s “Greetings to everyone online, and a special acknowledgement to you, Frank, our speaker for today. For this gathering, seek knowledge for understanding, have purpose in all that you do, stand tall, be strong, let us show respect for each other – behold, the breath of life. Kia ora. CHARLI: Kia ora Bevan, thank you. So just before we get going, I’d ask you all to please share your name and the organisation or community you represent in the chat while I’m taking us through how this session’s going to run, and let us know where you’re joining us from in the world. It’s always really good to see who we’ve got participating in these sessions. Today we’re going to be led by our commissioners Catherine Leining and Professor James Renwick. Catherine is one of the leading experts on climate change mitigation policy in Aoteaora, with a specialisation in emissions trading. As a Policy Fellow at Motu Economic and Public Policy Research, she co-led Motu’s research programme on “Shaping New Zealand’s Low-Emission Future.” She has held policy positions at the Ministry for the Environment and the Ministry of Foreign Affairs and Trade. Before moving to Aotearoa, she held policy positions in the US. She provides consulting through Silver Lining Global Solutions and was trained as a Climate Leader under The Climate Reality Project launched by Al Gore. James is a leading climate scientist with a strong national and international reputation, and four decades of experience in weather and climate research. His appointment as a Lead Author and Coordinating Lead Author on three Assessment Reports of the Intergovernmental Panel on Climate Change (IPCC) demonstrates his expertise. He has also been involved in the governance of the World Climate Research Programme for the past eight years. He was awarded the 2018 Prime Minister’s Prize for Science Communication. So Frank’s shortly going to take us through some of his work, followed by discussion between Frank, Catherine and James. This will then be your opportunity to ask questions – you should see a Q&A box at the bottom of the screen. Please feel free to type your questions throughout the session, and please remember to use the Q&A box rather than the chat, as they can tend to get lost in the chat if you pop them in there. We might not have a chance to cover all of the questions, but we’ll get through as many as we can. And I just wanted to let you know as well that we are recording this session, so anyone you know who was unable to make it can watch it on our website afterwards. So I’m now just going to hand over to Catherine. CATHERINE: Tēnā koutou katoa, ko Catherine Leining tōku ingoa. It is such a pleasure to be here today to introduce Frank Jotzo. I’ve been working with Frank on emissions trading and other climate policy development for a number of years. He’s always been a reliable source of information on what’s happening in Australia, and the timing of this session is fantastic given Frank’s work on the Inter-Governmental Panel on Climate Change, and the new election in Australia and what that might signal in terms of a phase shift in Australian climate action. So just to give you a fuller sense of Frank’s background: he’s a professor at the Australian National University’s Crawford School of Public Policy, and the Head of Energy at the ANU Institute for Climate Energy and Solutions. He’s the lead author of the Inter-Governmental Panel on Climate Change sixth assessment report, with a focus on policy instruments. Frank’s research spans economics and policy of climate change and energy, including decarbonisation, domestic policy choice and international dimensions of climate policy. He is joint editor-in-chief of the academic journal Climate Policy, has advised governments in Australia and international organisations and contributed to policy assessments in the Asia Pacific. And he tweets at @frankjotzo. So, Frank, welcome, and I’ll turn over to you for presentation. FRANK: Well, thank you very much, it’s a great pleasure to be with you, always good to have that exchange over the Tasman. I’m joining you today from Jakarta, but I would like to take just a second to acknowledge the first nations of the place where I live and work, which is in Canberra, Australia – which is Ngunnawal land, and we of course acknowledge the elders past and present of the Ngunnawal people and all of all first nations in Australia. And I must say, living in Australia, I find the traditions with which you acknowledge lands in New Zealand and open events are really very positive ones. So today I’m looking forward to the discussion and the conversation most of all. I’ve watched the affiliations go by on the chat and I’m very aware that there’s a very knowledgeable group of people here on this call. As much as anything, I look forward to learning more about the latest developments and thinking in New Zealand. So what I’ve prepared for the 25 minutes or so that I’ve been asked to speak is a brief overview of what the latest IPCC report, the sixth assessment report on mitigation, has to say on policy instruments and policy packages and the role of carbon pricing in that. I’ll then add some thoughts and insights about the roles and limitations of carbon pricing, and will then give you a run-down of climate policy or lack thereof in Australia and how we’re expecting that to change under the new federal government given the election platform that they took to the election. And so it’s early days of course, but we know at least what has been planned. And again, I’ll look at that through the lens of policy instruments that could be applied in New Zealand – in Australia, I’m sorry – and what that might imply for elsewhere. OK, so with that, let me launch into my talk, and slides should be able to be seen. If that’s not the case please let me know. CATHERINE: They’re all good. FRANK: Very good, excellent. So I’ll delve in to the IPCC assessment report, partly because that is of course what is internationally acknowledged as the state of understanding at this point. And I will spend a little bit of time a little later on the words and the summary for policy makers, because they are approved by all governments and so every word – or every sentence at least – has been hard-fought over in terms of what’s written there, and so these words carry authority. Now. A headline result from the IPCC sixth assessment report on mitigation is that the opportunities to reduce emissions at acceptable costs or even at low costs are really, really large. In fact the bottom-up assessment identifies options to cut global emissions in half by 2030 costs below US$100 per tonne of CO2 – that’s the marginal abatement cost as estimated in bottom-up studies. And very ample potential, nearly about half that or about a quarter of global emissions, at a cost below US$20 per tonne. Of course, the assumption here is that all available and technically available options are in fact being used, which will not be the case in practice. An important role for policy is of course to get as close to that ideal as we possibly can, and have really broad coverage to harness all of these low-cost emission reduction opportunities. Now, the assessment is much more favourable, much more optimistic, than it was in the previous assessment report published in 2014. And the reason really fundamentally is that zero carbon technologies – in particular solar power and wind power, but other zero carbon technologies as well – have fallen dramatically in their cost and are now being cost-competitive in many applications. So that’s a fundamental shift that actually enables far deeper emission reductions this decade and of course the following decades than was thought possible just half a decade ago. Now, in terms of the verdict on policy instruments, the IPCC report is very careful to point out that there is a complementarity of many different policy instruments, and that what is the best and the most feasible set of policy instruments is very strongly dependant on local and national circumstances. What’s also identified is that it is desirable to arrange policy instruments in so-called policy packages – so not just a more or less random collection of policies that overlay or have gaps as they naturally emerge in many jurisdictions, but a package that is well designed and put together. Central to that effective and efficient approach to emission reductions are economic instruments, in particular emissions trading and carbon pricing instruments, for the efficient coverage of lower-cost mitigation options. And these should be complemented, or are in practice complemented, by regulatory instruments for specific sectors and objectives, oftentimes aimed at higher-cost options where pricing doesn’t reach under the existing price levels. And also the report clearly points out that flexible implementation of regulatory mechanisms can reduce. And then there’s a whole host of other policy instruments, from subsidies for emission reduction activity to R&D support, support for structural adjustment, information policies, industry compacts, fossil fuel subsidy removal – not to forget, an important point in many jurisdictions – and so forth. There’s also a bigger picture that this latest IPCC report is at pains to point out, and that is climate change mitigation in the context of sustainable development and many, many other policy objectives, in particular equity and distributional fairness and justice with regard to policy instruments. The observation is that policy instruments can of course be designed to achieve these other objectives, and in that sense good climate policy is also good economic and social policy. And finally, what I’d like to mention is a very clear recognition that frameworks for climate change mitigation are very important, consisting of legislation that enables policy and measures institutions, including of course independent institutions, to help with the assessment and development of climate policies such as yours, and the involvement of actors and in groups right across society – so taking it out just from government departments. Here's the text from the summary for policymakers that I’d like to go through with you. So first of all, by 2020 about a fifth of global greenhouse gas emissions were covered by carbon taxes or emissions trading schemes, although coverage and prices have been insufficient to achieve deep reductions. So about 20% covered, but the bulk of that 20% comes from schemes that are relatively low in effective prices at this point in time. Economic instruments have been effective in reducing emissions – and the report presents a range of evidence of that fact – and have been complemented by regulatory instruments as already mentioned. Where implemented, carbon pricing has been effective at incentivising low-cost emission reduction measures, but it has been less effective on its own in getting at the higher-cost options further up the cost curve. This is fairly obvious but it’s important for the IPCC to state that in such clarity, I would suggest. Equity and distributional impacts again – I’ve already just mentioned it – can be achieved through revenue redistribution from carbon taxes and emissions trading. And in a more general sense, practical experience has informed instrument design and achieved better performance in terms of predictability, economic efficiency, environmental effectiveness, distributional goals, as well as social and political acceptability of climate policy. And finally, there is no evidence as assessed by the IPCC of significant emissions leakage between countries, and the text says that this can be attributed to design features aimed at minimising competitiveness effects among other reasons. And I expect that this will of course be an important consideration for current moves to perhaps adjust the treatment of agriculture in New Zealand’s climate change policy framework. Now, where will emissions pricing not work, or it isn’t enough? This is a more traditional view of the problem from an economics perspective, so: where do you need other things if you consider emissions pricing as the central policy instrument? First of all, small sources, and in particular small sources where emissions are difficult to measure. And of course agriculture is usually cited as the archetypal example of this, where farm-level emissions estimation may be difficult, in particular where it needs to be done to a degree of reliability and confidence that warrants significant payments, financial payments, on the basis of it. Secondly, where you don’t go to individual farm-level estimation, you will usually use default emissions factors for specific activities, which then in turn of course neutralise incentives at the micro level to vary those practices in order to actively achieve emissions reductions, because those emissions reductions will not be evident where default emissions factors are applied to a measure of activity. Second point, of course in many areas of the economy, price signals on emissions are ineffective or not fully effective. Energy efficiency is a classic example. We’re dealing with a lack of awareness often among consumers, but also businesses, of the energy use that’s actually taking place. Myopia: people apply unreasonably high discount rates to energy efficiency investments, split incentives and so forth. But also sectors like transport, where the price effect from emissions pricing is typically quite small relative to the overall financial magnitude of the decisions that people make – so just think of the addition to the price of petrol in the overall decision about buying a car. So this is the kind of thing where regulatory instruments come to the fore and can in fact be more effective and ultimately possibly more efficient than the pure application of emissions pricing. Third, innovation. Of course there’s public benefits from knowledge and innovation, which creates the case for government support. And innovation usually takes place at higher marginal costs than where carbon prices are, and so it’s better done through for example R&D support and similar. And then fourth, and I think we’re really realising that increasingly - including in Australia – systems transition, so investment in infrastructure to enable a fundamental retooling of different parts of our economy, in particular the energy sector in a fossil-fuel using economy like Australia. That has very large effects, fundamental transitional effects as well as regional and social impacts that will usually need to be dealt with through other means than carbon pricing. So carbon pricing could have a very central role in the policy mix and the policy package – sort of an economistic view of the world – might look like this in terms of the other policy instruments around carbon pricing as adjunct. Or in practice carbon pricing might just have a marginal role, sit somewhere in the corner, play a role somewhere, but the heavy lifting is done by other policy instruments. And possibly it’s somewhere in between. Now, moving on to Australia. So what we have is a situation where national greenhouse gas emissions including land use change in forestry peaked in 2007, were really high in 2005 which was of course the base year for the national target, have since declined, and the decline since 2005 in aggregate is entirely due to reductions in land use change, land use and forestry emissions – so in fact reduced land clearing but also some thickening of vegetation. Within everything else, emissions have actually increased since 2005, or roughly the same by now. But we do see a continued or very significant trend now for sustained emissions reductions every year in the electricity sector, and I’ll come back to that. The national target used to be – well, officially still is 26 – 28% reduction. Very easily achievable, given that most of that reduction has already been achieved between 2005 and 2012 through reduction in land clearing. The new government have said that they will set the new national target at a 43% reduction at 2030 relative to 2005. It’s worth noting that some influential business associations like the Business Council of Australia have in fact called for a reduction target up to 50% at 2030, and so we’re certainly not expecting that the 43% target is the last word. It might be the last word for this period of government, but we’d expect that these targets can and quite possibly will be strengthened, also in the context of a likely much-strengthened target for 2035 emissions reductions. Now briefly: where are we at in terms of sector-by-sector emissions climate policy in Australia, and we’re referring here sector-by-sector to existing policy at the federal level. I’m setting aside state and territory action because that’s a really complex picture that we don’t for. And I’ll say a few words about what the new government have said that they would do if in office. So first of all, agriculture. Existing instruments at the federal level are really only the eligibility for some agricultural and forestry activities to reduce emissions to be eligible in the national crediting scheme, and I’ll come back to the crediting scheme in a minute. The new government’s policy platform is relatively subdued in a sense on agriculture. It says something about developing new technologies, improving offsetting and crediting opportunities, and bringing down electricity prices as an input to agriculture. Now this is of course somewhat ironic, because electricity prices in Australia have just shot through the roof because of the unavailability of coal-fired power stations on the grid and high fuel prices. And there’s bits and pieces, for example for R&D on seaweed as an emissions reduction fodder and so forth. And perhaps the biggest effect that’s planned is to increase the demand, including through commercial sector demand, for the Australian Carbon Credit Units. Australian Carbon Credit Units is a domestic crediting scheme. The Clean Energy Regulator, an arm of the government, devises methodologies and accredits individual projects that aim to reduce emissions, verifies activities and issues credits. So far over 1,000 projects have been accredited, of which over half are in vegetation protection or regeneration – so in other words, largely leaving land uncleared and claiming that it otherwise would have been cleared, or letting land regenerate whether passively or actively. And a very large majority of credits that have been issued and will be issued over time is for avoided land use change. Now, who buys these credits? So far, government is in a very large majority the buyer of these emission reduction credits. About 90% of these credits so far traded have been bought by a government, and that’s done in so-called reverse auctions, or bidding rounds really. The government has committed $4.5 billion – I’ve written that wrong on the slide, it’s $4.5 billion dollars, not million – of which so far $2.5 billion have been committed to be paid over time as presumed emission reductions arise. Typical prices are between AU$12 - $17 per tonne of CO2 equivalent. In the last auction late last year, there were 24 projects awarded, 7 million tonnes of CO2 equivalent for $100-odd million. So the volumes are not very large, put it this way, for an economy where annual emissions are over 500 million tonnes. Now, the new government’s policy platform is to create greater demand for emissions credits from industry and to review the integrity of the scheme. As far as the integrity of the scheme is concerned, there has – just recently by a colleague of mine at ANU, Professor Andrew Macintosh, who used to be the chair of the assurance panel, the panel that is in charge of assuring the quality of these credits – has been some severe criticism of the scheme, mostly because of a presumed lack of additionality of projects. We’ve got Andrew’s quotes here: “Payments are being made to people to not chop down forests that were never going to be chopped down, to grow forests that are already there, to grow forests in places that will never sustain permanent forests.” And so the project that pays for avoided deforestation, avoided land clearing, avoided vegetation clearing, is the project type that creates most credits and the one that’s most subject of course to doubt as to the veracity of the claims, because the counterfactual claims of course that the land would have been cleared if it had not been for the credit payment. This is well-known, of course. This is something that we encounter in the clean development mechanism, or have encountered under the Kyoto Protocol clean development mechanism as well. In addition of course it’s by nature patchy, because only specific emission reductions projects that are defined in specific methodologies are eligible, and over time we have seen a declining interest or declining supply of potential projects in the government’s call for tender or auctions, and we’ve seen rising prices paid by government as well, which gives you an indication that we’re running out of options there. Now what about industry? So at the federal level, we have the bones of a mechanism that can and probably will grow into a baseline and credit scheme. So the 200-odd largest industrial installations in Australia above a threshold of 100 tonnes of CO2 equivalent per year fall under this mechanism which defines process- or product-specific emissions intensity benchmarks. And if an installation is above that benchmark for its own production, it needs to cover the excess with these carbon credit units. However the mechanism hasn’t really been effective in practice because the benchmarks are set very high. The benchmarks are set higher than the actual emissions of most industrial installations. And where an individual installation exceeds the benchmark, often the Minister has granted exemptions to the credit purchasing obligation. So the new government’s policy platform foresees the setting of new, lower benchmarks, which would make the scheme more effective – or effective, for a start - and also foresees that credits will also be issued for companies for installations that stay below their baseline. This is really important to give an incentive of course to companies to do things even better and not just stop doing things because they're sitting below a defined benchmark. So if this goes as anticipated, it will create a carbon price among these 200-odd large industrial installations in a baseline and credit scheme where installations trade with each other, and it's revenue neutral from the point of view of government. In transport, existing instruments to reduce emissions – there’s really none at federal level, there's no emissions standards, there's nothing really. The federal fuel excise fuel tax has been halved now to help with fuel availability and so forth. And there’s a patchy pattern of electric car incentives at the state and territory sub-national level. The new government's policy platform says that import tariffs – currently 5% – will be removed, and fringe benefit tax will be removed for electric cars. That will be a big difference for the affordability of company cars provided to private individuals. Of course there’s perhaps some questionable distributional effects of that, but it will very likely increase the availability, the demand for electric cars, and also some commitment to charging infrastructure and so forth. However, what's not foreseen, still not foreseen, is a fleet-wide emissions standard or in fact any emissions standards for conventional cars. And the absence of a fleet-wide emission standards is surmised to be behind a relative lack of supply from car companies of electric cars into Australia, because they prioritise other markets where they are in fact forced to put electric cars into their supply mix in order to still be able to sell conventional cars. In Australia you can get away with just selling conventional cars including at very low fuel efficiency. Electricity is really important in Australia for the energy transition. Not much in terms of existing policy instruments at the federal level. The new government wants to pump $20 billion into power grid investments. It's not immediately obvious in which way this will be used or is necessary, because this is normally private investment on the under-regulated framework. Some money for community solar and batteries. And increasing discussion about the establishment of a capacity market in the electricity sector to run in parallel with the energy-only market. And very big discussions at the moment as to which type of generators should be eligible for that, in particular should the gas generators – or indeed coal generators – be eligible for capacity payments. Very importantly, still no carbon price, and no carbon price planned in electricity. Various federal funding mechanisms – I won't dwell on it. The new government is anticipating to create a $15 billion national reconstruction fund, which will be like a regional development fund for low emissions activities, if I can characterise it in that way. Also important, the long existing instruments of the Clean Energy Finance Corporation, which provides co-financing for first-of-a-kind commercial activities. And the Australian Renewable Energy Agency, which provides grant funding for for renewable energy activities. I'm slightly running out of time so I won't spend too much time on this, other than to say the transition away from coal and towards wind and solar is well and truly underway in Australia, and it will in fact force the accelerated retirement of coal-fired power stations. In that rightmost panel here you can see the the daily pattern of a typical day. This was last week in New South Wales and you can see the black coal (rendered in black, of course) ramping up and down through the day in order to accommodate renewable energy supply – and that is not what these plants are made for. Many operators are in fact quite evidently running their plants into the ground. The systems operator expects accelerated exit of coal-fired power stations. We will see a huge wave of exit through the 2020s and the remainder will very largely go in the 2030s on current expectations, all replaced by wind and solar, plus storage and pumped hydro and batteries. And that of course provides difficulties also for regional communities for the electricity grid, because we don't firmly know what is the exit trajectory for these plants. And each individual power plant exiting creates some supply issues for the grid, because the replacement investment in wind and solar may not be there right at the time when it's needed, and obviously creates difficulties in the adjustment for local communities and providing more predictability – and in fact mechanisms, including financial mechanisms, to support the the local and regional transition is a big topic in Australia. Which brings us to funding. And really, at the time of sky-high energy prices, what we're seeing is an enormously large wealth transfer from consumers, private consumers and business consumers, to the shareholders of energy companies. And this is of course not something that is optimal, in particular when money will be needed to facilitate the energy transition. And so I argue that there is a very strong case for excess profit taxation in the energy sector. Of course it's a very difficult point in time to introduce such legislation, at a time when it would immediately bite – and so it may well be a case to finally bite the bullet and have proper excess profit taxation for the energy and resources sector, and implement that after this current energy price spike so that it's there for next time round. I’ll end on this. You can't not mention this in a talk that touches on Australia. Australia has huge potential to become a very large producer and exporter of renewables-based commodities, including both fuels – hydrogen, ammonia, synthetic fuels – as well as industrial commodities, energy intensive commodities, produced on the basis of renewable energy, wind and solar, which which can be harnessed at practically unlimited scale in Australia. So, just to finish on institutions and processes: we're emerging in Australia from ten years of... eight years – ten years of climate policy being very, very subdued at the federal level. Very highly political. And there is every chance now that climate policy – sensible climate policy – will become a proposition that is less contested politically and thereby opening up the space for gradually improved and broadened climate change policy. We will also see the Climate Change Authority certainly reinvigorated and better resourced than it has been. And Labor have also said that the Climate Change Authority will support government in providing an annual climate policy statement to Parliament. What is still needed and isn't really on the programme just yet is a true national low-emissions strategy built on the basis of a true national conversation about this, and I argue that the electoral support for sensible climate policy that we've seen in the last federal election in Australia could be built out to become a broadly-shared agreement on what constitutes good policy on climate change. So plenty of opportunity in Australia, and plenty of opportunity also to learn from the experiences and latest plans in New Zealand. Thank you. CATHERINE: Thank you so much, Frank. That was a fantastic overview of a broad range of issues, all of which are very interesting to learn from and relevant in different dimensions to New Zealand. So I really appreciate those insights. I'll ask a question, I'll go to James for a question, and then we'll open up to questions from our viewers. So my question... you know, a lot of countries talk about a war on climate change and in Australia it's been the climate wars in terms of politics, and from my perspective here it seems like that policy uncertainty has had a huge cost for business, and I was just curious to get your observations as someone who's been in this for a while about how businesses have responded to the lack of policy certainty and pricing certainty around the response to climate change. Do they use shadow pricing, are they concerned about stranded assets, I mean how has the business community responded to this? FRANK: The largest part of Australia's business community has just been exasperated by the lack of sensible climate policy, right? And to be fair, large sections of the business community are not clamouring for very strong climate policy, but they're clamouring for stable climate policy because there's a large amount of investments at stake. Climate policy, especially the carbon pricing, was of course abolished in 2014, and the result of that was not a kind of certainty that there would never ever be climate policy, but continued expectation that at some point there will be climate policy of some form – which is not a good foundation to make investments on. And so in particular since the Paris Agreement in 2015 there has been a very marked change in Australian business attitudes, including at the Business Council of Australia, which was very instrumental in the removal of the carbon price at the time, but which more recently has really been a positive force for sensible climate policy. And it's really only the pure play fossil fuel companies that remain vigorously opposed to climate change policy. And so are the climate wars over? The new prime minister declared that the objective is to put an end to the climate wars, but really I would say it's up to the Opposition as to whether the wars are over or not –and that it remains to be seen whether the Coalition in Opposition will continue to see political opportunity in attacking climate change policy. I think there's a risk of this in particular because energy prices are so high and affordability, cost of living, is such a big topic, and so it is unfortunately very easy to blame cost of living pressures on climate policy. And so I have somewhat of a fear that we might see the re-emergence of that kind of line of argument, which then of course politically constrains what government will feel comfortable doing by way of policy implementation. CATHERINE: Thanks, Frank. I'll pass to James. JAMES: Yeah, thanks Catherine, and thank you very much, Frank. It was a great presentation. I've got a lot of notes and a number of questions. It's very cool and I was very encouraged to hear that already we're seeing a bit of exit from coal-fired power stations in Australia, and the expectation there'll be a lot more of that this decade, that's great. And like you said, we've known for a long time the massive potential for solar and for wind in Australia. But one thing I wondered about from your presentation. Energy efficiency is an important plank of the whole mix of how we move away from large fossil fuel based emissions, and you mentioned that it was one area where price signals could be ineffective. But I just wondered if you had any reflections on how how to best encourage or promote energy efficiency as part of the story, going from here. FRANK: Really important question, James, I agree. So a host of different policy approaches that are that are needed and that are proven to be effective – standards for start. There should be a meaningful minimum energy efficiency standards in transport, in the building sector, as well as in appliances and industrial installations. In particular for new investments we're seeing really tragically in Australia still a large share of the housing stock being built to energy efficiency standards that are unnecessarily low, that that are in fact below what is optimal purely from a private perspective without any charges on emissions. So that compromises people's financial position as well as comfort, for example, right? Why is that not happening? Well, I guess, because of an overly strong emphasis on the initial affordability of the house that's being built, right, and the building industry might not like it as well. But absolutely that's what's needed. Also awareness, of course. I think we need to talk about energy efficiency more, and this period of high energy prices is the perfect opportunity for it: what do you do to get energy bills down? Well, leave the energy price up but reduce your consumption. And subsidy schemes I think are also tremendously important, in particular for low income earners, social housing and so forth. I mean, the state of some of our public buildings including schools and of course public housing in terms of energy efficiency is really quite dreadful. And these are very, very obvious opportunities for governments to simply invest for better energy efficiency and also just simply a higher quality of life for people who use these these buildings. And then there's industrial energy efficiency. We will get at that to some extent through the safeguard mechanism because energy use will be will be covered by that, but only for the very large installations, and medium and small sized installations will be untouched by that, unfortunately. JAMES: OK, thanks Frank, and interesting what you say about maybe there's more upfront cost with house building to improve efficiency but then the running costs are reduced in future. It's a little bit like the EV situation where there's a bigger upfront cost but the costs of running the vehicle are much lower. Thanks. I'll hand back to Catherine and we'll go through some of the questions that have been posed in the Q&A. CATHERINE: Rght, so here's our first question that's come through on emissions pricing. So in many emissions trading systems, including the NZETS, some units are provided to emitters for free and some emitters are excluded entirely – for example, agriculture hasn't been priced to date, although plans are underway to start pricing from 2025 at the latest. Do you consider that that's justified at this point, given the urgency of fighting climate change, and wouldn't the ETS be more effective if all emitters paid for their emissions in full? FRANK: Yeah, so this is a quite technical area of the economic mechanism design, and the effectiveness of carbon pricing with relation to whether units are given out for free or not depends on the basis on which units are given out for free. So if I have a factory, right? If i'm being given free emissions units for every tonne of carbon dioxide that I emit, then of course I won't be effective because I'm insulated completely against the carbon price. However, in most schemes where free allocations are made, the link is broken between the actual emissions that I produce and the amount of free permits that I get. And in that case I retain full incentives to reduce my emissions because I can still sell the free permits that I get given by government. And so the question becomes predominantly one of equity and foregone revenue for government rather than the effectiveness of of the scheme. And so for example when you think of emissions pricing for agriculture, I'm aware – I'm certainly not across the detail, but I'm aware in broad lines – that there's a discussion about what sort of compensation payments, or whatever the term might be, might then be made to farming enterprises and of course you know if you make those kinds of payments as a lump sum or provide a lump sum of emissions permits, then you're not compromising effectiveness. What you are compromising, of course, is the amount of money that government can gain from the scheme. And best practice is a scheme where governments sell the permits, at auction or in some other way, and retain the revenue – and then use the revenue either as an inflow to general revenue or earmarked for climate change related activities, because a lot of what we want to do will actually cost public money. And so just to briefly come back to the Australian example, what's planned for the industry sector there is, in effect, full – well, government takes nothing, right? All credit, all these emissions units, are created and traded within the industry sector. It's just one installation selling to the other or buying from the other. Whereas the gold standard system would have government providing these credits and selling these credits and using the revenue for something that's in the public interest. CATHERINE: Thanks Frank, I’ll pass to James. JAMES: Oh yeah, thanks. Another interesting question that's come in, and it sort of gets to the heart of international cooperation and collaboration around tackling climate change, I think. The question is: what do you think are the prospects for global carbon pricing initiatives such as the idea of a global levy on fossil fuels and with that revenue being used to address loss and damage globally? Sort of – again, sort of some of the things that are written into the Paris Agreement and so on. FRANK: Well, I think global carbon pricing and also a global levy on fossil fuels is a very good idea indeed and is extremely hard to pull off. We've written papers on the potential benefits, for example of a levy on coal production, and the benefits are obvious because this will increase the consumer prices of fossil fuels, and thereby create an enhanced incentive to get away from fossil fuels for energy efficiency and substitution into renewables and other energy sources. And it's being paid by the consumer, so it should be attractive from the producers’ point of view. And there's one episode in the world's history where this was done – that's of course OPEC, right, so the oil price would be and would have been a lot lower than what it is if it hadn't been for the catalysation of part of the global oil supply. And that did in fact help in particular with energy efficiency and also some substitution at the time. But these things are of course difficult to organise, and there's all sorts of strategic and political arguments around them. As regards a global carbon price, like a global emissions trading scheme or something like that, that used to be the vision for where things end up: a globally linked system of individual national emissions trading schemes. In the meantime a realisation has set in that most emissions trading schemes are only partially linked or not linked at all internationally. And there's a range of good reasons for that, from fears about my own country doing too much or too little relative to what I want to see there as a policy maker, to doubts about the integrity of emissions accounting systems in other other countries. In the end it's like merging your currencies or something, so you'd need this this happening at a very high standard. I think the the broad view in the community is that we're unlikely to see that happen. However – however –there's a little ‘however’ there with the carbon border adjustment, the border tax plans that the EU has, which could very well catch on in other energy intensive commodity importing countries. That provides tremendous pressure in other countries in exporting countries to put in place climate policy (including through pricing) that has an equivalent price to the importing country. I think we could guess that that will work as a mechanism to incentivise or or to help with the emergence of carbon pricing in individual countries to a similar carbon price level, but not necessarily linked in terms of cross-border trading. That would be my crystal ball here, but we'll see. JAMES: Thanks a lot, Frank. Back to you, Catherine. CATHERINE: Well, funnily enough, Frank, my next question was about the likelihood of a carbon border adjustment mechanism being applied to Australian exports. I’m interested to see if – you know, I've been looking at how the European Union has proposed its carbon border adjustment mechanism. Obviously this concept has been under discussion in the US for a long time. The realities of how you implement something like that are very complicated. And I’m just curious to see, is this seen as a credible threat in Australia? And how are people considering this? FRANK: Yeah, so it's seen as as something that isn't of immediate relevance for Australia, because we simply don't export much commodity that will be part under the carbon border adjustment mechanism. Australian commodity exports of that kind go to areas outside of the EU mostly. Now, from the EU’s point of view this is very tightly defined as something that's linked to the emissions trading scheme. So whatever activities and products are captured by the carbon price in the EU emissions trading scheme are then included in the carbon border adjustment scheme. However, when you extrapolate to the future – and just think ahead, right – then a scheme like that could very easily... or, well, not easily, but could perceivably be implemented also for sectors and products that are not under an importing country's emissions trading scheme or carbon pricing scheme but that are subject to regulation. You could just say, well, EU agriculture for example is under regulatory pressures to reduce carbon, improve local environmental effects, and so forth, and we're going to slap some carbon penalty or some penalty on imports from countries that don't adhere to the same standards. You would then need to make a more arbitrary determination of what that import tariff would be, because you need to calculate the price equivalent of regulatory measures and so forth. But that in itself would also be attractive, because it would allow them the implementation of relatively blanket kind of rules for this, and we might well be back to some sort of, you know, ‘here's a 10% tariff or something on on imports from countries that don't have comparable policy’. And so personally I could see things going in that direction and before too long Australian exports being subject to those kinds of constraints, including agricultural exports in fact. CATHERINE: Thank you. James. JAMES: Okay, thanks Catherine, and probably the last question from me. We're getting close to one o'clock. And this relates to what you were saying in your presentation about offsetting and forestry. The question is: given the many issues with carbon credit forests and the vulnerability of forest, the changing vulnerability of forests, to fire and disease as the climate changes – are these types of credit useful? And how else can we fund re-afforestation and ecological restoration? FRANK: My professional view on these things is very clearly that using a credit scheme like this for avoided land clearing in particular is not the way to go. The problems in determining additionality are overwhelming – and not just additionality, also leakage. So we say we're setting aside a thousand hectares here... what about the thousand hectares next door, and the ten thousand hectares off over the hill, right? Maybe they will be cleared as a result of not clearing my initial 1000 hectares. It just really is not possible in principle and in practice to establish that these are real emission reductions. And soso what should we be doing? We should have a better regulation for land use, and just simply prohibitions for land clearing, or land clearing only under very specific circumstances. Payments to be made by landholders where they want to clear land, for example. And it may well be that then some form of compensation payments may be needed for the taking away of property rights that would be implicit in such regulation, for example. That's political question at the end. But really I see this more or less in the realm of the regulatory rather than in the realm of of market mechanisms. JAMES: OK, thanks a lot, Frank. I'll hand back to you, Catherine. We're just about out of time. CATHERINE: Yeah, I think I think we will probably wrap things up there. Thank you so much. I’d just like to acknowledge for the viewers out there, Frank, you had raised some really interesting insights on the challenges of applying emissions pricing to agriculture, and as you mentioned this is a very live issue in New Zealand. Some of the questions that came through from the audience were directed specifically to the Commission and what our views are on the new proposal that came out from He Waka Eke Noa, our primary climate action partnership here. So just to let people know, we're going to be delivering our next piece of advice to government at the end of June on how ready we think farmers are for emissions pricing, and until our advice has been tabled we're not going to provide specific comments on the He Waka Eke Noa proposal. But we're certainly listening carefully to what you shared today, Frank, and I will look forward to having a broader conversation on those issues in the future. So thank you for that. But thank you so much for your time today. I know we gave you an early start to your day in Jakarta, and want to thank you so much for sharing your expertise and time. And Charli, I'll turn over to you. CHARLI: Yeah, sorry, James, did you have any closing comments? JAMES: Not really, just to reinforce our thanks, it was a really interesting discussion and presentation, thank you. FRANK: Well, thank you from me. I really appreciate the opportunity, and I saw that we've had a large audience and thank you to you all actually for being with us for this. CHARLI: Thank you so much for making time to come and speak to us, Frank, and thanks to Catherine and James for leading the session so well for us, and to everyone who's listened and shared your questions. So enjoy the rest of your day or evening, depending on where you are in the world right now, and i'm just going to hand over to Bevan to close the session for us with the karakia. BEVAN: Tuia i runga Tuia i raro Tuia i roto Tuia i waho Tuia te here tangata Ka rongo te pō Ka rongo te ao Haumi e, hui e, Tāiki e! So let us connect to the heavens above, let us connect to the earth below, let us connect within, let us connect externally, connect to the essence of humanity, exploring the unknown, realising the potential, uniting as one in this gathering and conscious thought. Thank you CHARLI: Kia ora everyone.