Last August Matt Burgess sat down with Carbon News editor Jeremy Rose and explained why he thinks the ETS alone could see New Zealand reach net zero much sooner than the 2050 target.

Jeremy Rose: In a Q and A on the NZ Initiative website you describe the NZ ETS as one of the most comprehensive and best in the world. If that’s the case, why are we yet to see any reductions in emissions?

Matt Burgess: So, after an initial bump, prices were below $5 for a long time. Then you had two for one. Prices started rising in about 2015 and 2019. And now we’re at 50 bucks. There’s also a reasonable lag between years and reporting of emissions from users. Something like 18 months to two years. So, between all those things, that’s going to be muting the effects.

But now that we’re at $50 - we got to $50 very quickly - and I have some confidence that $50 is really going to start to have some effect.

A couple of things give me confidence. You can work through the maths. How much more do you pay for a tonne of coal based on $50. You can work out how many emissions are produced by burning a tonne of coal, you can multiply that by the ETS price to understand how much that marks up the wholesale price. It’s something in the order of double.

It’s something in the order of 30% when it’s natural gas. That’s quite a lot. You can see how that’s going to a real impact on the bottom line and changes in behaviour as a result.

The second thing that gives me confidence is when you look at overseas studies of cap and trade and what sort of prices it took to get changes in behaviour, you see real movement in investment and behaviour at around 15 Euros. That was the experience in Britain. I think there are other studies that show something similar in Europe.

Certainly, in respect to R and D but also with emissions.

I think we will see quite a bit of movement in the next 18 months. [The price of carbon is currently around $75 and hit a high of $86 in February.]

I think we might already be seeing it in the price of tomatoes and capsicums - which use natural gas and coal for heating green houses. But with petrol the prices difference is pretty insignificant. At $50 it adds something like 12 cents a litre compared with 9 cents a litre a couple of months ago.

Something like that yeah. And that just reflects the relatively small share of carbon in a dollar’s worth of petrol. So, a litre of petrol is marked up over the wholesale price in something of the order of 100% right? So that’s to cover excise, you’ve got GST, you’ve got retailers margins, importers margins, cost of sale, all that sort of thing. So, there’s a lot in the cost of a litre of petrol that isn’t the carbon. ETS treats every tonne of carbon equally, so ultimately, it’s going to have a much bigger impact on the wholesale price of coal, than it is on the retail price of petrol given all the other things that you’re paying for.

But it’s a level playing field. So ultimately the reason the ETS has a muted effect on your incentive to drive a car, is precisely because it’s an expensive way to cut a tonne of emissions. There’s lower hanging fruit in a lot of other places in the economy. Cars are actually, pretty much the last place you’d look to cut emissions - if you look at the cost per tonne of the EV subsidy for example.

They are responsible for…

They’re responsible for about 24% of our emissions, so it’s a big chunk. But that’s not the same as saying 20% of our reductions should come from cars. If we want to make the biggest to emissions the principle should be we cut from the most cost-effective places first.

And we should be prepared to treat all emissions equally, because ultimately a tonne of carbon is a tonne of carbon. And if that’s not from cars, it’s from somewhere else, we should be prepared to say fine, conditional on the reductions being genuine and conditional on making sure people aren’t being hurt along the way.

If the government wants to insist on a decent share of the reduction in emissions coming from cars  - when that’s not the most cost effective way to cut emissions - it’s going to be harming consumers and businesses.

If you’re paying $1000 a tonne instead of $40 or $50, you’re just consuming more resources for each tonne of emissions you taking out of the atmosphere.

It’s going to have no effect at all. And the reason is that we’ve already capped emissions under the ETS. Transport is in the ETS. ETS caps emissions. All you’re doing with a policy like subsidising low emission vehicles - can’t fault the intent - but ultimately if you’ve capped emissions all you’re doing is freeing up emissions for someone else to use, somewhere else in the economy.

Or lowering the cap…

Well, you can draw a link between car subsidy policy and the cap or you can just cut the cap. And actually, you’re better off just cutting the cap because that allows a contest for where the next tonne of carbon comes from.

If you just cut the cap, you have a contest for where those emissions come out of the economy. If you do a link with policy, then you’re forcing those emissions to a particular channel.

And all the evidence suggests that using cars to cut emissions is very expensive way to cut emissions. Ultimately, you’re burning more national income to achieve an outcome that you could do for a fraction of the cost.

Let’s go through some of the objections to the subsidy. One criticism is that well-off people end up not only paying no road user charges - so they might be better off by, say, $700 a year - they’re also making savings by not having to buy petrol, and they’re getting an $8000 subsidy when they buy a new EV. So, in that sense it’s a generous government subsidy to the rich.

The government could use the money from the fee on polluting vehicles to subsidise public transport, on bicycle paths etc. That could lower emissions, couldn’t it?

No. It’s already in the ETS. Sorry to hammer the point. You can only cap emissions once.

Except climate change minister James Shaw has said, is that he’s prepared to lower the cap at a faster rate if emissions there are significant reductions in the economy.

That’s right. But there are two objections to that. The first, is that he could do that by simply lowering the cap, and the second is that he doesn’t have the machinery in place to detect how many tonnes of emissions his policies are cutting.

He should have that. It would be great if he did. And he’s indicated no intention build it. We really need it that are doing little or nothing. We’ve got all these policies that are doing little or nothing to  reduce emissions - some of them are even raising them. It would be great to have the machinery in place so governments can shut down policies that aren’t working.

Does that machinery exist? Are other countries doing that?

You can measure the actual real-world performance of emissions policies when all said and done. There’s no shortage of studies that have tested how many tonnes of emissions policies actually remove. No question you can do it.

Government has declared a climate emergency and says it wants to cut emissions. Well, that seems an obvious thing to do. The difference between a good emissions policy and a bad one is two orders of magnitude. It really matters that you’re not doing $1000 a tonne policy when you could be doing more of the $50 a tonne policy.

Not doing the really bad stuff and doing the good stuff double or quadruples how many tonnes of emissions we take. So the government should be organised on that.

You’re one of the key proponents of the idea that the ETS is the sole policy that’s required…

I’ll correct you on that. The question is we should do what works. We’ve got an ETS and we support it only to the point it works. And we should be prepared to test that it works. And we should do anything else that works taking into account the effects that the ETS has.

There are policies that can still have a benefit under that cap. You might do things like R and D. You’re certainly going to do things in agricultural because it’s not under the cap. You’re going to look at international air transport because it’s outside the cap. The principle is do what works.

We’ve got an ETS, if we’re doing other things, we’ve got to check they’re adding value.

The New Zealand Initiative has a lot of members who are taking actions to cut their own emissions. Lion is one that claims to be net zero carbon. You would argue that they’ve done has made no difference to New Zealand’s overall emissions…

Provided they’re under the New Zealand ETS… ahh, well, no, I wouldn’t say that actually.  When you put on a carbon price it is going to put on incentives to change behaviour and reduce emissions.

When you put a price on carbon, emissions have to come down somehow, so companies like Lion are naturally going to make changes that reduce their emissions and that may well lead them to get to zero emissions.

But they’re offsetting to get to those emissions…

Great, but that is the system working. You want companies responding to the incentives and if they find it’s in their interests to…

But why would it be in their interests, they’re already under the system like everybody else … Let’s reduce it to us individually, if you want to drive a V8 down the street, as you often point out, it makes zero difference to the country’s emissions…

Ultimately, it’s changes in behaviour that bring down emissions and the point of a carbon tax is that it encourages behaviour somewhere in the economy - including people who drive certain cars - to make changes that cut emission. People are just responding to the incentives, price will go up however high is necessary to get enough people to change. But ultimately when people driving cars, or corporates change their behaviour in response to incentives that’s the system working.

But they’re not responding to the ETS - if they were responding to the ETS, they would simply say now it’s more expensive to use gas so we’ll see if there’s an alternative and they would do that. But the reason they’re saying they are carbon zero is because they have a corporate policy of being carbon zero. In the same way that someone that drives an EV, often does so, because they want to contribute less to the problems of the world … but you’re saying that really it makes no difference them driving the EV or Lion reducing its carbon emissions at a faster rate than the price of carbon demands…

No, I’m not saying that. I’m almost saying the opposite of that. The cap works because the government only issues a certain number of emissions units. And each unit can only be used once. So, every person who is making a decision about, how and where they spend their money, part of that is making a decision about how many units they’re going to consume that year. Every unit that they consume is one less unit that somebody else can consume.

So, every 400 litres of petrol you buy you are funding the purchase by your petrol company on your behalf of one emissions unit. If you decide to drive an EV, it means your petrol company is no longer buying the unit on your behalf. That’s one more unit for someone else, somewhere in the economy.

But someone has to be the marginal person who decides not to produce emissions because there’s only so many emissions units to go around. And the government’s going to issue fewer over the next year and fewer the year after that.

Somebody has to make the decision not to be willing to buy a unit and make a change that means they don’t need it - whether that’s an EV or changing production processes or shutting down in some cases - hopefully not.

Ultimately emissions come down because those decisions have been quietly made by millions of people across the economy in response to the ETS. So, it’s hard but ultimately emissions come down because those changes have to be made.

But as an individual you do argue that it makes no difference beer from a carbon zero brewery or if you drive a V8 or you drive an EV…

The ETS just works by you responding to the price incentives. If you’re getting hacked off by the price of petrol driving a V8 you’ll think you know what I’ll get a Corolla. That’s how the ETS works. It’s not a moral thing. It’s rising the price however high is necessary to get enough people to change their behaviour and cut emissions to bring emissions within the cap.

In some sense it’s taking the moral responsibility that we feel for carbon emissions and putting it into a price and then just basically are you willing to pay for the permit or not. If not someone else will. And there’s only so many to go around, so make a decision.

So, if someone who is very concerned about climate change, says I’m not going to drive a car, I’m not going to fly, I’m not going to eat meat, it actually makes zero difference because they’re just allowing someone else to use their pollution?

Emissions are decided by how many permits the government issues. Ultimately, it’s true when you switch to an EV there’s still the same number of permits in the economy and emissions this year will be exactly the same. It just means when you decide to drive an EV, it means somebody else somewhere in the economy gets not to make a change. Their change comes next year or the year after.

Are there any actions that you personally do for an environmental reason… do you change lightbulbs because you think it’s good for the environment or do you do it purely because it will save you some money on the bill? 

I am not consistent with my own advice because I do buy offsets for my car. My car is in the ETS. My driving it doesn’t raise emissions but nevertheless, really just to see how it works, I purchase some offsets by a company that plants offsets in Australia somewhere, and I’m going to buy some more from a New Zealand company as well. Now that I understand how their offsets interact with the ETS because I worry about it being neutralised by the ETS but they’ve convinced me that it doesn’t. So, I’m not following my own advice in some sense because I accept that my car doesn’t raise emissions because it’s in the ETS cap but I’m also buying offsets. So, I think I can say with a straight face that my car is carbon negative.

Not that straight a face surely?

The whole thing works on the basis that the reduction from Australia is genuine and as long as I’m satisfied that is true where’s the breakdown?

The breakdown for me is the belief that the ETS is the maximum amount of carbon reduction we can achieve.

If you believe there is an existential crisis to the world and you want everyone to do the maximum amount they can, then can be more ambitious than the government cap, because no matter what we do there’s going to be some countries that overshoot and others that are going to have to undershoot to make up for that. So, it’s in all of our interests to undershoot, so people not travelling, not driving their cars would make that easier

We can cut way more emissions by not relying on moral pleading or demand, if we use a system like a carbon price we can reveal people’s willingness rather than implore them or compelling them. We can just confront them with the consequences of the emissions and let them make the decision.

Most people, including the Climate Change Commission, say that if you have a system like the ETS you are going to cut carbon at least cost.

The difference between least cost and the sort of average cost that the government ends up paying for its top down, command and control-type approach is one or two orders of magnitude. Forget about income or prosperity. We can cut 100 times more emissions per dollar - potentially - with a system like the ETS.

That’s the difference between getting to net zero in 2050 and getting there in 2035. Why on earth are we waiting to 2050 to get to net zero when if we just opened up to all the options - and only applied t the test: are they genuine - we could be there next week.

The world’s a big place, there are genuine - it has to be genuine – options out there. We don’t have a system in place to be confident yet but that’s the point we should be building one. Because once we’ve got those systems that give us that assurance then we have choices.

We should be cutting emissions here, keep the ETS going, keep it at fifty bucks, that’s fine, keep it in line with our trading partners. Let’s do our bit here too. But why are we waiting to 2050? We could be at net zero next week if we’re prepared to work with other countries replanting rainforests, converting coal plants to gas plants wherever they are in the world because it’s so affordable. You can cut a tonne of carbon for seven US dollars by replanting forests in other countries.

Now if we’re satisfied it’s genuine why on Earth would we wait 29 years to get there when we could get there next week? I’m not saying we don’t keep making efforts here, but if it’s a climate crisis what the heck is stopping us spending $50 or $60 million to get to net zero next year?

How serious is the Government about climate if it’s just so reluctant to do what works to cut emissions? It’s consistently doing ineffective or even counter-productive policies. The train between Hamilton and Auckland. It’s raising emissions. It puts out twice the emissions per passenger than a car does for the same trip.

Do you do believe it’s a climate emergency?

Doesn’t matter what I believe.

But do you?

I’m not trained on that question, I don’t know. It’s almost an impossible question, right? It’s genuinely hard to know. It’s climate science, I’m not a climate scientist. I’m perfectly happy to accept the declarations and the commitments our parliament has made to our emissions targets, I’m very happy to accept both of those things.

One of the concerns the Climate Change Commission raised about simply leaving even to the ETS is that we could end up with far more Pinus Radiata being planted than most people think is desirable. Is the solution to something like that simply regulations?

You do what works. You maintain the objective of cutting emissions at least cost, however and wherever it is, but you work within the constraints that society decides you have to work within.

There are perfectly legitimate concerns about Pinus Radiata. Farmers are worried about it. I suspect local councils are worried about it.

So, either Parliament or local councils have to decide how many pines they’re willing to tolerate in an area based on the trade-offs. Do they like farms, do they like forests. And there’s trades off both ways here. A lot of farmers actually like the revenue or the potential to earn revenue from the ETS, by planting trees. So, it's not a one-way street.

But you leave the decision to the communities. And then you have a system that takes whatever they decide and optimises those decisions for costs.

We plot the number of trees that communities are willing to tolerate, and no more, we go offshore to the extent that voters are willing to tolerate that. They might say the numbers zero, they might say the numbers 20%, or 25%, like they have in Switzerland, but whatever the number is, the system is optimising for these cost, whatever constraints are.

The Climate Change Commission’s model is that the it decides all of these trade-offs on behalf of, you know, the rural community in 2035. Here's the commission in 2021 trying to make these judgments. What a dumb model. With the best will in the world the Commission cannot know, the trade-offs and people's views - partly because most of them aren't even born yet.

The right answer is to recognise that decisions should sit with communities. The model should be that they work within the constraints that those communities decide rather than making judgments on their behalf.

Let's talk about the dividend idea. You believe the revenue from ETS auctions should be returned as a dividend to all New Zealanders?

Absolutely. A dividend would improve the political viability of the ETS. If you think the ETS is an effective way to cut emissions but you're worried about the political viability of being able to raise the carbon price high enough to achieve our emissions targets – which is a perfectly reasonable concern - a carbon dividend is the best way of achieving that.

It’s a cheque in the mail to every household in the country, at least once a year, that reminds them that there's an ETS and builds support for in the process.

It lets the minister stand up in parliament when the ETS raises the price of electricity or the cost of petrol or other costs and say: “Sure you're paying $100 more for your electricity this year. But, you know, every household got a check for $500.”

The alternative uses of that money won’t reduce emissions. Logic tells you that if you cap emissions other policies won’t reduce them any further. That neutralising effect applies to every other use of that money.

With the best intent in the world, if the government wants to take that money instead of getting it back to households, spend it on more EV subsidies or whatever, if it's for things that are already covered by the cap, then they're not going to cut emissions.

And I suspect they're not going to do much for the political appeal of the ETS either. Quite frankly, people would much prefer to get a cheque in the mail.

You could argue that low-income families would benefit the most because there’s a progressive element to it. But you could still have the situation where basically a low-income family, they're on the breadline, they’ll spend that $500 on necessities but they won’t have enough to, say, insulate the house. So, wouldn’t targeting things like home insulation – which have both health and climate benefits – be a more efficient way of using that money?

Possibly. We already have Home Insulation packages. And yeah, we should investigate that. The principle is we should do what works best. I think getting the money back is probably simplest and cleanest solution. But it’s testable proposition and it should be tested.

People often talk about climate change as an existential threat. Is there a certain point where a crisis becomes so big that you simply can’t leave it to the market and millions of people making individual decisions?  I presume when it came to Hitler you wouldn’t think it should be left to individual market decisions…

I would not think that.

So, is there a point where a problem becomes so big, that in fact, it becomes acceptable to have a command economy response?

To me, that's an argument for just doing whatever combination of things work best. So that's the principle and then you're open to whatever the answer is.

And if it turns out that you have to cut emissions next week, because it's that desperate – the right answer is to be prepared look at all the options. The test is that they’re genuine – you drop other tests like whether it’s local or whether it’s EVs or whether it's gross reductions rather than removals.

Because those things actually get in the way of, of getting the job done. And you just focus on what works. To me, an argument that it is existential threat should act to sharpen the focus on whatever solution is most effective. It seems to have the opposite effect; it seems to always be deployed as an argument for the government to do more stupid things.

Is there a country that you look at the moment and think they've got it right?

It sounds silly, but I think it's us, I think we’re still more sane than almost everybody else.

We've got a really good ETS, we are finding that we are getting traction on just pointing out that we've got a good ETS, and that has consequences for everything else the government's doing. People can understand that point.

New Zealand has a real opportunity for global leadership. I think the fundamentals here are actually pretty good and getting better, which is a credit to this government, actually.

If New Zealand can demonstrate that there is a political market for an effective emissions reductions scheme and it’s got a system that you can prove to the electorate that it really works.

And you can demonstrate the governments don't get unelected under the system. Well, that's a model that every other country in the world can follow. And we’re the ones that are on track to get there first.

If you personally wanted to reduce New Zealand’s emissions would the best way of doing it be to buy NZUs and just destroy them?

Yes. If you were particularly motivated about reducing New Zealand emissions, then yes. I'm not aware of any alternative that's more cost effective than that. For any given budget, you can cut more emissions by doing that than anything else.

I’m interested in your decision to offset your car – in light of your position that the ETS alone sets the country’s total emissions. Why do you do it?

Mainly, because I just want to see how the system works. I really just wanted to have a bit of skin in the game. And just to, to give me a reason to go through the documentation and satisfy myself that this is genuine. That was probably most of it. I just liked the idea of being able to say, I've done my bit. I am serious about this, I support the targets…

Helping plants trees is much more satisfying than buying NZUs and destroying them, isn’t it?

In principle, it doesn't make any difference. But yeah, I can see where you're coming from. The thing that I'm really interested in you've got two ways to deal with your car's emissions. One is to buy an EV. The other is to finance somebody to do something that genuinely pulls emissions out of the atmosphere at least equal to the emissions from your car.

Now those two outcomes are the same, but one of them is 100, or 1000 times more difficult than the other.

It's just so much easier to deal with a company that specialises in pulling a lot of emissions out of the air for not very much money than it is to go to all the trouble of selling your car driving a car that you don't want to drive. With the net results that you avoid about a tonne of emissions, maybe one and a half tonnes of emissions per year. That’s a lot of trouble for not much benefit.

And the easier option is so much better for the environment because you can do 1000 times more for the same price.

Why are we waiting for 2050 when if we were prepared to look at all the options we can be there next week?

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The interview has been edited for clarity and length.

Matt Burgess takes up a new position as an economic advisor to National Party leader Christopher Luxon today.