Why emissions pricing cannot do it alone

By David Hall and Robert McLachlan

There is strong agreement among economists that emissions pricing should play a central role in climate change policy. New Zealand has had a price on some carbon emissions through its Emissions Trading Scheme since 2010, although (COVID excepting) emissions have not yet fallen. Recently the scheme has been strengthened through higher prices, now NZ$65 per tonne of CO2, and a falling cap on emissions. It remains a central plank in our climate change response.

It’s been argued that the ETS should be our only mechanism to cut emissions, and that it will deliver the required cuts in the cheapest and most reliable way. The cap on emissions can even lead to absurd claims that any specific cut isn’t necessary, since total emissions will be the same regardless. (If you don’t fly, someone else will be free to emit that carbon in your place.)

Now the government, along the lines advised by the Climate Change Commission, has taken sides on this issue and is proposing a whole raft of policies for different areas, such as transport, industry, waste, and electricity. (Submissions are due by 24 November.)

There are now many countries with a price on carbon, and many of them also have a lot of non-pricing policies, like fuel efficiency standards. This provides an opportunity to look at the evidence of how well different approaches work. 

In a new working paper (Why emissions pricing cannot do it alone, Hall and McLachlan), we conclude that emissions pricing alone won’t trigger the necessary levels of behaviour change and technological transition quickly enough. Non-pricing policies do work, while pricing policies face obstacles to reaching high enough prices in a fair way. Consequently, we argue that the weight of evidence lies with using emissions pricing as part of a broader policy mix.