Treasury vs Transport over feebate scheme

Treasury officials rubbished the Government's feebate scheme as "a costly way to reduce emissions," while the Ministry of Transport tried to allay their concerns, new documents show

Emails released to Newsroom under the Official Information Act provide more insight into the battle waged over the Government's Clean Car Discount feebate programme between sceptical Treasury officials on the one hand and the Ministry of Transport on the other.

MoT employees worked hard to convince Treasury that there was a rationale for extensive intervention in the light vehicle market through the use of a feebate scheme and the imposition of an emissions standard, which almost every other country has. Treasury officials repeatedly argued that such policies could be costly and would have a limited impact on emissions.

Instead of market intervention, Treasury pointed to the Emissions Trading Scheme as the only necessary component for reducing light vehicle emissions to meet New Zealand's international obligations. In response to a request for comment, a Treasury spokesperson said, "The Treasury regularly provides economic advice on a range of topics, and government agencies regularly canvas a range of perspectives on their work".

Feebate's effect doubted

Treasury raised numerous concerns about the efficacy of the feebate scheme and ultimately recommended against introducing it, although they supported the vehicle emissions standard.

"We are not convinced by the need to intervene in the transport sector in the immediate term in the absence of a strong, predictable and durable carbon price. Measures such as those proposed run the risk of counteracting the price, particularly given their narrow focus," Treasury wrote in a draft comment on a Cabinet paper.

"The Treasury considers that a just transition is best achieved through a credible and predictable carbon price delivered by an effective ETS, supported by policies that remove barriers to cost-effective mitigation options. However, we consider the evidence pointing to barriers in cost-effective mitigation through the light vehicle fleet is mixed," another draft comment stated.

'Just use the carbon price'

When Transport pointed to the European Union as an example of successful feebate schemes, Treasury rebutted that the EU's ETS doesn't include transport, while New Zealand's does.

Treasury worried that "the cost of a feebate and higher ETS prices creates a 'double burden' for those who need to purchase larger vehicles (e.g., rural industries) while creating a 'double benefit' for those who are able to purchase smaller and electric vehicles (e.g., urban dwellers)".

It also mentioned a paper published in the US-based National Bureau of Economic Research which found "that EVs generally replace the most efficient internal combustion engine (ICE) cars and, perhaps intuitively, most (around 70 percent) of the subsidies are captured by households that probably would have bought an EV anyway".

"In line with our advice, it also concludes that EV subsidies are a costly way to reduce emissions."

Genter defends feebate policy

Associate Minister for Transport Julie Anne Genter defended the feebate policy.

"Transport is the fastest growing source of climate pollution in New Zealand. By making fuel efficient cars and electric vehicles more affordable to New Zealanders, we will dramatically reduce climate pollution."

"The Clean Car Discount makes electric cars up to $8000 cheaper and very fuel-efficient petrol cars nearly $3,000 cheaper, which means New Zealand families can choose a vehicle that’s better for the climate and their back pocket."

Token gesture?

Treasury's opposition came after Transport's own estimate found the feebate scheme would only reduce emissions by about 1.6 million tonnes of CO2 equivalent over two decades. New Zealand's annual gross emissions are around 80 million tonnes.

However, Genter said there was "debate about the modelling accuracy – Ministry for the Environment proposed that the Clean Car Discount will deliver materially higher impacts on fuel savings and greenhouses gas reductions than is forecast by the Ministry of Transport’s model".

The Government also declined to go ahead with more radical options, such as a legislated end-date to the import of fossil fuel vehicles which Transport found would reduce emissions by 27 million tonnes. In October, Newsroom reported that the Government had quietly abandoned its pledge to make its own fleet emissions-free by mid-2025.

"We took these options to Cabinet because the real-world evidence is clear: the countries that have most successfully reduced climate polluting emissions from cars have done so by combining fuel efficiency standards with price incentives like the Clean Car Discount," Genter said.

Is the ETS sufficient?

In emails dating as far back as November 2018, Treasury officials raised concerns that "it is not yet known whether the areas of focus proposed [...] are the least cost ways of reducing New Zealand’s emissions". In particular, officials recommended that the proposals "be examined in the context of (a) the broader objective of lowering emissions in the least cost way and (b) the Government’s policy regarding the Emissions Trading Scheme."

In February, Treasury tried to emphasise that "in the presence of an ETS, the Government is not creating additional abatement [in emissions] through these [policies], only differences in who/when". Transport insisted that "while government may not be creating additional abatement, what it is doing is accelerating the achievement of that abatement".

This explanation didn't fly for Treasury, whose officials commented internally that "whatever units are freed up by purchases of EVs are available to be purchased by others. It is accelerating abatement in EVs only to the extent that it is decelerating abatement elsewhere".

"I am not convinced by all of these answers [from Transport]," the official added.

An ageing and dirty fleet

Adolf Stroombergen, chief economist at Infometrics, said, "If there is a higher effective carbon price on transport you may well get a bit more abatement in that area but I don't think you could argue that it's a one-for-one exchange elsewhere."

"These reforms have been proposed to address the supply and demand barriers that are currently restricting the fall in the average emissions of vehicles entering the New Zealand fleet," Glen-Marie Burns, manager for Environment, Emissions and Adaptation at the Ministry of Transport told Newsroom.

"The key supply barrier is that a relatively less fuel efficient selection of vehicles is made available to our vehicle market compared to other countries’ markets. The ETS cannot address this barrier as the decisions of overseas vehicle suppliers are unlikely to be influenced by New Zealand’s carbon price."

Genter also defended the addition of the feebate scheme, despite the ETS' own role in reducing emissions.

"The Clean Car Discount was investigated with a range of options to make it easier for Kiwis to buy more fuel efficient and electric vehicles. The Emissions Trading Scheme (the ETS) is an existing tool to reduce emissions, however, despite being in place for over a decade our transport emissions keep rising. The clean car discount policy works with our ETS to strengthen the Government’s work to reduce transport emissions," she said.

'All we need is markets...'

Throughout the emails, Treasury officials insisted repeatedly that the ETS was all that was needed. In April, Treasury "recommended that you should prioritise reforms to the Emissions Trading Scheme (ETS) in order to allow for a credible and enduring price signal. We also noted that complementary measures such as subsidies could result in costlier abatement as opposed to through the ETS."

To rebut this argument, Transport pointed to an Infometrics report written by Stroombergen commissioned by the Ministry in 2017. The report found that if the price of carbon was as high as $100/tonne, transport emissions would fall 11.5 percent by 2030 and total emissions excluding forestry would fall 5 percent by the same date.

If electric vehicles made up 15 percent of the light vehicle fleet by 2030, the drop in transport emissions would more than double, the report found. However, Stroombergen emphasised that the report didn't establish any causation between price of carbon and the uptake of electric vehicles.

'Nowhere near enough is being done'

"In the absence of the proposed Clean Car Reforms, very large increases in the carbon price would be needed to achieve change in the vehicle fleet," Burns said. The Infometrics report showed that "even with a carbon price of $100 per tonne, transport emissions are only likely to decline by 11 percent. Significantly greater reductions are needed if the transport sector is to make a contribution to our 2030 Paris target and 2050 target of having net zero carbon emissions."

Stroombergen agreed in principle with Treasury's move to prioritise the ETS. "In principle, I think most economists would argue that the most effective [approach] is the carbon price. As you probably know, we've had it at $25 for a very long time and that just isn't strong enough."

"The first thing to do is take that away and get a price that can deliver a proper signal. And then you can ask, is there something else we can do and is there something else that is necessary? One has to look very carefully at what that might be."

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