Marc Daalder is a Wellington-based senior political journalist covering Covid-19, climate change, energy, resource industries, technology and the far right. Twitter: @marcdaalder.
The government‘s decision to extend fossil fuel subsidies for another five months is a wake-up call for the difficult but necessary transition to a low-carbon economy
Comment: With no end in sight to war in Ukraine or other inflationary pressures on the price of oil, the government has now found itself stuck in subsidizing gasoline and diesel indefinitely.
Sunday’s extension of the 25-cent reduction in fuel excise duty and the equivalent reduction in road charges (accompanied by the halving of public transport fares) for another five months makes sense, given that the Prices at the pump are now higher than they were when the scheme was introduced in March. No sane government would raise fuel bills an extra 25 cents a liter in this economic and political environment.
But the decision also pushes the end date of the program into the election year, making it even less likely that fuel taxes and road charges will return to pre-inflation levels anytime soon.
There is no easy solution to this predicament. Soaring fuel prices are not in the hands of the government – nearly two decades of data clearly show that what drivers pay at the pump is closely linked to the international price of crude oil.
However, as I wrote in March, there are things the government could do to build the country’s resilience to future oil shocks. These are also the things we need to do to reduce carbon emissions in line with what science says is necessary to limit global warming to 1.5 degrees above pre-industrial levels.
That is: replace as much of our reliance on fossil fuels as possible with clean, local electricity demand, as quickly as possible.
There is no doubt that electrifying transport, industry and everything else we can can will protect us from the impacts of increasingly volatile energy commodity markets.
Take a look at more resilient countries, like Norway, where a quarter of vehicles are electric. Fuel prices there over the past year have risen 20% less than in New Zealand, after adjusting for our reduction in fuel excise duty, and far fewer drivers are at risk to these increases.
By other standards, New Zealand already has some resilience in the face of the current energy crisis. In the UK, household energy bills could triple by October, compared to the same period last year – and 90% of this increase is due to soaring fossil gas prices. Relatively few households use gas for heating or cooking in New Zealand, meaning we are feeling the most pain from the energy crisis at the pump (and in other fuel-dependent products for distribution) .
We know electrification works. But the government’s reaction to the current energy crisis casts doubt on its ability to muster the political will to help the country make this transition.
Switching to an electrified, low-carbon economy is entirely doable, according to advice from independent expert Climate Change Commission. But it won’t be easy. The government can smooth the way, but particularly vulnerable industries and communities will still be challenged during the transition.
The government’s reaction to soaring fuel prices offers little confidence that it will stick to a transition that poses similar threats to low-cost pollution.
It is important to note that the current fuel price hike has nothing to do with climate policy. The carbon price component of the average gasoline bill has increased by less than 6 cents over the past year, compared to a 70 cent increase in cost to importers and a 22 cent increase in importer profits.
That said, the purpose of a carbon price and most other climate policies is to make pollution more expensive. A successful emissions trading system should one day raise the price of gasoline to at least its current level. Modeling by the Climate Change Commission indicated that the price per liter could increase by 30 cents by 2035 due to its recommended emissions budgets.
Successive governments have bent over backwards to keep the price of the emissions trading system from rising – or, if it does, to shield the wider economy from that impact.
The current government’s reforms to the regime have allowed carbon prices to rise since 2020. But its changes also allow for additional pollution to try to mitigate that rise. Strict price controls have also prevented the price of carbon from finding the appropriate level needed to drive change, with the Climate Change Commission recommending last year that they be relaxed to allow a price of up to $140 by 2030, double the current level.
This is where the rubber touches the road. At some point in the near future, this government or another will face soaring pollution costs intentionally caused by climate policy.
This government will have two options: protect the most vulnerable wherever possible and steer the country towards an electric future, or back off, reduce carbon prices and forgo any pretense of meaningful climate action.
Hopefully they will make a different decision than the current government with its indefinite fossil fuel subsidies.