The government's Emissions Trading Scheme (ETS) is outdated and failing to function properly, meaning some polluters are profiting rather than paying the price, according to a new think-tank report.
Rebates are given to heavy emitters to prevent them from heading offshore, but some industries are receiving refunds three times as large as their pollution costs.
A new paper from Motu Research documents why the current approach to industrial free allocation under the scheme is not working.
Under the scheme, free allocation is given to producers who are emissions-intensive and where it could be cheaper to relocate overseas.
According to Motu website, in government roles Catherine Leining helped to design the emissions trading scheme.
But Leining, who is a Motu Research co-author, said the current approach is outdated, has high costs for taxpayers and could make it harder to meet climate change targets raising questions over fairness.
"The emissions intensity test for eligible firms is based on Australian industrial settings from the early 2000s and a coal-driven Australian electricity emission factor.
"A Kiwi-made approach would be more Kiwi-relevant."
She said because it was so out of step with the current New Zealand market, and it was possible, that some recipients if re-calculated with New Zealand-specific factors, would no longer qualify.
"Allocative baselines are also out of step with evolving industry structures and practices. The levels of assistance are a blunt instrument and activity-specific adjustment is slow.
"The world has changed since Aotearoa's industrial free allocation policy was first designed. We need an approach better aligning future industrial assistance with the actual risk and cost of emissions leakage - and supporting Aotearoa's 2050 climate change target."
Under the current settings, eligible industrial producers could receive 46 million free units over the next six years. That's worth $2.3 billion.
The government has collected evidence of over-allocation in some cases and now reviewing those industrial allocations.
"Current levels of industrial allocation are likely to be unsustainable in the context of New Zealand's future emissions budgets.
"There is also evidence that some activities are receiving more NZUs (New Zealand units) than is necessary to reduce the risk of their relocation overseas. "
The Ministry for the Environment is collecting public feedback and looking to update the policy by:
- updating allocation calculations with new baseline years
- reassessing eligibility with new baseline years and updating the eligibility criteria
- making other minor improvements such as streamlining processes and the reporting of allocation data.