Cabinet papers reveal the motor industry flip-flopping on car fuel economy plans and the government ignoring officials' advice as it abandoned new vehicle standards... Is this another example of political caution gone mad?

 

Transport Minister Steven Joyce announced on August 28 that vehicle fuel economy standards (VFES) work would not proceed. Last month, Pundit broke the news that the Greens would no longer collaborate with the government on the energy efficiency and conservation strategy (EECS).

The issues are related, because VFES are part of the EECS, which is currently being revised. The Greens were motivated by concerns about the substance of Joyce’s decision, as well as alleged process failures by Energy Minister Gerry Brownlee to keep Jeanette Fitzsimons in the loop on EECS-related developments.

I wanted to see the information or advice on which the government’s decision had been based. Brownlee ignored our invitation to write a post for Pundit, so I requested it from Joyce, under the Official Information Act.

In response, I received two documents. The first is a briefing from the Ministry of Transport to the minister dated March 31; the second is a Cabinet paper titled “Vehicle Fuel Economy Standard -- Report Back” dated August 12. They predate the Greens’ withdrawal from that part of the working arrangement and again, it seems, Fitzsimons did not know about them.

The March briefing from officials to Joyce starts from the premise that an emissions trading scheme (ETS) is the key plank of New Zealand’s domestic climate change policy response. It notes that “New Zealand also has ‘complementary’ measures that were designed in the absence of a price-based mechanism … Accepting that there is now an ETS in New Zealand … we would like the opportunity to discuss with you the extent of complementary climate change policy measures for the transport sectors”.

That’s a false start, because the premise is wrong, in three respects.

1. The ETS will achieve very little by way of emissions reduction;
   
2. The “complementary” measures, as their name suggests, are not an alternative to a price-based mechanism, but necessary companions to it;
   
3. And the VFES was developed alongside the ETS during 2008, not “in the absence” of it.

The briefing goes on to say that other measures to overcome market or institutional failures or remove barriers to change should be adopted only if they are of net benefit to New Zealand.

There is some evidence of such failures, in New Zealand’s sub-par average fuel economy, estimated in 2007 at 207 grams of carbon dioxide emissions per kilometre (g CO2/km), and around 198 g CO2/km in mid 2009. Since both of those figures omit the CO2 emissions from used diesel vehicles, because (the released papers say) the Ministry doesn’t know how to measure them, the actual average is likely to be somewhat worse.

Joyce’s August 28 press release gives an average for new vehicles coming into the country of 204 g CO2/km. Although the average is trending down, here's the kicker:

“the current rate of improvement is not enough to reach the 170 g/km CO2 by 2015 target set out in the NZ Energy Efficiency and Conservation Strategy”.

The papers also note that, in the absence of intervention, New Zealand’s CO2 emissions from transport are expected to continue to rise; and with the exception of Australia, virtually all developed countries have schemes in place to regulate and improve the average fuel economy of vehicles entering their fleets.

How? By either by incentivising the purchase of more fuel efficient vehicles or introducing a fuel economy standard, most often some combination of the two approaches. But unlike other countries, both New Zealand and Australia have agreed to include transport fuels in their ETS, “thus creating the necessary economic incentive”.

“Further research by an external consultant is underway to determine whether, in the presence of an ETS, there will be a market failure because people do not ‘adequately’ take fuel economy information into account when making vehicle purchase decisions. The results of this research will be considered and included in the April Cabinet paper.”

However, in that paper (which went to Cabinet in August, not April), there is only a single line: “Consumer surveys undertaken by Nielsen show that fuel economy labels are having a positive impact on vehicle purchase decisions”.

This, one might think, is a little different from “adequately” taking into account: the “positive impact” is surely inadequate, if the rate of improvement cannot achieve what everybody, including the industry, had previously agreed was the right fuel economy goal.

The briefing describes the extensive work undertaken to date by officials and the industry:

“The Motor Industry Association (MIA) (which represents all new vehicle importers) invested quite a lot of time and effort in developing a series of proposals … significantly, the MIA accepted the 170g CO2 per kilometre by 2015 target on average across the new vehicle industry, and developed a mechanism that members agreed on, with which to achieve this”.

Nevertheless:

“...the MIA has informally advised the Ministry that, due to the current economic climate, its members are not likely to support an industry agreement of the kind agreed to last year”.

That’s surely further evidence of “market and institutional failure”, which could be an argument for, not against, government regulation. However:

“In light of the government’s stated preference for options that involve market-based incentives or voluntary agreements rather than regulatory approaches, we propose the … Cabinet paper recommends against proceeding with a regulated VFES”.

The principal concern is expressed as being about whether the policy would have a net benefit. The Cabinet paper says:

“The … approach would have been complicated to implement and potentially had high compliance costs. An independent cost-benefit analysis found that under most scenarios, costs would have outweighed the benefits from this specific scheme. Depending on the assumptions made … the overall cost benefits of the scheme by 2025 ranged from over $900 million as a net cost to approximately $240 million as a net benefit … estimates ranged from a $400 decrease in price for a small fuel-efficient car to a $1,500 increase for a large less efficient 4WD”.

Interesting. Would this be the same cost-benefit analysis that had been described back in March as “inconclusive”?

More cogently:

“It may also have the perverse effect of lowering new vehicle sales and increasing the average age of the fleet, with a potential negative impact on the fuel economy of the fleet”.

The outcomes from consultation on the VFES policy were discussed with Labour ministers before the election. Consideration of the proposal was deferred -- so the Labour government, too, may have had questions about cost efficacy, or perhaps by then they were just on the run, with claims of nanny-ism hot on their tailpipe.

The papers show that the government took official advice in departing from the proposal. However, it did not accept official advice as to the preferred option. Officials and their independent external consultant recommended differential vehicle registration levies according to fuel economy, with the possibility of a cash rebate for vehicles that exceeded the target standard -- a “market-based incentive” approach.

Instead, the Cabinet paper simply reiterates that the government is doing some other things, referring again to the ETS and voluntary consumer trend (both discussed above), and waving the little policy trophy of electric vehicles’ exemption from road-user charges. I am very tired of hearing about the road-user charges policy: the accompanying short post explains why.

It’s another example of this government’s cautious, conservative, steady-as-she-goes approach in the face of mounting evidence about the need to transition to a new kind of economy. The question we're left with is whether we will pay a long term price for such short term risk aversion.