ANALYSIS: It's a cliche to describe any confusing system as "Kafkaesque", but there are few other words that adequately explain the nightmarish complexity of the Emissions Trading Scheme (ETS).

It is surely one of the worst public policy disasters in this country's recent history.

Not only has it failed, it has actively hampered progress, and done so in a way that has ongoing financial implications for every New Zealander.

What makes the ETS Kafkaesque is not just that it's confusing, or that it has contradictions. It is Kafkaesque because it was seemingly designed to be this way.

For the last decade, the ETS has been the main tool to reduce New Zealand's greenhouse gas emissions.

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In that time, net emissions have risen by about 17 per cent and are still rising. Gross emissions have kept steady, with no sign of an imminent decline.

In the course of failing to reduce emissions – its main function – the ETS managed to protect our largest polluters from paying any significant cost for damaging the atmosphere, while imposing price increases across the rest of the economy.

ROBYN EDIE/STUFF The aluminium smelter at Tiwai Point.

This failure to reduce emissions, in a time of growing public pressure to do so, puts an economic burden on us all. As the reality of our international agreements starts to bite, increasingly harsh emissions cuts will be needed, across all sectors of the economy.

By giving our worst polluters an easy ride, the ETS has spread the pain on to those less responsible for the problem.

Why has the ETS failed? A full cataloguing of its problems would be worthwhile but exhausting. But it's worth looking at its defining feature, which it shares with other public policy disasters.

This week, Stuff reported the scheme was likely over-compensating major polluters with public subsidies due to a mistake in the formula underpinning the way carbon credits are allocated.

The cost of this is unknown, but is thought to be high enough for the Government to consider it a "significant and ongoing fiscal risk to the Crown". That is boffin-speak for "heaps".

Thankfully, we have an explanation. It happened because the EAF, which underpins the allocative baselines calculated with the formula A=LA x AB x Out, is too high at 0.537 tCO₂–e/MWH, which is over-allocating NZUs to EITE firms with levels of assistance set at 90 per cent within the NZETS.

Got it?

What this burst of technocratic nonsense means is that a handful of wealthy corporations are being given more public money to continue polluting than they are supposed to. It's even possible that they're getting paid money – that is, getting a subsidy of more than 100 per cent – to continue polluting, with no obligation to actually pollute less.

ALDEN WILLIAMS/STUFF The punishingly difficult to understand ETS is the main tool to reduce New Zealand's greenhouse gas emissions.

This is clearly an issue of public interest. People generally don't like corporate welfare, regardless of where they sit on the political spectrum.

Every free carbon credit given to a polluter is one the Government could auction for revenue. All revenue lost comes at the expense of something else you may care about: Addressing child poverty, tax cuts, reducing the national debt, actually reducing carbon emissions, and so on.

Its complexity has become the scheme's defining feature. As economist Dr Geoff Bertram described it recently, the ETS is "characterised by complexity, obscurity, openness to rent-seekers, and ineffectiveness". In the interest of simplicity, he also called it "a dog's breakfast".

Using a cap and trade system to reduce pollution is a good idea. It dates back to the industrial revolution, where coal smoke in England's factory towns caused health problems among the wider population.

People dying, or becoming too sick to work, is an economic cost; it makes rational sense to seek compensation from those who cause it to happen. Today's equivalent of smoke-clogged skies is the heating climate, itself a product of certain industries polluting our shared atmosphere at an economic cost to the rest of us.

PARLIAMENTARY COMMISSIONER FOR THE ENVIRONMENT A very simple graph showing how subsidies place the burden of meeting climate targets on the rest of the economy.

It's why carbon taxes have broad support from economists across the political spectrum.

But the ETS is not a carbon tax, and it's not a cap and trade scheme. It is so riddled with exemptions and carve-outs and subsidies that it no longer imposes a meaningful price on pollution. Most of all, it is impenetrable in a way that disguises how it affects regular people.

It came to be this way through numerous changes across governments spanning a decade. Most of the changes went out for public consultation, but when a policy comes to be as confusing as the ETS, the playing field becomes tilted.

It allows for vested interests – with their lawyers and lobbyists and policy advisers – to navigate the political process in a way that most people cannot. Obscurity tips the scales heavily towards those with the time and resources to understand what's really going on, and gives them a huge advantage in guiding the policy process towards favourable outcomes.

You can see this in the list of submitters on recent ETS changes. It is filled with industry groups and corporate lobbyists, with the occasional academic or independent expert to spice things up.

Their written submissions are long and technical, mired in jargon. Non-experts don't stand a chance, and it's no coincidence that journalistic scrutiny of the ETS has, historically, been slight.

This is not a problem exclusive to the ETS.

One of my ongoing reporting fascinations is tenure review, a policy that breaks up Crown-owned pastoral leases, which has allowed a small group of people to make extraordinary profits at public expense.

As part of my lengthy investigation into that policy, tenure review critic Dr Ann Brower – who wrote a book about the policy – said this: "If you're confused by it, it means you understand."

Tenure review didn't make sense because it wasn't supposed to. She was right.

When you ask why the Crown was buying worthless conservation land for up to 1200 times the rate it was selling productive farmland, you are told it's because Crown pastoral leases are perpetually renewable under the Land Act 1948, which confers upon the lessee rights equivalent to freehold ownership under an exchange of interests.

While you're trying to figure out how owning land gives you fewer rights than leasing it, Peter Thiel ends up with valuable former Crown land at Lake Wanaka.

We saw this complexity play out again during the so-called "meth contamination" crisis, when hundreds of state house tenants were displaced after the houses tested positive for methamphetamine.

This debacle happened because testing showed methamphetamine levels exceeded the NZS 8510:2017 clean-up standard of 1.5 µg/100 cm², which rely on exposure dose models factoring in a 300-fold safety margin for former meth labs, whereas general exposure to methamphetamine levels below 15 μg/100 cm² is unlikely to cause health issues.

Again, a small group benefited from this complicated and baseless policy – meth-testing companies – while the public as a whole picked up the tab.

ALDEN WILLIAMS/STUFF Former Crown land at Lake Wanaka now owned by Peter Thiel.

It's worth going into the weeds on what makes the ETS unfair, but for now, let's take just one example.

In 2018, the aluminium smelter at Tiwai Point was given 1.3 million carbon credits by the Government. Companies within certain heavy industries are given free credits because there's a risk they'll shut down if they have to pay for all of their emissions.

The worry is they'll start a factory somewhere else, in a country where they can do more damage to the climate than they do here.

It's fair to point out that other countries with trading schemes offer industrial subsidies, and there is justification for some level of protection. There is general agreement, however, that New Zealand's subsidies are way too high.

Under the ETS, some of these polluters are given credits covering the emissions of 90 per cent of their output. The 90 per cent rate stays the same, no matter how much they produce; there is no cap on how many credits they can get.

And so the smelter got 1.3m credits, which at the time were worth around $33m.

The smelter directly employs 990 people, meaning the value of the subsidy in 2018 was about $33,000 for every person it employs. That is a great deal for the smelter's majority owner, Rio Tinto, which in 2018 reported a net profit of $13b. That's billion, with a b.

Because it gets a 90 per cent subsidy, the ETS has barely any impact on the smelter's operations.

An analysis by Dr Robert McLachlan, a professor of Applied Mathematics, estimated that for every tonne of aluminium the smelter produces, it makes $220 in profit. ETS costs amounted to around $5 per tonne, or around two per cent of its per tonnage profit margin.

It is unclear to what extent the smelter's emissions have reduced, or if they have at all. Like many of the major recipients of the subsidies, it does not report its emissions, and the Government does not yet have the power to obtain them.

The 90 per cent subsidy recipients as a whole said recently that their emissions have barely changed since 1990.

It's hard to imagine what incentive the smelter would have to reduce emissions, if doing so came at a cost of more than $5 per tonne of profit. Despite this exceedingly generous subsidy regime, the smelter's owner, one of the world's most profitable companies, continues to play chicken with the Government about shutting down.

As the heavy industries point out, they employ a lot of people, particularly in regional New Zealand. But as the carbon price rises, the cost of the subsidies becomes extreme; and the longer they go without meaningfully reducing emissions, the larger the burden on other parts of the economy grows.

By some estimates, if New Zealand continues to give out subsidies at its planned rate, meeting our 2030 target without buying overseas credits would effectively require the rest of the economy to be carbon neutral.

There is an important debate to be had here. Should the industrial allocation regime, which privileges EITE industries with a 90 per cent level of allocation that continue to receive NZUs in excess of their ETS exposure, be allowed to constrain the NDC budget of 601 MtCO₂ –eq over 2021–30?

Confused? Then you understand.

- Video courtesy of RNZ.