New Zealand: The ETS Review - likely inputs and outcomes

Brief Counsel
Last Updated: 15 February 2011

By Andy Nicholls, Frank McLaughlin and Chris Bougen

Events in the international arena will be a key input for the Emissions Trading Scheme Review (ETS Review). In particular, the Review Group has been instructed to keep a close watch on the work of the Australian Multi Party Committee on Climate Change.

This Brief Counsel looks at what is happening on the world stage, and the likely outcomes of the Review.

Review scope

A periodic review of the operation and effectiveness of the ETS is mandatory under the ETS legislation (the Climate Change Response Act 2002). This first ETS Review must be completed before the end of this year. But in setting the Terms of Reference (TOR), the Minister for Climate Change Issues, Nick Smith, has asked for the review panel's report by 30 June 2011.

The TOR reflects a clear desire to move away from two key points of debate over recent years: whether New Zealand should be taking action on climate change and whether an ETS is the most appropriate response. Both these questions are expressly out of scope.

Instead the focus is on:

  • the implications for the design of the New Zealand ETS arising from whatever international arrangements (if any) succeed the Kyoto Protocol
  • whether the transitional phase (the 50% surrender obligation for certain emitters and the $25 price cap per emission unit) should be extended beyond 31 December 2012
  • whether the legislated timetable for the remaining sectors (waste, synthetic gases and agriculture) to enter the ETS should be revised (they are all scheduled to begin mandatory reporting next year with full entry in 2013 for the first two and in 2015 for agriculture), and
  • whether synthetic gas emissions should be included in the ETS at all or would be better dealt with through "alternative approaches" (a likely nod to the success of the Montreal Protocol on Substances that Deplete the Ozone Layer).

When announcing the TOR, the Minister said that we need to "keep an eye on international developments and how the ETS is working in New Zealand to ensure we are doing our fair share on climate change at least cost to consumers and businesses".

So what recent international developments have occurred and how might they impact on the ETS Review, and on the current implementation schedule?

Australia is still groping toward an agreed policy...

A key driver of the changes the National-led Government made to the ETS in 2009 was to align it with the Australian Government's planned Carbon Pollution Reduction Scheme. However the ETS was left to go it alone when Kevin Rudd was unable to get his scheme through the Senate.

Since then, nothing has changed the Minister's view that "a close relationship between New Zealand and Australia on climate change policy continues to make sense for both countries". The continuing difficulty for New Zealand is that it is still unclear what will happen in Australia and that uncertainty is likely to persist through most of this year.

Australian Prime Minister, Julia Gillard, chairs the Multi Party Committee on Climate Change, has two of her Ministers on it (Wayne Swan and Greg Combet) and has invested significant political capital in the search for a cross-party agreement on the introduction of a price on carbon.

This weekend, "The Australian" newspaper reported that Gillard will this week propose a fixed carbon tax for introduction in 2012, as a transition towards a cap and trade scheme by around 2015, with support for the electricity and trade-exposed sectors at levels commensurate with those initially proposed by Rudd.

The Greens, whose vote will be needed to give the Government a majority, have previously opposed compensation, as well as being critical of the emission reduction targets signalled by the Government. Any agreement will, therefore, require a big political compromise.

Murk at the UN also...

The Cancún conference rescued the UN process after the debacle at Copenhagen, and there is now cautious optimism that new rules can be agreed that include emission reduction commitments by both developed and developing countries, and in particular by key countries such as China and the US.

However the extent of any such commitments remains unclear, and there has been no progress on agreeing principles for allocating limited emission entitlements across countries (assuming that an emission entitlement mechanism is retained). Substantive progress at the international level will take some time and the Republican takeover of the US House of Representatives means that the US's contribution will continue to be problematic.


The glacial progress in the UN negotiations does not mean that climate change has slipped off the global political agenda.

The work of the Global Research Alliance on agricultural emissions (in which New Zealand is taking a leadership role) continues, as do regional and domestic initiatives.

The adjustments to the EU Emissions Trading Scheme for the 2013-2020 period have already been decided, with the EU ETS being strengthened (and the direct cost to European industry set to increase) by more auctioning of emission allowances, less free allocation and greater restrictions on the importation of credits from outside the EU.

Reports out of China are that Beijing is moving toward developing a domestic carbon market to promote much needed energy efficiency as well as reduce emissions. And California has adopted a mandatory cap and trade program to be phased in from next year.

These developments suggest a cost of carbon is beginning to be introduced in more economies around the world, including in key trading partners. But there is a distinct lack of coordination (not helped by the murk at the international level) of both the pace of implementation and the level of carbon cost incurred directly by domestic industry and consumers.

Implications for New Zealand

There is a recognition within the Government that our "clean, green" brand will be compromised (at potential cost to our food exports and tourism) if we are seen to drop the ball on climate change. The existence of an ETS remains a tangible accomplishment for New Zealand, despite the debate over its strength. So while the operational settings and pace of implementation of the ETS are open for discussion under the ETS Review, the question of whether New Zealand should have an ETS is not.

Given Nick Smith's objective of maintaining a close relationship with Australia on climate change policy, the ETS Review will closely watch policy initiatives by the Gillard Government over the coming months. While Australia grapples with the form of an Australian scheme, the key issues for the ETS Review in New Zealand are likely to be:

  • whether Australia ultimately adopts a carbon pricing mechanism
  • if it does, the level of assistance to Australian industry as part of any mechanism, and
  • what adjustments (if any) should be made to the ETS to maintain a "level playing field" for trade-exposed industries in New Zealand.

It is unclear whether any answers to these questions will emerge from Australia by the time the ETS Review report is due mid-year.

Given this the review may recommend staying with the status quo until the broader picture becomes clearer, or it may recommend acting now to put back the timetable for full implementation. The TOR hints at this by expressly questioning the duration of the transitional supports (the 50% surrender obligation and the $25 price cap).

National has already clearly signalled that it will not bring agriculture into the ETS unless the technologies are available to enable farmers to reduce their emissions and if inclusion would put New Zealand agricultural exports at a disadvantage to our competitors. However, whether the deferral of the 2015 entry date is confirmed or simply foreshadowed in the review is as yet uncertain.

As noted above, the Review Group, chaired by David Caygill, is to report to the Minister by 30 June this year. Mr Caygill says the committee plans to publish an issues paper by mid-March, accompanied by a call for written submissions, which must be in by mid-April. Any oral submissions are likely to be constrained by the tight timetable for the review.

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