An emissions trading scheme, rather than the previously proposed carbon tax, will be the central platform for implementing New Zealand’s commitments under the Kyoto Protocol and reducing the country's greenhouse gas emissions. This was announced by the New Zealand Government yesterday.
Of interest to Australian regulators and companies with trans-Tasman operations is that the scheme will encompass all industry sectors and all gases. The forestry industry will be the first participant, kicking off from 1 January 2008, followed by the fuel retailing and transport sectors in January 2009, power utilities and industry in 2010 and agriculture in 2013.
Alongside the emissions trading scheme there are a range of other initiatives aimed at reducing New Zealand’s greenhouse gas emissions and improving progress towards a more sustainable nation.
The bottom line is that business and households – to varying degrees – will face increased costs.
Fuel companies and electricity generators will definitely have to pay for their allocations under the emissions trading scheme. And agriculture gets a longer timeframe to come on line, as well as the possibility of significant free allocations.
Key aspects of the Government's proposals
The New Zealand Government has clearly positioned sustainability and climate change as one of its key policy platforms going forward. The newly-announced package includes:
- setting up an emissions trading scheme (discussed below)
- a goal to increase renewable electricity generation
- measures to encourage forestry and environmentally-friendly land use, including financial incentives to the forestry industry to encourage planting of more trees
- research into how New Zealand can remain a world leader in agricultural emission reduction
- improved fuel and energy efficiency in buildings, homes and businesses
- a goal to reduce emissions from the transport sector, and to be one of the first countries to widely introduce electric vehicles
- a goal to make the public sector carbon neutral.
To achieve these objectives, the Government has adopted a number of aspirational targets. For example, by:
- 2020 - New Zealand will have a net increase in forest area of 250,000 hectares
- 2025 - the electricity sector will be carbon neutral
- 2030 - the energy sector (including coal, natural gas and geothermal) will be carbon neutral
- 2040 - the total energy sector will be carbon neutral.
How the emissions trading scheme will operate
Much like the proposed Australian model and the current European regime, the emissions trading scheme will be a ‘cap and trade’ scheme. Greenhouse gases emissions will be capped. Those entities that operate within their limits can sell surplus credits. Those that exceed their cap will either have to reduce their emissions or buy further ‘carbon credits'.
By putting a price on greenhouse gas emissions, the Government hopes that producers, consumers and investors will be encouraged to reduce emissions and invest in environmentally-friendly alternatives.
All parts of the economy that emit greenhouse gases will be caught by the scheme, including electricity generation, transport, industrial processes, forestry, agriculture and waste. The inclusion of agriculture and forestry is particularly groundbreaking.
Activities with minimal emissions will be exempted, but the Government has not yet announced details of these.
Core features of the scheme include:
- emission units held by participants need to reflect the emission levels they produce and they will have to surrender one emission unit for each metric tonne of eligible emissions
- participants face binding consequences for non-compliance, including penalties and ‘make-good’ provisions
- the primary domestic unit of trade will be the New Zealand Unit (NZU). One NZU equals one tonne of emissions. (The price of one NZU will be closely tied to the international price of carbon. Although the Government has indicated that the price could be around NZ$15, a higher price may be possible.)
- participants will be allowed to sell to, and purchase from, international trading markets, ensuring market liquidity and price stabilisation.
Allocation of emission units
Of key interest is how emission units will be allocated. At this stage, it appears units will be allocated by sale (most likely an auction) and by a free allocation, but the Government’s thinking on this is far from clear. At a minimum, the following underlying principles will apply:
- broad equity of treatment between and within sectors
- assisted transition, especially by being relatively generous in the first commitment period (2008-2012)
- no assistance for firms whose profits are largely unaffected by the introduction of the trading scheme
- free allocations as the preferred form of assistance
- over time, a move towards zero assistance, for overall efficiency, equity and administrative reasons.
The Government has said it intends to be fair and generous in its initial allocations. Nonetheless, it has specifically ruled out fuel companies and electricity generators as sectors eligible for free allocations. And it has also foreshadowed that some big emitters facing competition from overseas entities that have not yet been confronted by emissions pricing should receive generous levels of free allocations – up to 90% of their 2005 stationary energy and process emissions.
At the same time, and even though it has not actually decided whether any direct obligations will be imposed on individual farmers (as opposed to processing companies), the Government has also indicated that farmers will likely benefit from free allocation of emissions units, based on 90% of their 2005 emissions.
How exactly the Government will balance such concessions with its World Trade Organization and other international obligations is a moot point.
The method of allocation will differ widely from sector to sector, and the Government will need to provide much more detailed information. It will also need to address and explain aspects such as the tax treatment of NZUs and credits, for example.
Timetable for implementation
The proposed emissions trading scheme will have a staged implementation – by the beginning of 2013 all sectors (including forestry, transport, stationary energy, industrial processes, agricultural and wastes) will be covered. Forestry is the first participant, starting on 1 January 2008.
The legislative regime
New legislation will be required to introduce the emissions trading scheme and ensure that the obligations under the scheme can be effectively enforced.
The Government has indicated that legislation will be introduced into Parliament before the end of this year and the main opposition party, National, has already indicated that it generally supports the framework.
All interested and affected parties need to ensure that they make their views known to the legislators in the lead-up to, and during the forthcoming legislative process. At the same time, all sectors of the economy need to start making adjustments now to relevant parts of their operations to ensure these align with the proposed scheme
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