Modest New Zealand ETS shows the way

Tucked away on the bottom of the world, New Zealand is showing bigger developed nations how its done when it comes to tackling greenhouse-gas emissions and climate change. The first jurisdiction outside Europe to take the plunge on a nation-wide mandatory carbon pricing scheme, New Zealand has gone a long way to tackling the political and economic challenges of fundamental low-carbon reform that have bedevilled the US, Canada, Japan and Australia.

The New Zealand Emissions Trading Scheme (NZ-ETS) began in earnest on July 1 this year, obligating emitters in the power, industrial processes and transport fuels sectors for their emissions. The scheme has been in operation in the forestry sector since 2008 where economic incentives to sequester carbon appear to be driving a fundamental turnaround.

The NZ-ETS is a “modest” and “moderated” scheme, said Dr Nick Smith, New Zealand’s environment and climate change minister, addressing the Australia-New Zealand Climate Change and Business Conference in Sydney this week. Compared to the US and Australia where governments have put emissions trading and carbon pricing in the too-hard basket, New Zealand offers some valuable lessons on how to get it done. They are; start slowly, start cautiously but, above all, get started. The government also says leveraging off the EU-ETS and the work done by Australia designing its shelved CPRS helped it create a balanced, workable scheme. In fact, the joke New Zealanders like to tell is that the country boasts an ETS made in Australia, for Australians, but stolen by New Zealand.

It can be argued that it was always going to be easier to price carbon in New Zealand than in the US, Canada and Australia. The Land of the Long White Cloud has a significantly lower dependence on fossil fuels for power generation and a much smaller mining and minerals extraction sector. And the country is yet to tackle the emissions challenge in its agricultural sector, responsible for almost half the national emissions profile. But after a decade-long debate, a system is in place that provides real incentives to reduce emissions, Smith says. In his speech, the minister maintained that while it is “only a first step” and carbon pricing remains a “work in progress”, the sky hasn’t fallen in, fuel and power price rises are modest and changes in investment and operational behaviour towards a low-carbon footing are clearly evident in business sector. Small and medium-sized energy-intensive businesses are seen changing from burning coal to wood waste and exploring options for geothermal energy, as one example.

Working out arrangements for protecting emissions-intensive, trade-exposed industries (EITEs) was the most difficult challenge, Smith said. The National government overhauled the original NZ-ETS design under the previous Labour government to one targeted at emissions intensity rather than absolute emissions. Free NZU emissions allowances are allocated not on the level of an entity’s total emissions but on its turnover and according to average industry emission levels. This avoids punishing emitters that have already taken steps to lower emissions and removes perverse incentives for industry to cut production.

The scheme applies transition carbon pricing arrangements for the first two-and-a-half years. A capped price, much like a carbon tax, of $NZ25 ($US €) applies although emitters can also buy NZUs and eligible foreign credits, including CERs, for compliance. NZUs are currently trading around $NZ18-19 on the spot market, offering an opportunity to lower the cost of compliance for those who want to trade.

During the transition phase, emitters are also only liable for half their emissions, having to surrender one allowance for every two tonnes of emissions. Intended to ease the impact of the scheme in the early years, the government also argues that the 1-for-2 approach offers the best of both worlds. Smith boasts of its neatness in softening the carbon price impact on emitters but not penalising foresters who still receive full price of $25 tonne for carbon sequestered.

Forestry was always going to be a key sector in New Zealand’s attempts to lower emissions, a large sector offsetting a fair chunk of rising industrial and energy emissions during the 1990s. This helped control the country’s Kyoto liability during the 2008-12 commitment period and the government is relying on further new forest plantings to make a big contribution to target commitments up to 2020. But during the 2000s, the forest contribution waned amid greater economic incentives for landowners to convert forest to agricultural land. There was net deforestation between 2005 and 2008, now reversed since the ETS price signal came into play.

There are criticisms of the scheme in the forestry sector; particularly from those with pre-1990 forests not eligible to generate NZU credits as their trees grow, yet liable for emissions from clearing if the land is not replanted.  And half the scheme participants who are eligible are small landowners and foresters holding less than 50 hectares of forest. For them the business risks are not insignificant, operating without diversified holdings of different tree species, age and class. This creates vulnerabilities, especially in covering potential harvest liabilities, Peter Weir from Ernslaw One, a large forest estate owner on the South Island told the conference.

Forestry is one area where future refinement may be needed. The NZ-ETS will be reviewed every five years with the first review due next year to assess the transition phase and plan for the post-2012 phase. How the NZ-ETS evolves will depend greatly on international developments – commitments to carbon pricing in other developed countries and the progress of a new global climate agreement at the UN. At this stage, there is no guarantee that, with a small trade-exposed economy, New Zealand will maintain its scheme beyond the middle of the decade if the United States and neighbouring Australia don’t come good with their own emissions trading schemes.