Reviewing the Emissions Trading Scheme

29 March 2016

A Brief History of the Emissions Trading Scheme (ETS) in New Zealand

In 2008, the New Zealand Government introduced an emissions trading scheme (ETS) for greenhouse gases.  It required upstream energy suppliers, the users of imported fossil fuels, and industries with CO2 process emissions, to surrender a New Zealand Emissions Unit, for every tonne of greenhouse gas (GHG) that would be subsequently be emitted.  Upstream suppliers pass on the costs of these emission units to downstream users.

The Government was aware that energy-intensive, trade-exposed industries would suffer competitively if they were fully exposed to this cost.  It therefore provided a free allocation of up to 90% of the emission units required to these industries.  It provided a price cap of $25 for an emissions unit.

Geothermal power Station, near Taupo New Zealand

Geothermal power Station, near Taupo New Zealand

In 2009, the incoming Government made some amendments to the ETS, in recognition of the effects of the global financial crisis.  It reduced the requirement to surrender emission units to one unit for every two tonnes of GHG emitted.  It delayed indefinitely the planned phase-out of the free allocation of units to energy-intensive, trade-exposed industries.

ETS Implications for New Zealand’s Energy Users

The ETS legislation requires that the scheme be reviewed in 2015, and the Government has just released a discussion paper, inviting submissions.  The aim of the review is to ensure that the ETS contributes to a change to a low-carbon economy, which readily adopts new energy-efficient and renewable energy technologies.

The Government believes that the New Zealand economy needs to transition to a low emissions economy. The NZ ETS is New Zealand’s main tool for reducing emissions and will play an important role in this, although other measures will also be needed.  Earlier this year, it announced a new climate change target to reduce GHG emissions to 30 per cent below 2005 levels by 2030. This new, more ambitious climate change target will apply from 2021 to 2030, and will be more challenging to achieve than past emission reduction obligations.

The ETS Review in 2015-6

The ETS transitional measures will therefore be considered during this review.  The discussion paper has made the “one-for-two” emission unit requirements a priority issue for submissions, along with managing the cost of moving to this.  It states that this was a transitional measure and the rationale for this no longer exists.  The proportion of emission costs within total energy costs, is therefore likely to increase in future years.

This will be an issue for energy-intensive, trade-exposed industries.  For these industries, it is important that free allocation continues until such time as international competitors are also subject to costs on their emissions.  If our energy-intensive, trade-exposed industries are exposed to these costs ahead of international competitors, then they will become uncompetitive.  Either their exported products will not be competitive in international markets, or their domestic products will be subjected to unfair competition from exports.  Internationally, the term “carbon leakage” is used to describe this.  The risk of climate change results from global GHG emissions.  It does not matter where they occur.  Therefore if New Zealand reduces its emissions by “exporting” industrial emissions, it may appear to improve its own emissions profile, but it is not contributing to reducing global climate change risks.

The outcome of this review will impact on both the efficacy of New Zealand’s climate change policies, its energy prices and its international competitiveness.  There is a balance needed here, and constructive business submissions can help the Government to find that balance.  Submissions on these issues will be due by 19 February 2016, while submissions on other issues can be made until 30 April 2016.