The New Zealand Emissions Trading Scheme (NZ ETS) is an all-gases partial-coverage uncapped domestic emissions trading scheme for emissions of greenhouse gases. It features price floors, forestry offsetting, free allocation and auctioning of emissions units.
The NZ ETS was first legislated in the Climate Change Response (Emissions Trading) Amendment Act 2008 in September 2008 under the Fifth Labour Government of New Zealand and then amended in November 2009 and in November 2012 by the Fifth National Government of New Zealand.
The NZ ETS was until 2015 highly linked to international carbon markets as it allowed unlimited importing of most of the Kyoto Protocol emission units. There is a domestic emission unit; the 'New Zealand Unit' (NZU), which was initially issued by free allocation to emitters until auctions of units commenced in 2020. The NZU is equivalent to 1 tonne of carbon dioxide. Free allocation of units varies between sectors. The commercial fishery sector (who are not participants) received a one-off free allocation of units on a historic basis. Owners of pre-1990 forests received a fixed free allocation of units. Free allocation to emissions-intensive industry, is provided on an output-intensity basis. For this sector, there is no set limit on the number of units that may be allocated. The number of units allocated to eligible emitters is based on the average emissions per unit of output within a defined 'activity'. Bertram and Terry (2010, p 16) state that as the NZ ETS does not 'cap' emissions, the NZ ETS is not a cap and trade scheme as understood in the economics literature.
Some stakeholders have criticised the New Zealand Emissions Trading Scheme for its generous free allocations of emission units and the lack of a carbon price signal (the Parliamentary Commissioner for the Environment), and for being ineffective in reducing emissions (Greenpeace Aotearoa New Zealand).
The NZ ETS has been reviewed and amended many times: first in November 2009 then in late 2011 to 2012 by an independent panel. A 2016 Government review concluded that the NZ ETS had caused only minimal reductions in net emissions. In 2020 rules for emissions budgets and auctions of units within price caps were introduced.
Economics
Economic modelling In June 2009, Nick Smith released an economic modelling report on the NZ ETS by economic consultants NZIER and Infometrics which had been prepared for the Emissions Trading Scheme Review Committee. Smith stated that the report supported the Government's intention to modify the NZ ETS. The report "Economic modelling of New Zealand climate change policy" created static computable general equilibrium (CGE) models using 2008 emissions projections. The terms of reference set the policy options to look at as the 2008 NZETS vs the least-cost option for meeting the Kyoto liability vs a revenue-neutral tax on carbon equivalents.
The impacts of the various options were estimated as the differences between a carbon tax and a reference 'business as usual' scenario assuming New Zealand had not signed the Kyoto Protocol. The variables changed in the model runs were the NZ carbon price ($0, $10, $25 or $100), the world carbon price, the duration (short term to 2012, long term to 2025), the level of free allocation and whether the Government assumed all Kyoto liabilities. The results of each model run was reported as the percent difference from the 'no-Kyoto' 'business as usual' scenario in 2012 or 2025.Stroombergen et al. 2009, p 22
The report noted several limitations of computable general equilibrium models that should be kept in mind in interpreting the results: CGE models are only an approximation of highly complex real economies, results can only ever be indicative,Stroombergen et al. 2009, p 16 and are highly dependent on the structure of the models and the input assumptions and on the assumption that other variables remain constant. Therefore, the "interpretation of CGE results should centre on their direction (up or down) and broad magnitude (small, medium or large), rather than on the precise point estimates that the model produces".
The report's bolded conclusion was that a narrow carbon tax or trading scheme was the least cost option in the short term.Stroombergen et al. 2009, p 40 Predicted reductions in GHG emissions ranged from 0% (Government pays), 0.4% to 2.8% for a $25 carbon price and 3% to 4% for a $50 price.Stroombergen et al. 2009, Table 17, p 38 However, the report noted that there was little difference in costs between the government paying all and the ETS with free allocation, as all the model results indicated small reductions (-0.1% and -0.4%) in Gross National Disposable Income compared to 'business as usual'.Stroombergen et al. 2009, p 39 In respect of the 2009 amendments to the NZ ETS, intensity-based allocation was favoured over allocations based on historical emissions by business groups, and representatives of large emitters, by Fonterra and by Federated Farmers. Environmental organisations and opposition political parties opposed intensity based allocations.
First version of the emissions trading scheme, 2008
Background In 2002, the Fifth Labour Government of New Zealand adopted the Climate Change Response Act 2002 in order for New Zealand to ratify the Kyoto Protocol and to meet obligations under the United Nations Framework Convention on Climate Change.
Labour's emissions trading scheme In 2008, the Labour Government enacted the Climate Change Response (Emissions Trading) Amendment Act 2008 which added the first version of the New Zealand Emissions Trading Scheme to the Climate Change Response Act 2002.
The proposed scheme covered all six greenhouse gases specified in the Kyoto Protocol and was intended to progressively apply to all sectors of the economy including agriculture. 'Participants' (who would account for their emissions) were to be few, and high in the production chain of each sector. Their compliance obligation would have been to surrender one New Zealand unit (NZU) or one internationally tradable Kyoto-compliant unit for each tonne of emissions.
New Zealand units were to be capped in number and were to be allocated to participants either by grandparenting (gifting) or auctioning. Sectors of the economy were to have progressively entered the NZ ETS, with forestry the first from January 2008 and agriculture last in January 2013. Allocation rules varied between sectors. In general, participants who could pass on costs of the ETS, such as fuel companies, would not be allocated free units. Participants such as exporters with products that are priced internationally, would be allocated free units.
Forest owners with pre-1990 forests were to receive a fixed one-off free allocation of units. Transport (liquid fossil fuels), stationary energy and industrial processes would not receive a free allocation of units. Trade-exposed industries would have received a free allocation of 90% of 2005 emissions annually to 2018. From 2019 to 2029 the free allocation of units would have phased out at the rate of a 1/12 (8.3%) reduction each year. Agriculture would have received a free allocation of 90% of 2005 emissions each year to 2018. From 2019 to 2029 the free allocation would have phased out at the rate of a 1/12 (8.3%) reduction each year. Fishing would have received a free allocation based on 50% of 2005 emissions each year from July 2010 to January 2013.
The Labour Government subsequently lost the 2008 New Zealand election to the coalition led by National Party, who had campaigned on amending the NZ ETS.
The amendments of 2009
History In December 2008, the National-led Government set up the Emissions Trading Scheme Review Committee to review the NZ ETS. The committee provided a report nine months later on 31 August 2009.
In early September 2009, Rod Oram predicted that the National Government's goals would be; to adopt intensity-based allocation of free carbon credits to export industries; have no cap on greenhouse gas emissions; to have a temporary cap on the price of carbon; to delay bringing in sectors into the NZETS; to delay phasing out free emission units; and, maximum alignment with the Australian Carbon Pollution Reduction Scheme. Oram viewed these changes as significantly weakening the incentives to reduce emissions and to plant carbon forests.
On 14 September 2009, the National Government Minister for Climate Change Issues Nick Smith announced that it had reached an agreement with the Māori Party about revisions to the NZ ETS and that an amending bill would be drafted in order to "make the ETS workable and affordable".
On 24 September 2009, the Climate Change Response (Moderated Emissions Trading) Amendment Bill had its first reading in Parliament and was sent to the Finance and Expenditure Select Committee for public submissions.
Submissions to the Finance and Expenditure Committee Between 15 October 2009 and the date of its final report, 16 November 2009, the Finance and Expenditure Committee received 399 submissions on National's draft bill.
Absence of a cap on emissions In 2007, the Ministry for the Environment released a detailed report, "The Framework for a New Zealand Emissions Trading Scheme", which stated the NZ ETS would not have a binding, absolute limit on the total level of emissions allowed in New Zealand. While the quantity of domestic NZ Units gifted to eligible emitters would be fixed, the quantity of international 'Kyoto-compliant' units that could be imported in to match emissions would not be limited. In consequence, as there is no limit on the volume of international emissions units (CERs and ERUs) that may be imported, there is no cap or limit on the volume of emissions permitted in New Zealand provided that emissions units are imported into the country and surrendered. In that respect, the NZ ETS is unlike most other emissions trading schemes,
Ministry for the Environment Fact Sheet 16 stated "There is no cap on the emissions that occur within New Zealand." However, the Ministry for the Environment still regarded the NZ ETS as operating within the cap on emissions established by the Kyoto Protocol for the first commitment period of 2008–2012. Moyes (2008) describes this as a "flexible cap" where New Zealand sourced emissions regulated by the NZETS are constrained only by the international market price for GHG emissions.
Minister for Climate Change Dr Nick Smith's press release of September 2009 announced that the method of allocation of NZ units to trade exposed and emissions intensive firms would now be based on average industry production, where the levels of units allocated would vary in proportion to a firm's production.
In combination with the unlimited use of internationally sourced Kyoto units, the allocation of New Zealand units to eligible emitters in proportion to their production means that there is no cap on total emissions within New Zealand.
There is also no cap on total emissions during the transition period as the Government will supply the market with unlimited New Zealand units at the fixed price of NZ$25 per NZU.
When the NZETS included a proposed free allocation of units to agriculture, there were no eligibility tests. Allocations to agricultural activities were to have been made on an intensity basis. The baseline would have been the sector average emissions per unit of output.
Allocation of NZ Units to trade-exposed activities