UPDATED: The Government has announced a package of changes to the Emissions Trading Scheme (ETS) following a review of the system.
Agriculture was not included in the scope of the review and while the ETS will be re-opened to international units, with limitations, the timeframe on this has not yet been set.
The SMC asked experts to comment on the review. Feel free to use these comments in your reporting. More information and past comments on the ETS are available here.
Updated with new comments.
Dr Suzi Kerr, Senior Fellow, Motu Economic and Public Policy Research, comments:
“Overall these proposals are a positive move toward creating an ETS architecture that can provide a clear long-term price signal to guide low emissions investment.
“Creating an auction mechanism and different price ceiling will enable the government to set a cap on the number of emission units in the NZ ETS – and hence control New Zealand’s domestic emissions (other than biological emissions from agriculture). A cap is hard to set but the decision cannot be avoided and will only get harder with time. With the current bank of NZUs, the private sector currently has a lot of flexibility in the timing of emissions if a cap is set now. With the five-year rolling cap, that cap will be regularly adapted. We don’t have to get it ‘right’ now; we do need to make a decision and move forward. The current price ceiling model is no longer fit for purpose; revising it is urgent.
“Explicitly recognising that the use of international units by private actors in New Zealand should be limited, even if in future they are able to purchase them directly (currently no internationally accepted mechanism exists) is critical. This announcement should provide clearer signals to ETS participants that our experience of unlimited access to cheap international units will not be repeated and help them re-focus on the real work of domestic mitigation.
“The announcement still sends the unfortunate message that the only way we can access international units to contribute to global mitigation and meet our targets is through linking of emissions trading markets. This is only one option, and in my opinion an inferior option, for credibly helping to reduce emissions in developing countries that are unable to transform toward low economy societies as quickly as they would like. We are working with international partners to develop a stronger, more credible government-to-government approach to catalysing and supporting transformational change.
“The rolling five-year approach to setting caps and price controls is welcome. Together with the gradual de-politicisation of climate policy that is being achieved through efforts by both politicians and civil society groups, it will provide a more predictable process for policy decisions and for flexible adjustment in those decisions as external conditions change. This will reduce the emission price uncertainty we create ourselves within New Zealand. Those making decisions with emissions implications will be better able to predict medium-term emission prices and better manage the remaining long-term risks from external factors.”
Professor Ralph Sims, director, Centre for Energy Research, Massey University, comments:
“New Zealand’s total ‘gross’ greenhouse gas emissions have increased over 24% between 1990 and 2015 (latest data from MfE). If we take removals of CO2 by forests planted after 1989 and those harvested into account, our ‘net’ emissions have increased 63% over the same period.
“We have signed the Paris Climate Agreement and agreed to reduce total emissions by 11.2% below the 1990 levels by 2030. The Paris Agreement will not keep the world anywhere near below the 2oC temperature rise that is the internationally agreed ambition, so all countries have been asked to be more ambitious in reducing emissions – New Zealand included. We don’t have much time to avoid more catastrophic climate impacts – and the recent series of unusual weather events in NZ could become the norm – just as various climate models have projected.
“The ETS has been promoted by government as its key policy to reduce greenhouse gas emissions. However, even at the higher current carbon price of around $18-19 /t CO2 (compared with $5-6/t in earlier years), it has had little, if any, impact on encouraging businesses or householders to reduce their emissions.
“For example, a car owner might spend around $2000 a year on petrol so the additional cost of around $30-40 paid for producing CO2 by burning that fuel under the ETS is not enough to affect driving habits, the choice of car, or journey mode. Indeed, most people have no idea they are paying extra for producing more CO2 when burning oil products, gas or coal under the ETS.
“The review of the ETS is to make it ‘fit for purpose’ for the 2020s. But time is running out and we need to start reducing emissions now. Todays’ announcement provides only several ‘in-principle decisions’ that are subject to further discussions, consultations etc. Further procrastination whilst our emissions will continue to rise making it that much harder to reduce domestic decisions by 2030 and beyond. It seems this government, just like the Trump administration, do not yet fully understand what the science of climate change and recent observations of ice melting, extreme weather events, sea level rise are telling us all.”
Catherine Leining, Policy Fellow, Motu Economic and Public Policy Research, comments:
“Policy uncertainty is a powerful deterrent for efficient low-emission investment. Since late 2012, the NZ ETS market has had no certainty on long-term unit supply and domestic emission prices – or on how quickly New Zealand will head towards net zero domestic emissions.
“The New Zealand government has announced four significant changes to the NZ ETS which will make it a more useful tool for helping to meet New Zealand’s emission reduction targets under the Paris Agreement.
“This package signals the mechanisms that the government will use to manage future supply and prices in the NZ ETS in alignment with New Zealand’s targets. It does not tell us what unit prices will be. The mechanisms have potential to shift New Zealand onto a low-emission pathway, but only if they are implemented well. The current uncertainty for low-emission investors will continue until further decisions are made.
“At this time, the government has chosen not to implement a price floor, which would have offered a minimum return on low-emission investment and served as a price safeguard against interactions between the NZ ETS and other policies. We looked at this in our recent paper and it would be worth reconsidering.
“Over 2021-2030, New Zealand faces a projected target gap of 220 Mt CO2eq. The stated intention is to meet this through domestic emission reductions, forestry and purchase of international emission reductions (which at present can only be done by government and whose availability and cost are uncertain). Furthermore, NZ ETS participants have a sizeable bank of NZUs which will be honoured by the government.
“The government has not signalled how the cost of bridging this target gap will be allocated across ETS sectors, non-ETS sectors and New Zealand taxpayers. The government did affirm that current free allocation to industrial producers will remain unchanged through 2020 and biological emissions from agriculture will remain outside the NZ ETS for the foreseeable future.
“In an ETS, prices are set by long-term expectations of supply. If the market expects future prices to rise significantly in line with New Zealand’s target, then there is a possibility participants will choose to bank NZUs for a future where they will have more value, and meet their obligations using the $25 fixed-price option instead. This poses a fiscal risk to government.
“The government’s decisions represent a crucial signalling of the direction of travel for the NZ ETS, but the ultimate effectiveness will depend on the details of implementation.”
Dr Ivan Diaz-Rainey, Associate Professor of Finance, University of Otago, comments:
“The announced package provides broad brush direction of travel for changes to strengthen NZ ETS post-2020. The detail will come later following further work in 2018, thereby pushing much of the critical detail beyond the upcoming election.
“As we all know, the devil can be in the detail but it has to be said that that the in-principle decisions announced are to be welcomed. They address many of the concerns about the scheme [See my prior comments on this]. These include the need for auctioning to provide a stronger signal and to help manage the potential financial risks to the government that arise from the fact that we have hard target from the Paris agreement and an NZ ETS that is an intensity system (i.e. no hard cap).
“There is going to be a limit on importation post 2020, which is also welcome but the detail and level still need to be worked out. The government is also signalling that the $25 ceiling may need to be raised and managed over time.
“All the detail for the prior points are to be made joined up, managed and delivered in a manner that do not provide surprises to the market through a five-year rolling planning cycle. The planning cycle will formalise the ability to make changes as circumstances change and is designed to provide more certainty on unit supply. This builds in market design flexibility in a relatively predictable way. Again, this is welcome in principle – it will be interesting to see more detail of how this will all work.
On the less positive side I would make two points: (1) agriculture was not part of the review, but it remains the elephant in the room, (2) it is completely understandable that further work is needed on the detail of the proposals announced and if this is all pretty much wrapped up in 2018 then this will give business enough time to plan for the post 2020 arrangements.
“But if it is not wrapped up by 2018 and it drags on well beyond then we are in danger of making changes that do not allow for enough planning as we approach 2021. It should be doable to work out the core of the detail in 2018 if there is no major political change in the Beehive after the election. Whether political realities allow for it is another matter.”
Dr Adrian Macey, senior associate, Institute for Governance and Policy Studies, Victoria University of Wellington, comments:
“There is one major change signalled – a future limitation on use of international markets. Something that has run counter to the doctrine that has prevailed so far that it does not matter where emissions reductions are made. But this was leading to potentially unsustainable consequences – notably the prospect of spending billions of dollars offshore with no benefit to the NZ economy or its own transition to low carbon.
“And it had already led to the introduction of a huge amount of ‘hot air’ into the NZ ETS through purchasing of dubious credits from Ukraine and elsewhere.
“Linked to that is the signal that government envisages intervening to ensure the NZ carbon price is aligned with our climate change targets. Previously the doctrine was that the ‘international price of carbon’ would be appropriate in NZ.
“So the potential is there for major change in design.
“These longer term implications are accompanied by a reassurance that until around 2020 it’s business as usual and no ETS participants should expect major change.
“The Cabinet paper is unnecessarily redacted to suppress the reasons why it’s hard to link the NZ ETS with others under its present rules [our inclusion of forestry is a major one; the lack of a domestic target with the resulting complete openness to international markets is another] and also which countries NZ is engaging with over possible linking (this can be via ETS schemes or through an offset mechanism).
“Absent is an emphasis on the NZ long-term transition – it’s still on ‘targets’. That’s the focus of the Productivity Commission’s work but it would have been useful to state in this context. There’s a commitment to consult widely with stakeholders over future changes.”
Professor Euan Mason, School of Forestry, University of Canterbury, comments:
“If the Government creates credits to give ‘free allocations’, or alternatively auction, to polluters, then these ‘thin air’ carbon credits will have no environmental credibility. Credits should represent environmental gain, and only those that represent carbon extracted from the atmosphere can confer ‘greenhouse gas (GHG) neutrality’. Creating credits out of thin air simply adds to the total supply of credits and undermines both credit prices and the idea of ‘greenhouse gas neutrality’. For a purchaser of credits to claim GHG neutrality, the credits must represent the removal of their pollution from the atmosphere, and just printing credits does not change the atmosphere.
“If the government instead purchases foreign ‘offset’ credits, then the notion of GHG neutrality is still undermined (see an explanation). Moreover, why would a government purchase credits only to auction them to polluters? Why not have the polluters purchase them directly?
“There appears to be no intention to bring agriculture into our emissions trading scheme (ETS). Agriculture contributes roughly half of New Zealand’s annual emissions of greenhouse gasses, measured as CO2 equivalents. Ignoring this sector provides a large subsidy for pollution from the rest of us, and as one of the options for mitigating climate change is carbon forestry, providing a financial advantage for other land uses makes carbon forestry less likely.
“Participation of carbon forestry in our ETS is optional, and how could you recommend that anyone participates in New Zealand’s emissions trading scheme when the supply of bogus, thin air credits is infinitely variable? It costs money to sequester carbon. It costs nothing to print a thin air credit.
“New Zealand’s greenhouse gas emissions continue to rise, having risen 54% in net terms and 23% in gross terms since 1990. The ETS has failed in its mission so far (see here), and we had high hopes for this review. Unfortunately, it is, instead, the final nail in the coffin for our ETS.”