Emissions Trading Scheme
The Emissions Trading Scheme (ETS) is the primary regime used by the government to achieve its long-term commitment to reduce New Zealand’s greenhouse gas emissions so that our international obligations are met.
Through the ETS, a price is set on emissions by charging certain sectors for the greenhouse gases they emit. Emitters must acquire and surrender New Zealand Units (NZUs) to account for their direct emissions or emissions associated with their products. Emission units (often called ‘carbon credits’) are traded between participants in the scheme. One emission unit can either represent one metric tonne of carbon dioxide, or the equivalent of any other greenhouse gas.
The government has acknowledged that the current framework is not perfect and the ETS must adapt.
In June, the government released two discussion papers as part of its consultation process on proposed changes.
Document 1: Encouraging greater gross emissions reductions
The first document provides four options to encourage greater gross emissions reduction in the ETS while, at the same time, continuing to support forestry removals. It highlights the role that forests have in New Zealand’s response to climate change as well as the associated challenges with widespread exotic forest.
The four options proposed are:
1. Using existing ETS levers to strengthen incentives for net emissions reductions.
The government could reduce the supply of NZUs and therefore reduce net emissions through existing levers such as auction volumes, price controls or industrial allocation. In short, if fewer NZUs are available then fewer emissions would be offset resulting in reduced emissions being produced.
2. Creating increased demand for removal activities to increase net emissions reductions.
Additional entities (such as the government or offshore buyers) could purchase NZUs. This would help to attain the Nationally Determined Contribution (NDC); offshore buyers might purchase them to meet voluntary emissions targets or support voluntary market claims. As the discussion paper notes, there is no evidence of significant demand from offshore buyers and the effectiveness of this options is expected to be limited.
3. Strengthening incentives for gross emissions reductions by changing incentives for removals.
This option would create two prices: one for emissions reduction activities and another for removal activities. A lower price would apply to removal activities, making them less financially attractive. The prices for reduction and removals would still be linked, because an increase to the price for units sold at auction would likely increase the price paid for removal activities.
4. Creating separate incentives for gross emissions reductions and emissions removals.
The fourth option would create two markets with two separate prices: one for gross emissions reduction activities and another for removal activities. Emitters would only be permitted to use units sold at auction, or allocated for emissions-intensive and trade-exposed activities, to meet their surrender obligations, while removal activities would be incentivised through a separate market.
Document 2: Redesign of permanent forest category
The second discussion paper outlines the government’s proposal to take a cautious approach to the redesign of the permanent forest category in the ETS.
It acknowledges both the potential environmental and economic risks associated with large-scale transition of land to permanent forestry. The paper notes that the current ETS settings incentivise increasing levels of permanent exotic afforestation, in particular Pinus radiata, as it provides a much higher return on investment relative to other competing land uses including indigenous forests and some pastoral systems.
Three design choices are presented in the paper and, within these design choices, options are presented.
1. Which forests should be allowed in the permanent forest category?
a. Only transition forests and indigenous forests can enter the permanent forest category, or
b. Exotic forests allowed to enter under limited circumstances. This could, for example, include long-lived species, Māori-owned land or small-scale exotic forests planted on farms.
2. How should transition forests be managed to ensure they transition from exotic to indigenous forest and reduce the financial risks to participants?
a. Retain the status quo – no new specific carbon accounting method for transition forests or
b. New mandatory specific carbon accounting methods for transition forests in the permanent forest category.
3. How should permanent forests be managed?
a. Retain the status quo – no additional forest management requirements introduced for forests in the permanent forest category.
b. New minimum forest management requirements, specific to the permanent forest category, are introduced for all registered permanent forests (exotic, indigenous and transition forests), or
c. New forest management requirements are needed for transition forests.
The consultation for both discussion papers ends on Friday, 11 August 2023. A summary will be published once submissions close. Individual submissions on the discussion papers may also be made publicly available online. It is noted that late submissions may be accepted however they may not be considered in time to inform the next steps for the ETS review.
The ETS is complex and the two discussion papers contain considerable jargon that can be difficult to interpret. If you are interested in how these proposed changes may impact you, please don’t hesitate to discuss this with us. We are here to help.
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