Emissions trading: the right response

Emissions trading: the right response

By Nick Main
Chair, New Zealand Business Council for Sustainable Development

The NZ Business Council for Sustainable Development was an early Supporter for emissions trading in preference to a carbon tax. After receiving feedback on its five strategy papers on energy, sustainability and land use issued at the end of last year the government let it be known that it would be issuing a further paper setting out the design parameters for an emission trading scheme for greenhouse gases (GHGs) on September 20 with a view to a bill being before Parliament before Christmas and a scheme to start at some time in 2008.

To date nothing has emerged other than some broad hints as to the design principles that will be applied although there has been considerable speculation and discussion. The suggestion that a mixture of tax and regulation might be better has been rolled out – sometimes from surprising sources – and there has been a level of disquiet about what the scheme might mean. From Government there has been a clear signal that there will be an extensive engagement process to get the input of business and the public but that the timelines are tight. So lets go over some of the issues that are important to remember and will be helpful in designing your response to the paper when it emerges.

An emission trading scheme is the right response to the issue of climate change. The system is designed to apply a cap to emissions. This means the system must be designed to help with the climate change objective of reducing GHG emissions.. The cap can and should be reduced over time. The system will allow trade to occur so emissions reductions will be carried out by those who can do it at the lowest cost. Many will end up being 'short' normally a position to avoid in any trading system, and this will make prices volatile. Once a trading market is established, financial instruments can be used to reduce volatility for companies just as they do to manage currency or exchange rate risk. In turn this should give rise to risk avoidance behaviour of reducing emissions further. This is a good thing for the planet.

All gasses and all sectors is the right approach: New Zealand is unusual in that its GHG profile is dominated by agriculture and transport and the electricity generating and industrial sectors have relatively low contributions. The European Trading scheme has focussed on generators as they play a significant role in the emissions profiles of European countries. That more narrow approach would not be effective for New Zealand where both agriculture and forestry are significant.

The method of allocating emission rights and the period of phase in are key issues: We expect that some sectors will not be included from the start of the scheme. Some will take longer to respond than others and may have 'competitive at risk' issues. However the policy should map out how they will be brought into the system. Who gets emission rights allocated, the method of allocation, the period of the rights and whether some rights will be auctioned is important. The potential use of offsets (particularly forestry) is important

How will revenues be recycled?: If rights are to be auctioned how will the government deal with the revenue raised? If some is used to totally compensate for competitiveness issues will this undermine the effectiveness of the scheme? Some revenue could be directed to fund research on how to reduce or capture emissions.

Competitive at risk issues will arise: These are likely to be taken into account in rights allocations and are an important part of design. Will competitiveness or risk industries be protected and for how long? Will competing products from non Kyoto Annex 1 countries be levied for emission intensity at our border?

International connectedness is important: Unless the system is internationally linked we run the risk of having a carbon price that is out of step with the world price. Kyoto is an international treaty and will work best when some of the lower cost savings in developing and developed countries can be accessed – it is estimated that 20% of global emissions are caused by deforestation. How we can possibly link to non Annex 1 Kyoto Treaty countries, such as Australia, needs to be thought through.

Some final thoughts about design principals:

The system should take into account the long term objectives. There is a need to reduce GHG emissions by about 50 - 80% over time to avoid catastrophic impacts on the climate.

While it is a level of detail the measurement, reporting and verification obligations will underwrite the effectiveness of the scheme. Individuals, businesses and countries are unlikely to support emissions reductions if they think other businesses or countries are being allowed to "cheat".

The system should avoid forcing closures of plant where it is merely relocated to a less regulated environment and also embedding a competitive advantage to plants that would otherwise be replaced by more efficient plant or processes.

While a cap and trade system can be effective in changing behaviour through the price signals it puts into the market, on its own it may not be sufficient. Some regulation and other mechanisms will be needed to support this.

An emissions trading regime for a country like New Zealand offers not only a strong incentive to reduce our emissions but also the opportunity to access equal or lower cost opportunities to reduce emissions from around the world. By translating an environmental climate change management imperative into a cost that all businesses can understand, it will make it easier for businesses to take action reducing emissions while at the same time reducing costs.

ENDS

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