ETS Given Some Teeth, But Overseas Credits And Other Measures Still Needed

Sunday, 14 June 2020, 3:29 pm
Article: NZ Energy and Environment Business Week

First published in Energy and Environment on June 4, 2020.

After five years of work the Government has tightened up the Emissions Trading Scheme with a cap on emissions within the ETS, the creation of a provisional emissions budget and moves to lift the carbon price.

The release of changes to the Climate Change Response (Emissions Trading Reform) Bill and regulations created an avalanche of material with thousands of pages covering the details of what was already complex regulation. It also heralded the Bill’s progress through Parliament where it is now awaiting its third reading.

Minister for Climate Change, James Shaw said adding the cap in what was always intended to be a cap and trade scheme, finally brings into place a mechanism to lower the lid on emissions.

Cap details

The cap on the ETS will be 160m tonnes of CO2 equivalent greenhouse gases over 2021-2025 with an overall provisional emission budget for the 2021-2025 period of 354m tonnes of CO2 equivalent greenhouse gasses. This reflects half of all NZ emissions are agricultural and for the time being remain outside the ETS.

Of these 160m NZ Units (NZUs), 43m will be allocated for free to emissions-intensive trade-exposed industries. While the proposal to ratchet down the free allocation over time is still in place. Another 90m will be auctioned and the remaining 27m will have to come from NZU stockpiles. More detail on the auction system are elsewhere in this week’s Energy and Environment.

The provisional budget represents 15 Mt CO2e in reductions over the five-year period from previous forecasts.

Emissions budget review delayed

The Climate Change Commission will provide advice next year on future emissions budgets. Papers released around the Bill show this has been delayed. The Commission was initially required to recommend the first three emissions budgets and advice on the first emissions reduction plan by 1 February 2021.

The Commission has said these statutory deadlines are challenging and this has been exacerbated by covid-19. In April, the Commission wrote to Shaw asking to extend its deadlines by six months, from 1 February 2021 to 30 July 2021.

As a result changes to the law have been made to allow the Minister to delay deadlines for up to six months if he agrees after a request from the Commission.

Then the Commission will propose a revised emissions budget for 2021-25 that could supersede the provisional emissions budget. This is likely as the current budget is not sufficient to meet commitments under the Paris Agreement to cut NZ’s emissions by 30% below 2005 levels, and 11% below 1990 levels by 2030. Shaw is amongst those who say those commitments are insufficient to meet the wider Paris goal of limiting warming to 1.5C above pre-industrial levels.

The budget allows for 354 Mt CO2e in net emissions over the next five years, the Government's commitment is to only emit around 601 Mt CO2e in net emissions by 2030.

Shaw also acknowledged the reality that to achieve this NZ will have to purchase carbon credits. The rules of this system are yet to be agreed upon and the delays to global climate change talks to November 2021, mean it will be sometime before the framework is known let alone the detail.

There is also a growing realisation that no ETS alone will come near in reducing these emissions. When the ETS was first envisaged many believed it would be the primary tool to reduce emissions by putting a price on carbon and letting the resulting signals sort out the most efficient means to do so.

The problem with this was always that the carbon price needed to achieve this would cause enormous political and economic shocks.

Shaw said the realisation the ETS could only work at the margins for households was a “significant shift in thinking”. It is still hoped though the move to rising carbon prices with a sinking cap on NZUs will shift the calculations businesses make when deciding on investments.

Shaw says the Government will have to use every policy lever available to get emissions down.

This will mean things like incentives for emissions reductions and penalties to change behaviour. But as the Government’s now stalled plans for “feebates” for the light vehicle fleet show this is not easy either.

The committee stage debate on the Bill showed more insights into Shaw’s thinking on issues and this is covered elsewhere in Energy and Environment.

First published in Energy and Environment on June 4, 2020.

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