4 December 2007 Media Statement
EMBARGOED TO 11.30AM
Climate change legislation introduced

Legislation to provide New Zealand with two important tools to respond to the challenges posed by climate change was introduced to Parliament today.

The Climate Change (Emissions Trading and Renewable Preference) Bill establishes a New Zealand Emissions Trading Scheme and legislates for the government’s preference for new renewable electricity generation.

“The Labour-led government believes New Zealand must play its part in the global fight against climate change,” Finance Minister Michael Cullen said today. “We want New Zealand to be the world’s first truly sustainable nation and we are committed to providing the sensible leadership to make that happen.

“The Emissions Trading Scheme establishes a market which provides incentives to
reduce greenhouse gas emissions. It will do so while maintaining economic flexibility, equity, and environmental integrity at least cost in the long term,” Dr Cullen said.

Different sectors will be phased into the scheme over the next five years, and the assistance to help industry and agriculture adjust to the scheme will continue to 2025. The government is also developing proposals to assist households.

“Since announcing the scheme in September, the government has relaxed the penalty regime and set up a process to develop allocation plans. We have also worked closely with business, industry and community groups, and Maori on some key issues, particularly around pre-1990 forestry, assistance, and aspects of the carbon market,” Climate Change Minister David Parker said.

“Further engagement will occur over the next year before these issues are settled. The select committee process will be important for further refinement and improvement. The legislation also provides for a review of the ETS, which must consider the allocation model in the context of the emissions pricing policies of major trading partners.”

The government’s preference for new renewable energy generation will be achieved through a 10 year restriction on new baseload fossil-fuelled thermal electricity generation, except to the extent required to ensure the security of New Zealand’s electricity supply.

This takes effect through a new part 6A added to the Electricity Act 1992. The Bill’s provisions will apply to any proposed thermal generation above 10 megawatts that uses more than 20 percent of fossil fuels as its fuel source.

“We have already said that we expect State-owned generators to heed the government’s message that all new baseload electricity generation should be renewable. That expectation remains.

“This measure gives legislative backing to the policy outlined in the New Zealand Energy Strategy, and ensures privately-owned and publicly-owned generators operate on a level playing field,” David Parker said.

Exemptions to the prohibition will be possible in some circumstances, including when thermal generation is appropriately mixed with renewables or based on waste products, where it is needed in an emergency or to ensure security of supply, or where the needs of isolated communities are most logically met by thermal generation.

The Electricity Commission will recommend whether exemptions are warranted.

Addressing climate change is an important aspect of New Zealand’s economic transformation agenda, and is essential to our biologically-based economy, Dr Cullen said.

“There are real opportunities in adopting a more sustainable approach. Important sectors of the economy – notably tourism, viticulture, and agriculture - are already doing so.

“Our green credentials must be rock solid to compete in a global market place where proven sustainability can be a point of competitive advantage. The Labour-led government is showing leadership by making sure New Zealand is at the forefront of this new way of thinking,” Dr Cullen concluded.

See attached factsheet and Q&A on the Bill. A copy of the Bill is available at:
http://www.parliament.nz/en-NZ/PB/Legislation/Bills/c/0/4/00DBHOH_BILL8368_1-Climate-Change-Emissions-Trading-and-Renewable.htm

Q&A on thermal restriction
Climate Change (Emissions Trading and Renewable Preference) Bill
4 December 2007

1. What is the government’s preference for future energy generation?
In September 2007, the government announced a series of targets to move New Zealand towards a sustainable future, including a renewable electricity target of 90 percent of electricity from renewable sources by 2025. The government’s preference for new renewable energy generation will be strengthened through a 10 year moratorium on the construction of new baseload thermal electricity generation 10MW and above where the fuel source contains 20 percent or more by mixture of fossil fuels, except to the extent required to ensure the security of New Zealand’s electricity supply.

2. Why regulate for renewable energy?

New Zealand has an abundant supply of renewable resources that is cost competitive with fossil-fuels, especially with an emissions price included. However, an emissions trading scheme alone may not preclude new thermal power stations. The price of gas has increased substantially in recent years. Gas prices could drop to a level just below the cost of new renewables, even with emissions pricing. This could close out new renewables and would cause electricity-related greenhouse gas emissions to increase.
It would only take a handful of new gas plants, for example, to take New Zealand down a largely non-renewable and higher emissions path. This would be inconsistent with the government’s vision for a sustainable low emissions energy future for New Zealand, which was set out in the New Zealand Energy Strategy in October 2007.

3. How will security of electricity supply be affected?

It is essential that New Zealand maintain a secure electricity supply to provide firm baseload support, additional energy supply during dry years, and necessary ancillary support for voltage and frequency. For the foreseeable future this will be maintained through increased use of new renewable energy sources along with existing renewable and fossil fuel generation.

Modelling suggests that the portion of renewable generation can be increased to up to 90 per cent without adverse effect to security of supply. Importantly, the legislation does not preclude exemptions on the moratorium on construction of new generation to the extent required to ensure the security of New Zealand’s electricity supply.

4. How will exemptions to the moratorium apply?
Exemptions to the moratorium on the construction of new baseload fossil-fuelled thermal generation would only exist under very specific criteria:
 The plant is non-baseload plant that has an emissions profile or load factor less than a level defined in regulations; or
 The plant is necessary for one or more of the following reasons
 to mitigate an emergency
 to provide reserve energy
 to provide electricity to a small isolated community with no reasonable non-fossil-fueled alternative

 to form part of a co-generation process to improve the overall energy efficiency of the process above a prescribed level; or
 The plant uses an acceptable renewable/thermal mix as prescribed in the regulations; or
 The plant is based on waste material (for example, for burning rubbish using only a small amount of fossil fuel for ignition); or
 The plant will operate in circumstances where an existing thermal electricity generation plant will be retired in whole or part, and the new plant together with any part of the existing thermal plant that is not retired will significantly decrease projected greenhouse gas emissions and will not reduce security of supply.

The Electricity Commission will evaluate and hold public consultation on exemption applications, and make a recommendation to the Minister of Energy on that basis. The Minister of Energy will approve or reject an exemption. Operating new fossil fuelled thermal plant without an exemption, or in breach of exemption terms and conditions is an offence.

FACTSHEET: Climate Change (Emissions Trading and Renewable Preference) Bill
This factsheet explains the contents of the Climate Change (Emissions Trading and Renewable Preference) Bill, which was tabled in Parliament on 4 December 2007.

The Bill has two parts:

 Part 1 amends the Climate Change Response Act 2002 to introduce a greenhouse gas emissions trading scheme covering all sectors and all gases.

 Part 2 amends the Electricity Act 1992 to create a preference for renewable electricity generation by implementing a 10-year restriction on new baseload fossil-fuelled thermal electricity generation, except to the extent required to ensure the security of New Zealand’s electricity supply.
Part 1: Emissions trading scheme

In September 2007, the government announced details of a New Zealand greenhouse gas emissions trading scheme (NZ ETS). Part 1 of the Bill implements the NZ ETS.

Like any emissions trading scheme, the core obligation of participants covered by the NZ ETS is to surrender one emissions unit for each tonne of greenhouse gas emissions that the participant is responsible for. To meet this obligation, participants also have to monitor their activities and calculate any emissions that arise from their activities.

The NZ ETS also provides for participants who do activities that remove greenhouse gas emissions from the atmosphere to earn one emissions unit for each tonne of emissions they remove. They can then sell the emissions units they earn on the market for a profit.

Amendments to existing provisions for the Registry and Inventory Agency
Clauses 4-42 of the Bill amend the existing provisions of the Climate Change Response Act 2002 (“the CCRA”).
Most of the amendments are to Part 2 of the CCRA, which establishes the New Zealand Emission Units Register (“NZEUR”). These amendments extend the scope of the NZEUR to allow:
 New Zealand Units (“NZUs”) to be created, held and transferred between account holders
 Participants to surrender NZUs and other units (including Kyoto units) to meet their NZ ETS obligations
 Linking of the NZ ETS to the international Kyoto market (clause 28 (new section 30E) allows people to convert NZUs into particular Kyoto units for transfer to overseas buyers)
 Linking of the NZ ETS to other countries’ domestic trading schemes (overseas registries and emissions units can be approved for linking to the NZ ETS by regulation when such linking is considered appropriate).
The amendments re-enact the existing regulation-making powers in section 50 of the CCRA, enabling restrictions to be placed on NZEUR accounts, units and transactions. These powers are being moved from Part 3 of the Act into Part 2 so that all the NZEUR provisions will sit together in the amended Act.

These powers include the ability to restrict the type of emissions units that may enter the NZEUR (clause 28, new section 30G). If, for example, the government decides to restrict the types of Assigned Amount Units that may enter the NZEUR, it would use this power. Importantly, the amendments make clear that restrictions of this type will only apply from that date forward to emissions units not already held in the Registry.

There are also amendments to the inventory agency provisions of the CCRA. The “inventory agency” (which is in practice the Ministry for the Environment) is responsible for managing New Zealand’s inventory of greenhouse gas emissions as required under the Kyoto Protocol. The amendments to these provisions (clauses 30-42) are technical only, aligning the existing Part 3 with the other amendments.

New provisions for the NZ ETS
Clause 43 of the Bill inserts new Parts 4 and 5 into the CCRA. New Parts 4 and 5 contain provisions to implement the core provisions of the NZ ETS, including:
 who is covered by the NZ ETS and at what date
 what their obligations are
 compliance and enforcement of obligations
 allocation of emission units
 certain sector-specific provisions.
People covered by the scheme – who and at what date are they covered?
People with obligations under the NZ ETS are called “participants”.

Participants are the people who do the activities that are defined as resulting in greenhouse gas emissions, and who therefore have obligations to calculate the emissions from their activities and surrender one emissions unit for each tonne of those emissions. Participants are also the people who do activities defined as removing greenhouse gas emissions from the atmosphere, who may receive one emissions unit for each tonne of emissions removed.
Clause 44 of the Bill inserts new Schedules 3 and 4 into the Act. These schedules define the activities that result in, or remove, emissions.

Different parts of these schedules apply from different dates (see clause 4). This means that people who do the activities in the schedules only become participants (or may choose to do so) from the dates the schedules apply. This allows for a staggered entry of different sectors into the NZ ETS.
Schedule 3: any person who does an activity listed in Schedule 3 must register as a participant under the NZ ETS (see clause 43, new sections 54 and 56).

People only have to register after the date the relevant part of Schedule 3 (where their activity is listed) applies. The activities in Schedule 3 apply to the following sectors on the following dates:
 Part 1: forestry (pre-1990 forest land) – applying from 1 Jan 2008
 Part 2: liquid fossil fuels (transport) – applying from 1 Jan 2009
 Part 3: stationary energy – applying from 1 Jan 2010
 Part 4: industrial processes – applying from 1 Jan 2010 (except for the importation of sulphur hexafluoride, which applies from 1 Jan 2013)
 Part 5: agriculture (possibility for either a processor level or farm level obligation) – applying from 1 Jan 2013
 Part 6: waste – applying from 1 Jan 2013.
Schedule 4: any person who does an activity listed in Schedule 4 may elect to register as a participant under the NZ ETS (see clause 43, new sections 54 and 57) after the date the relevant part of Schedule 4 (where their activity is listed) applies. The activities in Schedule 4 apply to the following sectors:
 Part 1: forestry (post-1989 forest land) – applying from 1 Jan 2008
 Part 2: industrial processes (removal activities) – applying from 1 Jan 2010
 Part 3: transport (major jet fuel purchasers) – applying from 1 Jan 2008
 Part 4: stationary energy (major coal and natural gas purchasers) – applying from 1 Jan 2009.

People who do the activities in Schedule 4 may elect to register as participants at the times defined in new section 57. They may also elect to deregister at the times defined in new section 58.

New section 60 allows the Minister to exempt a person who would otherwise be a participant from the NZ ETS in respect of all or some of the emissions that result from a defined activity that the person undertakes. Exemptions may only be provided when the strict criteria in section 60 are met (except for Negotiated Greenhouse Agreement firms, who are eligible for an exemption due to their previous commitments to limit their emissions).
Participant obligations

New sections 61-66 state the core obligations and entitlements of participants. Participants must:
 have an account to hold emission units
 monitor their emissions and removals in accordance with methodologies that will be prescribed in regulations
 report annually by 31 March on any emissions or removals that resulted from their activities in the previous year (except for post-1989 forest participants, who may report at the times defined in new section 167)
 surrender 1 emissions unit for each tonne of emissions (or earn 1 emissions unit for each tonne of removals)
 retain records showing their emissions and removals for 7 years.
Compliance and enforcement

Subparts 3-5 of new Part 4 contain the main administrative provisions of the NZ ETS. These provisions give the NZ ETS administrator (called the “chief executive” in the Bill) certain functions aimed at ensuring that participants comply with their obligations. The administrator’s functions include:
 requiring or obtaining information from participants about their activities, emissions and removals (new sections 82-95)
 issuing “emissions rulings” to help people meet their obligations under the NZ ETS – these are similar to binding rulings issued under tax legislation (new sections 96-105)
 correcting errors in emissions reports received from participants and issuing assessments where participants have failed to report (new sections 106-115)
 taking enforcement proceedings and imposing penalties where participants have not complied with their obligations (new sections 116-130).

Subpart 5 gives the right of review and appeal to people who wish to dispute certain decisions made by the NZ ETS administrator.
New section 178 provides a transitional arrangement in respect of penalties. Participants will not be subject to civil penalties for any shortfall in the number of units they were supposed to surrender if that shortfall was caused by reporting errors made the first time they are required to report on their activities, emissions and removals.
Allocation of emission units

Subpart 2 of new Part 4 governs the allocation of New Zealand Units (NZUs) either by public tender or for free.
New section 67 enables the Minister to issue a certain number of NZUs into a

Crown holding account after having regard to certain matters. New section 68 then authorises the making of allocation plans governing the free allocation of NZUs. NZUs can only be freely allocated under an allocation plan. Once an allocation plan is made, NZUs must be allocated freely in accordance with that plan.
New sections 69-71 require the making of allocation plans for the free allocation of NZUs to the owners of pre-1990 forest land and to certain people in the industrial and agriculture sectors. These sections limit the total number of NZUs available for allocation within each sector, but empower the Minister to determine through the allocation plan who is eligible to receive a free allocation of NZUs and how many NZUs each person will receive. New section 72 makes clear that no-one, other than a person named in sections 69-71, may receive a free allocation of NZUs.

New sections 73-74 contain the process the Minister must follow before making an allocation plan. This provides an opportunity for people who may be eligible for a free allocation of NZUs to demonstrate both their eligibility and exact entitlement. It also allows the public to have input into how the plan proposes to freely allocate NZUs.

New section 75 empowers the Minister to sell NZUs by public auction. Finally, new section 76 requires the Minister to ensure that the Crown holds a number of Kyoto units equal to the number of NZUs it issued into Crown accounts by the end of the Kyoto Protocol’s “true-up” period. This is required to help ensure that New Zealand meets its obligations under the Kyoto Protocol.

Some aspects of allocation policy are yet to be decided and will be subject to ongoing stakeholder engagement in 2008. Also, the planned review of the NZ ETS (as required by new section 147) must consider aspects of allocation policy, including the emissions pricing policies of New Zealand’s major trading partners and the implications of these policies vis-à-vis allocation.
Sector-specific provisions

New Part 5 of the CCRA contains provisions that are specific to certain sectors within the NZ ETS: forestry (Subpart 1), transport (Subpart 2), and stationary energy (Subpart 3).

Most of these provisions relate to the forestry sector. They govern who is, or may be, a participant in respect of pre-1990 forest land and post-1989 forest land. The provisions also include exemptions from being a participant for the owners of certain pre-1990 forest land. They also specify certain requirements for when forestry activities are deemed to have occurred, and when participants must report in respect of those activities and the emissions (or removals) from them.

The provisions specific to the transport and stationary energy sectors cover the ability of major purchasers of jet fuel, coal and natural gas to elect to become participants and the effect of that election on Schedule 3 participants in the transport and stationary energy sectors.
Consequential amendments
Clauses 45-65 consequentially amend the following pieces of legislation:
 Income Tax Act 2004 and Income Tax Act 2007 to provide for the tax treatment of units transferred in respect of forestry activities
 Forests Act 1949 and Forestry Rights Registration Act 1983 to reflect the new NZ ETS provisions
 Personal Property Securities Act 1999 to allow the registration of security interests over emissions units on the Personal Property Securities Register.
Administration and review

The amendments provide for administrative flexibility, allowing different government departments to be responsible for different parts of the CCRA as appropriate. Nonetheless, the Ministry for the Environment will retain overall responsibility for the CCRA.

It is envisaged that the NZ ETS will be initially implemented by the Ministry of Economic Development (MED). MED will be supported by other agencies where necessary (for example, the Ministry of Agriculture and Forestry with respect to participation of the agriculture and forestry sectors in the scheme)
These arrangements will be reviewed after a period to assess whether it is necessary to make any changes to how the CCRA, including the NZ ETS, is administered.

Part 2: Preference for Renewable Electricity Generation

In October 2007, the government released the New Zealand Energy Strategy (NZES) and adopted a target for renewable electricity generation of 90 per cent of New Zealand’s electricity generation by 2025. Consistent with this, the NZES states a clear preference that all new electricity generation be renewable, except to the extent necessary to maintain security of supply. The NZES signalled consideration of regulatory options under the Electricity Act 1992 to support this objective.

Part 2 of the Bill inserts a new Part 6A into the Electricity Act 1992 to create a preference for renewable electricity generation. It does this by providing for a 10-year restriction on new fossil-fuelled thermal generation, except to the extent required to ensure the security of New Zealand’s electricity supply. The provisions address security of supply issues by enabling exemptions from the restriction for new fossil-fuelled thermal generation that is required to address security of supply concerns.

Where to go for more information

 For more information on the government’s climate change work, including the ‘The Framework for a New Zealand Emissions Trading Scheme’ and a series of emissions trading factsheets, visit www.climatechange.govt.nz

 For more information on the select committee process, including calls for submissions on the Bill, visit www.parliament.nz/en-NZ/SC/

 For more information on the Preference for Renewable Electricity provisions of the bill, see the attached Q&A on thermal restriction.

ENDS

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