Call for ETS review to be pushed to 2016

A leading climate change lawyer is recommending the substantive part of a review of New Zealand’s Emissions Trading Scheme be held until after a major international climate change conference scheduled for the end of the year.

In July, Climate Change Issues Minister Tim Groser confirmed a long-awaited ETS review would begin in 2015.

Bell Gully partner Simon Watt said the Conference of the Parties to the United Nations Framework Convention on Climate Change, which opens in Paris on November 30, could set entirely new parameters. Aimed at setting post-2020 emissions targets internationally, some reports have described the conference as the most important climate change event since the Kyoto Protocol in 1997.

Watt said settling on the terms of reference for an ETS review in 2015 but leaving the rest until later would be consistent with the announced intention to begin this year. “Our view would be that scheduling the bulk of the review for after the Paris conference would make sense. Any review that is looking to harden ETS settings will be affected by New Zealand’s position relative to key trading partners,” he said.

The minister has been reported as saying toughening up the scheme is on the table, particularly because when the National Government loosened the scheme it did not know there would subsequently be a collapse in carbon prices. The scheme was amended in 2009 amid the global financial crisis, but a dramatic decline in carbon prices has further weakened the scheme’s effect.

News of the ETS review was largely overshadowed by the simultaneous announcement of a new climate change target to reduce New Zealand’s greenhouse gas emissions by 30 per cent below 2005 levels by 2030. That is the equivalent of a reduction of 11 per cent below 1990 emission levels by 2030, compared with the current target of five per cent below 1990 levels by 2020.

Watt said the ETS review could be considered more significant for business in New Zealand than the target, because the long-term timing of the target meant there was always the possibility of further changes in the future, while the ETS determined the actual impact on an individual business. The target also remains provisional until the Paris conference, where it is relevant to New Zealand’s negotiating position, he said.

“The big issue becomes how do you distribute that burden? Having taken on the target, who do you impose that burden on?”

Sectors to watch

New Zealand’s scheme was established to incorporate all sectors of the economy. Certain sectors are required to acquire and surrender New Zealand Units (NZUs) to account for their greenhouse gas emissions, some can earn NZUs (such as post-1989 forest owners), while others are given NZUs (such

as emissions-intensive businesses exposed to international competition who can’t pass on their higher energy costs). This means a wide array of businesses will be affected by any changes. But some should be watching more closely than others.

Watt said those include any business in the emissions-intensive trade exposed category and those operating within the energy and forestry sectors.

Any tightening could feature the current obligation to surrender one NZU for every two tonnes of emissions that faces some participants in certain sectors including liquid fossil fuels, industrial processes, stationary energy and waste. In most cases this level of surrender was initially intended as a transitional arrangement which would end 31 December 2012, but in changes that took effect in 2013 these arrangements were extended indefinitely. Watt said the review might consider a change back to the one-for-one obligation originally envisaged, which would effectively double the cost to participants of meeting their obligations.

The agricultural sector is likely to be handled carefully given current market conditions, said Watt. Those operating in the sector are currently obligated to report on emissions, but there is no obligation to surrender units to ‘pay’ for those emissions and he said that is unlikely to change because the Government’s view has been that the obligation could only be introduced when there is economically viable and practical technology available to effect a reduction in emissions.

Carbon prices

The costs and benefits of complying with the ETS are set by the market price of carbon units, and in practice many businesses with obligations under the scheme will already be paying more in respect of its activities from this year. Until 31 May 2015 businesses could still satisfy their requirements under the scheme with cheap international units, compliant with the first phase of the Kyoto Protocol. Such units have often traded at around 30 cents a unit. With restrictions on the use of international units now in place, most businesses will be meeting their 2015 obligations with more expensive NZUs, which in recent months have generally traded in a range between six and seven dollars a unit.

The change means the cost of complying with the ETS would be in the tens of thousands for many businesses, depending on their size and nature. A few businesses might have obligations of hundreds of thousands and in rare cases obligations could reach into the millions. A review that tightened the scheme further might raise such costs, making ETS compliance costs more material for a wider range of businesses than has been the case in recent years.

Close competition

Trade-focused businesses may be particularly concerned about their obligations relative to those of competitors in other markets – particularly across the Tasman, where Australian competitors saw a carbon tax scheme repealed in 2014.

Australia is expected to announce its post-2020 emissions reduction target in August, but Watt said the targets are so high-level that it will again be the details of how countries propose to reach those targets that will be the focus for business. “Any business that is trade exposed with competitors overseas will have an interest in what the policy settings are,” he said. “So much depends on the

emissions profile of the relevant economy, their government’s policy in terms of how they will meet the target and where the burden will sit.”

Stability and certainty

Whatever the detail of the review, businesses are likely to want certainty. “Over and over again in the last decade businesses have talked about the need for more certainty,” said Watt. “Some changes have really pulled the rug out from under certain sectors, particularly forestry, where significant decisions were made only to have the policy soften.”

On that basis, a best-case scenario might be a review that aligned future ETS settings with the long term commitments made in Paris, he said. Setting out a clear path by which the ETS would be used to achieve the final target could offer the certainty that is desirable for business planning and investment.

What is proposed in practice may be quite different. While commitments may be made in Paris, there will still be a question over how binding they will be in practice. “It’s going to be debatable what the legal consequences will be of not meeting whatever is agreed to in Paris, and that might raise the question of whether we are compelled to turn this into domestic policy settings,” said Watt. “There’s a question over how it’s going to be enforced, which raises a question over how much New Zealand should be doing to give effect to this, relative to other countries.”

Key dates:

• Australia to revise emissions targets – expected August

• A review of the New Zealand Emissions Trading Scheme – to begin in 2015

• The United Nations Framework Convention on Climate Change, Paris, France: 30 November – 11 December

ENDS

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