New Zealand on Tuesday released a discussion paper that aimed to make its emissions trading scheme a more efficient tool in cutting carbon, but said agriculture, its biggest-emitting sector, would not be brought into the market.

The discussion paper launches an ETS review process that will conclude next year, with some changes to the market possibly taking force in mid-2016.

“This review will look at how the NZ ETS may have to evolve to support New Zealand in meeting this new target,” said Climate Change Minister Tim Groser, referring to the country’s pledge to cut GHG emissions 30% below 2005 levels by 2030.

“We also want to ensure the NZ ETS can continue to support New Zealand’s transition to a low emissions economy, and that we are prepared for the costs and opportunities associated with this transition,” he said.

The main issues in the ETS review will be:

• Should New Zealand abandon the 2-for-1 rule and if so, how should it manage the costs from that?
• How should future unit supply be managed, including potential auctioning of NZUs and a reintroduction of international units?
• Should a price floor be introduced, and/or should the NZ$25 fixed price be adjusted?

But the discussion paper also made it clear that some options that have been discussed for years have been ruled out, at least for the time being:

• Agriculture, which accounts for nearly half of New Zealand’s carbon emissions, will not be included in the ETS.
• The free allocation rate will not be reduced until 2020 at the earliest.
• The government is not considering a fixed emissions cap for ETS participants.

TWO FOR ONE

As expected, the review will consider whether New Zealand should give up the so-called 2-for-1 rule, which allows emitters to only surrender one allowance for every second tonne of CO2e they emit.

The rule was introduced in 2009 to keep ETS-associated costs down, but the discussion paper said it had contributed to building up a surplus in the NZ registry of 140 million allowances, enough to supply the entire market for five full years.

“Moving to full surrender obligations would increase the incentive to reduce emissions, and give businesses greater certainty when making investment decisions,” the paper said.

The big surplus is a concern for the government, because if those allowances are carried into the 2020s they will be eligible for compliance use in the ETS.  However, they can’t be counted towards the 2030 target, potentially forcing the government to spend taxpayer money achieving additional GHG cuts while the ETS contributes little.

Removing the 2-for-1 would double market demand and eat up the surplus more quickly. The government estimated that with the rule in place, the surplus in 2020 would be around 100 million allowances, but if removed it would drop to 45 million.

If the government decides to abandon the 2-for-1, emitters would be subject to full surrender obligation from mid-2016 at the earliest.

But the paper also recognised the costs associated with doubling emitters’ needs to buy allowances, probably at higher prices, and listed several options to manage those costs, including a gradual shift to 1-for-1 or lowering the NZ$25 fixed price surrender option, which would limit price spikes.

SUPPLY

While acknowledging that supply is not a near-term concern given the huge surplus, the review paper sought opinions on how to manage supply in the future.

It said it was highly likely that international carbon units will continue to exist from 2020, when a new climate treaty enters into force.

Until May this year NZ emitters had unlimited access to UN-issued offsets, but Tuesday’s discussion paper asked whether there should be restrictions – in quantity, geography or project type – if the NZ ETS reconnects with the international market in the future.

It also asked whether the government should add supply by auctioning NZUs into the market, although it pointed out that this risked adding to the surplus and therefore might be a more viable option after 2020.

If the review concludes that government auctions should be held pre-2020, it would take at least 18 months to develop the mechanism.

PRICE STABILITY

The review will also look at options to manage price stability. The NZU price has varied between NZ$2 and NZ$24 since the ETS was launched, rendering it inefficient in providing a clear price signal for emitters and foresters.

“An NZU price floor would protect against significant price drops, and provide businesses with more clarity on the carbon prices they may face in future,” the paper said.

But a price floor might increase compliance costs for emitters and be expensive for the government, as the easiest way to implement a floor would be a standing offer from the government to buy NZUs at that price level, it added.

A price floor might work better if New Zealand decides to introduce auctioning, the review paper stated.

NEXT STEPS

The government defined the decisions of whether to ditch the 2-for-1 rule and how to deal with the cost aspects as priorities in the review, and will take public comments on those until Feb. 19.

For the other topics, the consultation period will remain open until Apr. 30.

By Stian Reklev – stian@carbon-pulse.com

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