New Zealand’s ETS is well-functioning but inefficient, govt review finds

Published 03:27 on February 5, 2016  /  Last updated at 11:25 on February 5, 2016  /  Asia Pacific, New Zealand  /  No Comments

While New Zealand's ETS is operating smoothly and has helped the country meet its international climate obligations, it has barely made a dent in domestic GHG emission levels and the CO2 price is so low that few emitters take it into account when making business decisions, a survey by the NZ Ministry for the Environment found.

While New Zealand’s ETS is operating smoothly and has helped the country meet its international climate obligations, it has barely made a dent in domestic GHG emission levels and the CO2 price is so low that few emitters take it into account when making business decisions, a survey by the NZ Ministry for the Environment found.

The report was one of three documents released by the government on Friday to help the public engage in the ongoing review of the emissions trading scheme.

New Zealand is considering several reforms to the market, including removing the 2-for-1 rule and the NZ$25 fixed price option, which in practice functions as a price cap. The aim is to make the ETS an effective tool to cut carbon emissions in the future.

“The international market link, along with transitional policies intended to reduce the economic impacts of the NZ ETS on businesses, and regulatory uncertainty has led to no significant investment in emissions-reducing actions by New Zealand businesses,” the report concluded.

The survey was based on interviews with 22 market participants as well as existing literature on the market, and it found that the market had sufficient liquidity and was operated properly.

The scheme until last year allowed emitters to use an unlimited amount of UN offsets to meet their emissions obligations, which led to millions of cheap ERUs from eastern Europe flooding the NZ market and helping emitters meet their targets at low cost while the country over-achieved in its Kyoto Protocol goal.

But over 2008-2012, forestry was the only ETS sector that saw a drop in emissions, Friday’s report said.

Forestry emission reductions attributed to the ETS in 2012 amounted to 110,000 tonnes of CO2e, 0.2% of NZ’s total emissions.

In the other sectors covered, CO2 output increased.

FACTORS

The report found that hardly any companies take the ETS into account when making business decisions, and other factors such as commodity prices and exchange rates are much more important in determining energy and fuel costs.

The NZ carbon price started falling from levels around NZ$13-15 in 2011 in tandem with UN offset prices, and the domestic carbon market has since lost its relevance even to foresters, according to the report.

“There was investment in carbon sequestration by way of new forest plantings when the carbon price was high, but it appears carbon pricing is no longer an important factor in new forest establishment,” it said.

The NZU price has increased some 45% over recent months in anticipation that the ETS review will bring about changes to policy settings that will boost demand. Spot NZUs currently trade just below the NZ$10 level, having fallen as low as below NZ$2 in 2013.

One of the other reports released Friday, written by the New Zealand Institute of Economic Research, concluded that a domestic carbon price more than twice as high as current levels would come at a low cost to the economy.

“GDP and GNDI [Gross National Disposable Income] fall by 0.1% or around $267 million under the medium market price assumption of $25/tonne. This equates to around 8 hours’ worth of GDP in 2020,” it said.

The government has defined the decisions on 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 other topics, the consultation period will remain open until Apr. 30.

By Stian Reklev – stian@carbon-pulse.com

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