Analysts bet on NZ ending ETS cost-control measures, but see few major changes

Published 06:49 on July 8, 2015  /  Last updated at 06:53 on July 8, 2015  /  Asia Pacific, New Zealand  /  No Comments

The New Zealand ETS review is likely to bring to an end the scheme’s cost-controlling transitional measures, but other major changes are unlikely despite the government’s post-2020 climate pledge, according to analysts.

The New Zealand ETS review is likely to bring to an end the scheme’s cost-controlling transitional measures, but other major changes are unlikely despite the government’s post-2020 climate pledge, according to analysts.

Climate Change Minister Tim Groser announced Monday that New Zealand will cut its GHG emissions to 30% below 2005 levels by 2030, equal to an 11% reduction from 1990.

He said the government would draw up appropriate policies to meet the target, including reviewing the ETS, which is New Zealand’s main carbon-cutting tool.

Analysts said the ETS review would likely bring to an end the transitional measures put in place by the government in 2009 to limit the cost impact of the scheme during the global financial crisis.

The measures included a provision that companies would only have to surrender allowances for every second tonne of CO2e they emit and a freeze on the scheduled phase-out of free permits, and have been accused of keeping New Zealand’s carbon price too low to have an impact on emissions.

“Our view remains that if there is a positive outcome from Paris, the government will start to phase out the transitional measures in the period through to 2020,” said Stuart Frazer with consultants Frazer Lindstrom.

But he was doubtful the government would make more far-reaching changes to the scheme, such as including agriculture, which accounts for nearly half of New Zealand’s emissions.

“We do not foresee agriculture being brought into the NZ ETS as technology is not yet available and confirmation of accounting rules for the land based sector is a pre-requisite for this and this may take many years. Similarly we suggest substantive amendments to rules for NZ ETS forestry participants are unlikely in the next few years,” Frazer told Carbon Pulse.

NEED FOR CHANGE

The New Zealand INDC suffered a cold reception, with observers saying the country should do more to cut emissions despite its unique emissions profile.

“New Zealand’s 2030 target is not the stuff that strong global climate action is made of. It is only a little stronger than the existing target for 2020, an 11% reduction on 1990 levels compared to a 5% reduction. This means the targeted speed of reduction slows down in the 2020s,” said Frank Jotzo, a professor at the Australian National University.

But even the 11% target will be challenging, Jotzo said, and some observers argued the ETS needed to be ramped up for New Zealand to achieve the goal.

“If it is genuinely going to be a target backed by government policy to ensure it happens, there will need to be major changes to the ETS in the upcoming review,” David Rhodes, chief executive with the Forest Owners Association, said in a statement.

“We may be able to do better than this, but we won’t know what we can do until we have the ETS operating effectively. To date the ETS has been a failure. It hasn’t encouraged consumers or industry to reduce their emissions and it certainly hasn’t resulted in any sustained planting of carbon forests,” he added.

“A carbon price of effectively NZ$3.50 a tonne on a very limited proportion of emissions will not see the ETS contribute much,” said one market participant who wished to remain anonymous.

“In my view, the two-for-one subsidy to emitters will need revoking, free allocations will need revisiting, and a physical cap needs to be introduced, alongside limits on the eventual use of international credits, if we are to do this,” he added.

“Agriculture has legitimate difficulties but shouldn’t be used as an excuse for overall weak ETS settings and weak ambition.”

The NZ INDC was provisional and the government made it clear it wanted unrestricted access to the international market, a key factor, according to another analyst who also wished to remain anonymous.

“I think it all comes down to their ability to access the international markets, and, importantly, whether they will even exist post-2020,” he said.

“If they do, it will be New Zealand’s get out of jail card. If they don’t, it could be more difficult, as forestry will need to be incentivised.”

The government is expected to launch the ETS review soon, but may not make any final decisions until after the December Paris summit.

By Stian Reklev – stian@carbon-pulse.com

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