A lack of certainty over supply is stopping the New Zealand emissions trading scheme from working effectively, and the government should introduce a fixed GHG cap and provide clarity over future international supply to help drive domestic carbon cuts, according to one of the market’s architects.
The government is in the middle of carrying out a broad review of the ETS and closed submissions on Apr. 30. Researchers at Motu Economic Public and Policy Research on Thursday released their submission to the review.
“A market cannot function when no one can predict supply. The first thing the NZ ETS needs is greater certainty over the domestic supply of units by fixing a cap on units issued into the ETS other than for removal activities. This option was legislated but has never been implemented,” said Motu’s Suzi Kerr, who helped design the market.
Unlike most carbon markets around the world, the New Zealand ETS does not include an absolute emission cap for participants, but it issues allowances based on production levels and carbon intensity.
The lack of a cap combined with unlimited access to international units until recently have led to NZ emissions growing despite regulating around half the nation’s GHG output through the scheme.
“Greater certainty over the future supply of international credits could be provided by clearly signalling that once market access resumes – which may not happen for an extended period – it will be limited and strictly controlled. These changes would help focus domestic attention on domestic mitigation,” Kerr said.
Over the 2010-2014 period, NZ emitters met around 70% of their obligation through cheap international units.
Many observers argue these rules have made the NZ ETS a poor tool for cutting emissions, and a February government review found the scheme had been inefficient.
By providing longer-term certainty for participants, tightening market rues, setting a schedule for phasing out free allocation, and bringing agriculture into the scheme, the government would go a long way towards addressing the issues, the Motu researchers said.
“Once we have a cap that is clearly linked to our international targets and other domestic mitigation policies, a longer-term vision for New Zealand’s emissions and predictable ways to make adjustments as conditions change and we learn, we could have a system that drives an effective transition to a successful low-emission economy,” said Kerr.
By Stian Reklev – stian@carbon-pulse.com
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