Government Proposes Emissions Trading Scheme - International Law Office

Background
Scheme Proposals
Overall Financial Impact
Transport
Stationary Energy
Industrial Processes
Forestry
Agriculture
Waste

Background

New Zealand ratified the Kyoto Protocol in 2002. The government's initial climate change policy was based on a carbon tax model. However, it soon became apparent that the government would be unable to pass the necessary legislation through Parliament to support a tax, and the proposal was abandoned in 2005. Following a comprehensive review of climate change policies in 2006, the government indicated that an emissions trading scheme was its preferred option for the first commitment period of the protocol.

The government recently released its policy for an ambitious emissions trading scheme which will tie all greenhouse gases and all sectors to the international price of carbon through a phased programme beginning on January 1 2008. However, the policy has attracted high-profile criticism and led to warnings that the volatile price of carbon on the international market will seriously damage the New Zealand economy unless the government acts as a buffer between international and domestic markets. Key stakeholders have also accused the government of inadequate consultation and of over-reaching its mandate.

Scheme Proposals

In September 2007 the government announced plans for a domestic emissions trading scheme based on the following points:

• The New Zealand Emissions Trading Scheme will cover all sectors of the economy and all greenhouse gases.
• It will establish an emission unit, known as the New Zealand Unit, which will be fully fungible with Kyoto units.
• All sectors will be obliged to surrender one unit per tonne of CO₂, with support provided through free allocation of units in certain sectors.
• Points of obligation will be located high up supply chains, limiting the number of parties with obligations under the scheme.

On December 4 2007 the government introduced the Climate Change (Emissions Trading and Renewable Preference) Bill, which will implement the scheme. Under the bill, the scheme will be phased in on:

• January 1 2008 for the forestry sector;
• January 1 2009 for the liquid fossil fuels sector (mainly transport);
• January 1 2010 for the stationary energy (coal/gas/geothermal) and industrial processes sector; and
• January 1 2013 for the agriculture and waste sectors and "other emissions".

A limited number of units will be issued each year and the scheme will operate within the global cap on emissions set by the protocol. Thus, there will be no specific cap on domestic emissions - scheme participants will help New Zealand to contribute to the protocol obligations that the government must account for after 2012. One unit will equal one tonne of greenhouse gas emissions.

The scheme will allow full international linking with the international protocol market, allowing for sales to and purchases from overseas buyers and sellers. There will be three types of participant:

• participants with obligations to surrender units to cover their emissions;
• participants that receive freely allocated units or hold units which can be traded to other parties; and
• participants that engage in trading activities for commercial purposes.

In order to help achieve the ultimate goal of 100% carbon neutrality, New Zealand has set the long-term goals of:

• a net increase in forest area of 250,000 hectares (on a 2007 baseline) by 2020;
• 90% electricity generation from renewable sources by 2025;
• reducing transport emissions per head to half of the 2007 levels by 2040; and
• becoming one of the first countries, if not the first, where electric cars are widely used.

Overall Financial Impact

The government has stated that it will be relatively generous in allocating free units to certain emitters over the next few years, especially to the agriculture sector when it joins the scheme in 2013. The government has also confirmed that it will not provide windfalls to firms whose profits will be largely unaffected by the introduction of the scheme, such as fuel companies and renewable electricity generators.

Due to its staged introduction in various sectors up to 2013, the scheme will not fully distribute the cost of New Zealand's protocol obligations to emitters during the first commitment period. The government has indicated that some ongoing taxpayer support may continue beyond 2012. Economic modelling undertaken in October 2007 forecasts that if the price of carbon is around NZ$25 a tonne, there is no significant cost to aggregate economic welfare associated with having an explicit carbon price as part of an emissions trading scheme, rather than the government purchasing all required emission units offshore (financed by higher income taxes) without a domestic carbon price.

Transport

The scheme will cover liquid fossil fuels, including:

• petrol;
• diesel;
• aviation gasoline;
• jet kerosene;
• light fuel oil; and
• heavy fuel oil.

As the scheme takes its overall guidance from the protocol system, international aviation and marine transport emissions will be exempt.

The point of obligation under the scheme will be the top of the supply chain, focusing predominantly on the oil refineries and importers of refined oil products (ie, BP, Caltex, Gull, Mobil and Shell). Although the costs will be imposed on the fuel companies, they are expected to be passed on directly to consumers at predicted higher costs of between 4 cents and 9 cents a litre.

Stationary Energy

The stationary energy sector includes all fuels used in electricity generation and in the direct production of heat in the industrial, commercial and residential sectors. It does not include energy used for transport or emissions from industrial processes.

Emissions trading within the stationary sector is expected to raise electricity and other energy prices for consumers, placing greater importance on energy efficiency and conservation, as electricity generators are expected to increase wholesale electricity prices, which will ultimately be paid for by consumers. Given the design of the wholesale electricity market, prices for all types of electricity, including electricity from renewable sources (eg, hydroelectricity and wind-generated electricity), will also increase.

Industrial Processes

The metal, mineral and chemical industries in New Zealand emit significant quantities of CO₂ in addition to other greenhouse gases. The products made by these industries include:

• steel;
• aluminium;
• cement;
• burnt lime and glass;
• ammonia; and
• urea.

Industrial producers are likely to face increased costs twice over as a consequence of their direct process emissions obligations and their high levels of electricity consumption. The government will assist such producers by either reducing their emissions obligations or allocating free units.

Forestry

The government will devolve 100% of the carbon credits and liabilities to the owners of Kyoto forests planted after January 1 1990. Kyoto forestry owners which do not wish to take up this opportunity can choose instead to receive cash payments under the new Afforestation Grants Scheme, which will provide NZ$50 million in funding for new forests planted after January 1 1990.

Particularly affected are owners of exotic non-Kyoto forests planted before December 31 1989. They will be penalized if they choose not to replant their trees following harvest, although exemptions will apply for smallholdings of under 50 hectares.

Under the emissions trading scheme the forest owners will be granted free credits on the basis of their forest landholdings. However, due to protocol accounting this grant is estimated to equate to only NZ$585 a hectare, leaving the landowner to meet the remaing NZ$11,500 cost. This will have a dramatic impact on proposed land conversion plans and new dairy conversions are likely to be halted.

The first reporting period for forestry owners under the scheme will be two years (compared to the one-year period for all other sectors). This will allow owners initially to trade units with the transport sector.

No decisions have been made yet on indigenous forests, which are mostly owned by Maori and the government. These decisions will be the subject of further consultation and engagement.

Agriculture

The primary sector - and specifically New Zealand's 40,000 farmers - will be relieved that the government has allowed some breathing space until 2013 (in most cases). The rationale for excluding the sector in the short term is to protect against the possible loss of international competitiveness while science catches up on the reduction of methane emissions.

The government has acknowledged that the sector has significant adaptation issues in respect of emissions pricing. It has agreed to maintain its promise in 2003 to meet the costs of non-CO₂ emissions until the end of 2012 in return for the industry's agreement that it will invest in research and development in this area.

The baseline for agricultural emissions will be set at 2005 levels, rather than 1990 levels. When the scheme comes into force for the sector in 2013, the government will be prepared to gift up to 90% of the 2005 emissions to the sector. The free units may go to:

• individual farmers;
• companies and processors dealing with farm produce; or
• farming industry organizations (which would manage units on behalf of farmers).

The sector will need to meet monitoring and reporting obligations from 2011 and will also be expected to adopt new technologies as they are introduced for emissions reductions, such as the nitrogen inhibitors now being encouraged.

Waste

Methane and nitrous oxide are emitted through waste treatment and disposal (eg, solid waste, wastewater facilities and incineration). It is proposed that the scheme will apply to methane emissions from solid waste disposal via landfill from 2013.

For further information on this topic please contact Paul Majurey or Allison Arthur-Young at Russell McVeagh by telephone (+64 9 367 8000) or by fax (+64 9 367 8163) or by email (paul.majurey@russellmcveagh.com or allison.arthur-young@russellmcveagh.com).