Changes to the Emissions Trading Scheme announced in July 2012

13 Jul 2012

In this Q&A we discuss the changes to the New Zealand Emissions Trading Scheme (ETS) being made later in 2012.

Why is the ETS being changed?

The latest changes to the ETS have been developed following a comprehensive review and consultation process. The ETS legislation required the review to be undertaken 5 years from commencement of the ETS.

The four key objectives for the changes are:

• maintaining the costs that the ETS places on the economy at current levels
• improving the operation of the ETS
• ensuring the ETS continues to be "fit for purpose"
• maintaining New Zealand's international competitiveness.

More on the background to the changes can be found in these earlier publications:

FYIs on the Review Panel recommendations: http://www.simpsongrierson.com/fyi-climatechangeemissionstrading-NZETS-oct-2011/ and http://www.simpsongrierson.com/property-infrastructure/climate-change-emissions-trading/?archivequarter=2011Q4

Q&A on consultation carried out in May 2012
http://www.simpsongrierson.com/2012-consultation-on-proposed-changes/

What is happening to the transitional arrangements that are currently available in the ETS?

• The transitional "one for two" unit measure will extend beyond 2012
  The "one for two" measure will continue for the foreseeable future. At the moment, participants only have to surrender one unit for every two tonnes of CO2-e. This transitional relief was originally set to expire at the end of 2012. The announced changes go further than changes proposed in the consultation, which had been for a further 3 year phase-out).
  
  
• The $25 fixed price option will extend beyond 2012
  The option to pay $25 instead of surrendering a unit will extend beyond 2012 with no specified end date. This measure recognises the potential for uncertainty in the future carbon price.
  
  
• The ban on export
  The current ban on exports of non-forestry NZUs will continue. This goes hand in hand with the measures above. There is no information on whether the Government will continue to facilitate the export of forestry NZUs beyond 2012 (this currently occurs by the Government exchanging NZUs for internationally accepted AAUs which will no longer be available).

The May 2012 consultation indicated that there would be limits on the use of international units. What is happening?

• No quantitative limits on international units
  There will be no new limitation on the use of internationally derived Kyoto units. The consultation on ETS changes raised the possibility of limiting the use of international units for surrender in the ETS (ie CERs and ERUs produced by international projects under the Kyoto Protocol). Participants can now continue to source the best priced permissible units for their obligations (still subject to the no nuclear, no industrial gas ("grey CER") restrictions).
  
  
• Power to auction NZUs
  The Government will have a power to increase the supply of NZUs through an auction. This will be subject to an overall cap on the number of NZUs. The intention is that this will make NZUs more available (rather than sending money offshore to buy international units) and it may provide a more transparent pricing mechanism.

Will pre-1990 forest land owners get the second tranches of NZUs allocated to them?

Pre-1990 forest land owners will still be eligible for the second tranche of Government allocated NZUs - unless the forest owner chooses to offset by replacing deforested pre-1990 forest with forest on other land. This means that the NZUs expected to be allocated to pre-1990 forest land owners next year will still come into the market (subject to an obligation for forest land owners to pay them back if they offset).

How will offsetting work?

Pre-1990 forest land owners will be able to convert forest land without deforestation liabilities under the ETS if they establish a new forest elsewhere. They must however meet the following conditions:

• the same carbon stock must be achieved within a specified time
• the new forest must be established by direct planning on land that is eligible for post-1989 forest planting
• any other requirements in regulations to be developed are complied with

Pre-1990 forest that is harvested before 2013 but not already considered to be deforested (eg because the replanting timeframes in the ETS would be met) will also be eligible for offsetting.

Are there any other changes for forestry?

There are also to be a number of other useful operational changes to forestry under the ETS. See the fact sheet at http://climatechange.govt.nz/emissions-trading-scheme/ets-amendments/forestry-sector-changes.pdf

Are there any changes to the costs of the ETS?

• Higher costs for waste and coal and some synthetic greenhouse gases
  Landfill operators, underground coal miners and bulk importers of HFCs and PFCs will face higher emissions factors, and therefore will have increased surrender obligations. This is due to international agreement on the treatment of global warming potentials.
  SF₆ users will have a decreased emission factor, and therefore a lower surrender obligation.
  
  
• Increased allocation for some EITE
  Higher emission factors for landfills and underground coal will flow on into costs for some recipients of NZUs as "emissions intensive trade exposed" industries, and they may receive an increased allocation.
  
  
• EITE phase out suspended
  The phase-out of the allocation of NZUs to "emissions intensive trade exposed" industries will be suspended until ETS participants face full surrender obligations (at the moment they only have "one for two" obligations), rather than phasing out at the rate of 1.3 per cent per annum from 2013.
  
  
• Allocation baselines changing for some
  Fugitive coal seam methane and stationary energy use of liquid fossil fuel will be counted in calculating the allocative baseline for "emissions intensive trade exposed" industries. Manufacture of steel from cold ferrous feed will be classed as highly emissions intensive, rather than moderately emissions intensive.
  
  
• All users of obligation fuels able to opt in
  All users of obligation liquid fossil fuels will be able to opt-in to the ETS. No thresholds have been announced, but we expect these will be included in the legislation. At the moment only large users of obligation jet fuel can opt-in. This ability to opt-in may be attractive to large fuel users as a way of controlling the carbon element of fuel costs more directly.
  
  
• Combustion of oil
  Combustion of crude oil or oil products by a miner will be brought in to the ETS.

Is there any relief in for synthetic greenhouse gases?

• Importers of goods and motor vehicles
  Importers of synthetic greenhouse gases in goods and motor vehicles will no longer be participants under the ETS, but will instead pay a levy from 1 July 2013. This will be an administrative relief to importers of cars and appliances with systems that use synthetic greenhouse gases.
  
  
• SF₆ obligation
  The point of obligation for SF₆ emissions will move from importer to large user.
  
  
• Removals
  The criteria for receipt of emission units from the Government for removals of synthetic greenhouse gases will be tightened.
  
  
• Wilful release
  There will be penalties for the wilful release of synthetic greenhouse gases, including through poor servicing practices.
  
  
• Removing exemptions
  The exemptions from the ETS for HFC-245fa and HFC-365mfc will be removed, in line with New Zealand's international obligations.
  
  
• Transitional relief
  The transitional "one for two" and fixed price option will apply to the synthetic greenhouse gas (and waste) sectors.

What is happening with the agriculture sector?

• Agriculture out until at least 2015
  The agriculture industry will not have to comply with the emission unit surrender obligations under ETS until at least 2015, meaning that this sector is not likely to be looking to buy units for a while. The agriculture sector already has reporting obligations under the ETS, at the processor level.
  
  
• 2015 review
  The 2015 review will consider whether there are technologies available to reduce agricultural emissions and whether international competitors are taking sufficient action on their emissions in general, before imposing surrender obligations for biological emissions in the agriculture sector.
  
  
• Move to farmgate
  It is likely that the Government will continue to explore how the point of obligation for agriculture under the ETS can be moved from the processor level to the "farm gate", placing obligations on farmers themselves rather than processors.

Where can I get further information?

Factsheets about the changes are published at http://climatechange.govt.nz/emissions-trading-scheme/ets-amendments/. There will also be consultation throughout the year on the changes. We are happy to discuss how the changes may affect you and what opportunities there may be.

Authors

Joanna Lim

Senior Associate - Corporate & Commercial

DDI: +64 3 365 0958

Mobile: +64 21 359 407

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Craig Nelson

Senior Associate - Corporate & Commercial

DDI: +64 9 977 5185

Mobile: +64 21 918 309

Email:

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