Climate Change & Emissions Trading

09 Feb 2012

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NZ ETS – Update 2012

In our last FYIs on climate change we did some “crystal ball gazing” on the future of the New Zealand Emissions Trading Scheme (ETS), following the release of the report by the ETS Review Panel. With the new year well and truly underway and the John Key led National government kick starting its second term, Elisabeth Welson and Joanna Lim comment on what can be expected for the ETS in 2012.

Banned industrial gas CERs

Breaking news going into 2012 was the ban on surrender of CERs generated from HFC-23 and N2O industrial gas destruction projects from 23 December 2011 (see amended Climate Change (Unit Register) Regulations 2008).

There is, however, no prohibition on the holding of such CERs in a holding account. And anyone receiving these type of CERs under forward contracts registered by 10 February 2012 can still use them for surrender up to 1 June 2013.

Industrial gas CERs are said to create perverse incentives in developing countries to maximise the underlying industrial gases, bringing into question the overall environmental gains. Both the European Union and Australia have indicated they will be prohibited in their emission trading schemes. In contrast, ERUs involving industrial gas are not banned. They have had to meet different environmental standards and have not been seen to have resulted in over-production of industrial gases.

Fine tuning

The start of 2012 saw a number of developments with the ETS in the category of "fine tuning" or general updating.

Requirements for collecting information and calculating emissions have been adjusted for a number of participant activities in the stationary energy and industrial processes categories. This fine tuning will affect participants involved in any of the following activities: mining coal, underground coal gasification, combusting industrial waste for the purpose of generating electricity, mining or purchasing natural gas, and exporting LPG. The amendments apply from 1 February 2012, but have all been backdated to 1 January 2011, and so will need to be applied and taken into account for 2011 emissions return reporting.

Administration of the ETS (apart from forestry aspects) has now moved to the Environmental Protection Authority, rather than the Ministry of Economic Development. This has had no effect on the day-to-day running of the ETS.

Account holders wishing to export units should take note that transactions to export units from the New Zealand Emission Unit Register now have to be verified by the Registrar, as a security measure. The verification can only be done during New Zealand working hours and may take up to two working days. This process does not apply to imports or to transfers within the New Zealand Emission Unit Register.

1 January was also the ETS start date for reporting obligations for the following sectors: agricultural processors and live exporters, fertiliser importers and manufacturers, importers of synthetic greenhouse gases either in bulk or within refrigeration appliances or goods containing air-conditioning systems, including motor vehicles, and landfill operators. These participants will have surrender obligations for emissions from 1 January 2013, except for agricultural sectors.

What else is in store for 2012?

National's policy platform going into the 2011 election gives some insight into what else might be in store for the ETS in 2012. Here is a summary of some other things we can expect the future to hold for the ETS:

Transition measures

• Partial surrender obligations for the electricity, industrial and transport sectors will continue, but scaling up to a full surrender obligation (one unit for every tonne of CO2-e) by 2015, moving to an obligation of 67% in 2013, 83% in 2014 and then 100% in 2015.
• The fixed price option of NZ$25 per tonne will be maintained until 2015.

Forestry

• Offsetting for pre-1990 forest land owners from 1 January 2013 - despite this being inconsistent with the Kyoto Protocol (and New Zealand will continue to negotiate for international settings that suit New Zealand's forestry landscape).
• A corresponding reduction of the second tranche of compensation to be paid to pre-1990 forest land owners, given the National party view that offsetting will allow landowners to change land use such that the original level of compensation for this should be lowered.
• The option of an averaging approach to carbon credits for post-1989 forest owners will be considered, with the intention of encouraging small scale post-1989 forestry.

Agriculture

• Agriculture is likely to stay out of the ETS unless there are practical technologies to reduce emissions and taking into account steps being taken by other countries to reduce emissions (with agriculture's inclusion in the ETS to be formally reviewed in 2014).

Internationally

• Discussions with Australia on the linking of our two schemes for the post-2015 period (ie when Australia's scheme is to enter its trading phase). A formal group of senior officials from each country has already been established to work through the issues, and New Zealand's and Australia's negotiators worked closely together in the Durban talks.
• Working towards a comprehensive international agreement to succeed the Kyoto Protocol in a way that is balanced and fair and includes obligations for all major emitters. The Durban talks indicate general agreement for there to be a second commitment period under the Kyoto Protocol, and the European Union has committed to it. New Zealand is yet to decide though whether it will make its future commitments within the Kyoto umbrella, or if it will instead make its commitments under "transitional arrangements" applying to developing countries, the United States, Canada, Japan, Russia and others. The timing of a second commitment period is also still to be finalised.

Other areas

• A number of other possible areas for reform have been flagged. These include consideration of:

For more detail on what was proposed by the Panel, see our FYIs Crystal Ball Gazing the Future of the NZ ETS and Crystal Ball Gazing the Future of the NZ ETS – a Focus on Agriculture and Forestry.

Authors

Elisabeth Welson

Partner - Corporate & Commercial

DDI: +64 4 924 3400

Mobile: +64 29 924 3400

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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

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