Climate Change

12 Jun 2009

Emissions Trading Update

The New Zealand Emissions Trading Scheme (NZ ETS) was referred to a Special Select Committee for review shortly after being enacted in October 2008. Although the outcome of the review process remains uncertain, work on developing implementation details continues. In this FYI, we look at the progress of the Special Select Committee review, the draft regulations that have been released to provide guidance on how emissions will be calculated for designated activities for the purposes of the NZ ETS, and recent international developments which are of relevance in a New Zealand context.

Special Select Committee Review of the NZ ETS

A comprehensive review of the NZ ETS by a Special Select Committee has been underway since early 2009. The review was a key component of National's climate change and emissions trading policy in the lead up to the 2008 General Election. In spite of the review and the resulting uncertainty, work inside central government continues in readiness for the entry into the NZ ETS of a number of sectors. Recent developments include the drafting and release of a series of regulations for public consultation (refer below).

The Special Select Committee received in excess of 270 submissions on the NZ ETS, and completed the process of hearing those parties who wished to make oral submissions in May. No timeline for a final report or set of recommendations has been issued, but it is expected that the Special Select Committee will present findings sometime in the next couple of months, to allow for the timely preparation of amendment legislation.

The shape and form of the NZ ETS going forward will depend to a large extent on the outcome of the review and the recommendations made by the Special Select Committee. While the prospect of a carbon tax (as an alternative to an emissions trading scheme) was noted as a point for consideration in the terms of reference of the review, a move away from an emissions trading scheme would put New Zealand at odds with developments in a number of significant international jurisdictions, including Australia. This would suggest that it is unlikely that the review will recommend a carbon tax in place of the NZ ETS.

Notwithstanding that the review seems likely to advocate the survival of an emissions trading scheme, there is a strong possibility that a number of significant changes will be made to the current form of the NZ ETS. A number of compliance dates and obligations are likely to be pushed out, altered or completely removed as a result of the review process. Additionally, the current economic climate and the desire to see the NZ ETS aligned closely with the Carbon Pollution Reduction Scheme currently under development in Australia may also drive a number of changes.

The Government decided against suspending the operation of the NZ ETS when initiating the review process. As a result, entry and compliance deadlines continue to creep closer for a number of sectors. Forestry was the first sector to enter the NZ ETS (retrospectively from 1 January 2008). Forestry participants now face rapidly approaching deadlines and the end of the initial compliance period on 31 December 2009.

Owners of pre-1990 forests who wish to obtain an exemption for holdings under 50 hectares must make an application by 30 June 2009, while applications for the one-off Government allocation of NZ ETS units for pre-1990 forests must be made by 31 July 2009. A failure to complete either course of action may give rise to significant deforestation liabilities in the future.[1] While there is a strong expectation that these dates will be shifted back, the timeframe to do so is getting tight, and the regulatory uncertainty may be affecting long term decisions on investment in this sector.

Regulations

Participants in the NZ ETS (which is currently framed to cover all sectors and all greenhouse gases overtime), will be required to monitor, record and report emissions and to surrender one approved emissions unit for each metric tonne of greenhouse gas emitted. As part of an ongoing work programme for implementation of the NZ ETS (subject to the outcomes of the Special Select Committee review process) the Ministry for the Environment has released, for the purposes of consultation, a series of draft regulations[2] dealing with the monitoring and calculation of emissions by the stationary energy, industrial processes and liquid fossil fuel sectors, covered by the NZ ETS. The stationary energy and industrial processes sectors include natural gas, coal, geothermal, waste oil, refining petroleum, steel, glass and gold. Liquid fossil fuels are generally transport fuels, such as petrol and diesel.

The draft regulations seek to establish practical and accurate methods by which participants can meet their reporting obligations under the NZ ETS. In drafting the regulations, the Government has reiterated the principles which underpin the development of methods for calculating emissions for the purposes of the NZ ETS. These principles include that the methods used to monitor and calculate emissions should:

• neither advantage or disadvantage the Crown fiscally
• send a clear price signal, with no perverse incentives
• minimise transactional costs for participants and the Government
• provide for an accurate and verifiable statement of emissions

The regulations are technical and complex, which is unsurprising given the methodological and procedural requirements they provide for. As a result, this FYI does not purport to provide a comprehensive overview of the latest draft of the regulations. Instead we have highlighted a number of the key features of the regulations, and invite readers to contact us for more detailed information or to review the overview of the Regulations prepared by the Ministry for the Environment.

View the full version of the draft Regulations.

Calculating Emissions

NZ ETS participants in the stationary energy and industrial processes sectors are required to report greenhouse gas emissions from 1 January 2010. The draft regulations set out methods for participants to monitor and calculate their emissions from ETS activities. An initial draft of the regulations was released for consultation in December 2008, and the latest draft includes a number of significant changes as a result of this initial consultative process. Natural gas and coal are two areas where the changes have been substantive.

The regulations contain a point of measurement which is specific to each activity. A key change from the previous draft regulations is that the point of measurement for mined coal and gas has been changed from the point of valuation to the point of sale.

The method for calculating emissions from gas mining has been substantially revised under the new draft regulations, and is now based on continuous measurements of gas volumes and properties. This effectively provides for unique emissions factors for gas producers. Further, some amendments to the emissions calculation equations for industrial process activities have been made so that the amount of pure chemical substance used in each process (carbon, calcium oxide, calcium carbonate, magnesium oxide) is the key variable in the equation. The Ministry for the Environment is still to develop a set of standards and guidelines on the measurement of total chemical content in the raw materials used in many processes.

With the exception of natural gas, as discussed above, the draft regulations contain default emissions factors for each liquid fossil fuel, stationary energy and industrial process ETS activity. As an alternative to a default emissions factor, an approved unique emissions factor may be used to calculate and report on emissions for a particular activity (in accordance with regulations). A unique emissions factor is a participant-specific factor by which each unit of production of a participant's activity is multiplied to calculate emissions.

In order to obtain a unique emissions factor, participants must comply with specified sampling and testing standards for that sector. Once this has been completed, testing results must be used to calculate a unique emissions factor in accordance with prescribed calculation methods for each sector. As noted above, even with the regulations for unique emissions factors, further guidance will be required from the Ministry for the Environment.

International Developments

Australia

Prime Minister John Key and the current New Zealand Government have continually emphasised a desire for the NZ ETS to be as closely aligned with the Australian Carbon Pollution Reduction Scheme (CPRS) as possible. This desire was clearly evidenced in the terms of reference for the Special Select Committee review of the NZ ETS, which noted that the decisions of the Australian Government in relation to emissions trading should be considered as part of the review. A Prime Ministerial summit in early March 2009 between Prime Ministers Key and Rudd resulted in an agreement to explore harmonisation of the respective emissions trading schemes and also led to the establishment of a Trans-Tasman Officials group on the issue.

Development of the Australian CPRS has progressed steadily since late 2008. A series of Bills related to the CPRS were introduced into the Australian Parliament on 14 May 2009, where they passed their first reading and were referred to a Senate Economics Committee (who will report back to Parliament on 15 June 2009).

Prior to the legislation entering Parliament, a detailed and comprehensive consultation process was conducted in relation to the proposed CPRS. Following the release of two sizeable discussion papers, an exposure draft of the legislation was circulated for public consultation. As a result of the submissions received on the exposure draft, and in light of prevailing economic conditions, Prime Minister Kevin Rudd announced a series of changes to the proposed scheme in the week prior to the legislation being introduced into Parliament. These changes included a delay in the start date of the CPRS of one year, to 1 July 2011, and a proposed increase in the maximum possible carbon pollution reduction to 25 per cent of 2000 levels by 2020 (if the world agrees to an ambitious global deal to stabilise levels of CO2 equivalent in the atmosphere at 450 parts per million or less by 2050).

There are substantial similarities between the CPRS and the NZ ETS, as well as some differences. Differences include the ability of the Australian Government to set a cap on carbon prices for an initial period, and the ability of participants to bank domestic units for use in subsequent compliance periods. The New Zealand Minister of Climate Change Issues, Hon Nick Smith, has acknowledged that the proposal to impose a $A10 ($NZ13) cap on carbon prices for the first year of the CPRS should be considered by those charged with the responsibility of reviewing the NZ ETS. He has also noted that the delay in implementation of the Australian CPRS should be taken into account as part of the review. There is little doubt that the members of the Special Select Committee will be considering in some detail the legislation introduced in Australia in developing their recommendations.

United States

On 21 May 2009, the US House Energy and Commerce Committee approved the American Clean Energy and Security Act, implementing a cap-and-trade emissions trading scheme for the USA. The passing of the legislation has attracted criticism from participants in a number of sectors, including the oil and gas industry, who argue that the legislation will have a disproportionate adverse impact on consumers, businesses and producers of fuel products. Similar to concerns raised in New Zealand, there have been claims that the US legislation will lead to additional unemployment and will also compromise the ability of US businesses to compete with their overseas counterparts. The international community will be watching the progress of the US emissions trading schemes particularly closely in the lead up to the United Nations climate change conference in Copenhagen in December 2009.

[1]    See our FYI ' Emissions Trading Scheme - Continued Uncertainty for the Forestry Sector ' (February 2009) for more detail.

[2]    Climate Change (Stationary Energy and Industrial Processes) Regulations 2009, Climate Change (Unique Emissions Factors) Regulations 2009, Climate Change (Other Removal Activities) Regulations 2009, Climate Change (Liquid Fossil Fuels) Amendment Regulations 2009.

Authors

Dave Trueman

Partner - Corporate & Commercial

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Elisabeth Welson

Partner - Corporate & Commercial

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Craig Nelson

Senior Associate - Corporate & Commercial

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Michelle van Kampen

Senior Associate - Public Sector

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