Climate Change

08 Sep 2009

Eight months after the Emissions Trading Scheme Review Committee (Review Committee) was set up, it has released its report on the review of the New Zealand Emissions Trading Scheme (ETS). The report comprises a majority report and four minority reports from the Labour Party; Green Party; ACT New Zealand Party (ACT) and Maori Party. Despite the range of conflicting views, a majority of the Review Committee has supported recommendations around how New Zealand should respond to climate change.

The report is a very high level document and does not make specific recommendations regarding the form of an amended ETS or suggest amendments to the Climate Change Response Act 2002. The Green Party noted in its minority report, "the report is so high level that the committee has not formed a view on many of the key issues of design and implementation of an ETS. It is hard to see how it can contribute to anything more to the decisions the Government will now make on amending legislation than the advice from their officials which they already have". However, given the breadth of and high level nature of the terms of reference for the Review Committee, the lack of specificity in the report is understandable.

Nonetheless, as the devil is in the detail and the detail is still to be negotiated between the various political parties, it is not surprising that the Review Committee has recommended "that a full and comprehensive regulatory impact analysis be undertaken preliminary to any amendments to the Climate Change Response Act 2002".

The Recommendations of the Review Committee

The Review Committee has made 34 recommendations, the majority of which have been agreed between all members of the Committee.

New Zealand's Policy Response to Climate Change

The most significant matter agreed between all parties, other than ACT and the Maori Party (both of which preferred a carbon tax), is that an all sectors, all gases ETS should be the primary economic mechanism adopted by New Zealand to respond to climate change.

Key recommendations include:

• New Zealand take immediate action on climate  change to protect its international reputation, particularly in the areas of trade and tourism.
• New Zealand pursue an agreement at the December 2009 Copenhagen Climate Change Conference that reflects the country's "willingness to do its fair share and play its part  in setting the stage for further  multilateral action for the post-2012 period".
• "[T]hat the IPCC assessment, its projections,  and the findings of the Fourth Assessment Report, which represent a consensus on scientific evidence, [should] underpin New Zealand's future international policy negotiations." 

Only ACT, in its minority report, challenges the science which it considers has not "proven beyond reasonable doubt that future human-induced climate change is likely to be dangerous; that cutting greenhouse gas emissions is the best human response to this problem; and that an ETS is the most efficient way to reduce net emissions". 

International Linkages

Adopting international linkages between the New Zealand ETS and other Kyoto-compliant schemes is also recommended. Linkages with other schemes would allow the buying and selling of emission units in an international market.

While the Review Committee does not make any specific recommendations on how to link to other schemes, it acknowledges that the final shape of the ETS will influence the extent to which those linkages can occur. For example, the inclusion of imported assigned amount units in New Zealand's ETS could form a barrier to linking with other schemes that prohibit such units, such as the European Union ETS and the proposed legislation for the Carbon Pollution Reduction Scheme (CPRS) in Australia.

Price Caps

Another potential challenge in aligning the New Zealand ETS with the Australian CPRS is the proposal for the CPRS to operate under a temporary price cap from July 2012 to June 2016.

The Review Committee's recommendations (opposed by the Labour Party, the Maori Party, ACT and the Green Party) leave open whether a short-term price cap is introduced into the New Zealand ETS. If a price cap is introduced, the Review Committee is of the view that:

• "[A] clear exit strategy is critical for maintaining market confidence and development."
• While a case can be made for a short-term price cap to assist firms while the market is developing, in the long-term, "price caps stand in the way of market development and shield business from the real price of carbon to the economy".
• "[A] price cap in a New Zealand ETS could create a negative incentive for post-1989 forest investors in particular" by limiting potential returns on investments for forestry investors. Any form of price cap, even for a short term, is liable to negatively affect new plantings as forestry investors would be wary of potential market manipulation.

The Labour Party has indicated its willingness to move on the issue of price caps "if absolutely necessary to achieve consensus … but only if appropriate protection for the forestry sector could be agreed".

• The Green Party is however staunch in its approach, and considers that a price cap would have "the perverse effect of rewarding those who are causing the climate change problem and punishing those who are part of the solution".

Agriculture Sector

The question of whether the agriculture sector should be included in the New Zealand ETS has long been, and remains, a contentious issue. As agriculture accounts for about 48% of New Zealand's greenhouse gas emissions, on the basis of "polluter pays" it seems reasonable to include this sector into any ETS scheme. However, due to a current lack of easily implemented emission reduction responses on the farm, there is a very real problem that the international competitiveness of the agriculture sector may be affected if it is included.

Balancing these considerations, the majority of the Review Committee (excluding ACT) has recommended that the agriculture sector be included in the New Zealand ETS. While no recommendation is given about the timing of the entry of the agriculture sector into the ETS, the Labour and Green Parties strongly support the status quo of agriculture entering the scheme no later than January 2013.

The recommended long-term goal is that the point of obligation for the agriculture sector will be placed at farm level - but this can only occur once issues relating to the number of participants and the ability to verify farm level information relating to emissions are resolved. In the interim, the Review Committee has recommended that the point of obligation for agricultural emissions be set at the processor.

The Review Committee has also recommended that the ETS rules "be confirmed as soon as possible so that those who have significant interests in the primary sector, may make practical and robust investment decisions quickly".

Forestry Sector

The Review Committee report includes a number of specific recommendations in relation to forestry, impacting on both pre-1990 forest owners and post-1989 forest owners (and potential investors in post-1989 forest). Recommendations include that:

• The issue of off-setting be pursued at the December 2009 Copenhagen Climate Change Conference and that no changes to domestic policy be made unless such an agreement is reached. Off-set planting is where liability is avoided for deforestation of pre-1990 forest by its replacement with a new area of forest elsewhere. Currently neither the Kyoto Protocol nor the New Zealand ETS allow off-setting.
•  "[F]urther research be conducted on the role of forestry sequestration in mitigating emissions, including an investigation of the carbon sequestration rates of indigenous species and management techniques for their enhancement" and "that the carbon look-up tables for indigenous forest be amended to reflect the best scientific information on sequestration as soon as possible." The Parliamentary Commissioner for the Environment made submissions that the current ETS (and any potential off-setting regime) would encourage the planting of exotic tree species rather than indigenous species, with potential negative environmental effects such as exacerbating water quality issues and increased risk to bio-diversity, and recommended that the ideal long-term balance between exotic production forests and natural indigenous forests must be considered.
• "[T]hat a clear decision be made about in what circumstances, if any, wilding pines may be used for carbon sequestration, given the negative economic and environmental impact of tree weeds in some areas of New Zealand." Currently, post-1989 wilding pine forests are eligible to earn carbon credits under the current ETS, which creates a disincentive to control wilding pines.
• That "certainty for the forestry industry be legislated for as soon as possible to ensure that further planting is not inhibited".

 Complimentary Measures

• The Review Committee accepts that while the New Zealand ETS is an important component of New Zealand's response to climate change, it needs to be supplemented with other policies and steps.

A number of recommendations have therefore been made relating to:

• research and development funding to reduce emissions and improve efficiency, particularly focussed on forestry, agriculture and geothermal energy;
• developing long-term infrastructure in line with climate change considerations;
• economic and environmental planning including climate change mitigation and adaption strategies; and
• providing a full array of assistance targeted at rural communities, lower income households and other members of the economy who are likely to be more vulnerable to the impact of climate change and less able to meet the costs of an ETS.

The Minority Reports

Four minority reports have been provided on the review of the ETS.

The Labour Party, in its minority report, has indicated that it would support the passage of a legislation amending the current ETS that:

• confirmed an all gases, all sectors approach;
• retained the current timing for sectors to enter the scheme, other than the stationary energy and industrial processes sectors;
• contained responsible transitional measures; and
• strengthened consultation procedures.

The Labour Party has agreed that New Zealand should align itself with the Australian CPRS, but only when it is in our interest to do so. It has cautioned that care needs to be exercised to ensure that New Zealand does not import policies from the Australian CPRS that respond to issues that are not experienced in New Zealand.

The Green Party has indicated its belief that:

"…a successful ETS must:

• be comprehensive (all sectors, all gases)
• ensure emitters face the full market price at the margin
• ensure mitigators receive the full market price for the emissions they capture or avoid
• allow only units with environmental integrity into the system

be fair in the sharing of the obligations."

The Green Party lists five ways in which it considers the current ETS could be improved. These measures are:

• increasing the transparency around free allocation;
• putting more of the criteria for allocation in the primary legislation rather than in later regulations;
• restricting the ability of foresters to get credits for destroying native eco-systems to plant pines;
• improving the measurement of carbon in native forest; and
• making the rules for the Permanent Forest Sinks Initiative fairer for the land owner.

The ACT minority report for the most part attacks the science on which climate change concerns are based, and the use of an ETS over a carbon tax. In ACT's view the way in which New Zealand responds is important: "[t]his is a big issue for New Zealand and unless we get it right, New Zealand's chances of achieving income parity with Australia by 2025 will likely disappear. ACT's strongest recommendation is that the Government insist on a sound regulatory analysis by officials".

Finally, the Maori Party minority review continues to oppose the introduction of an ETS and supports the introduction of a carbon tax regime as the best mechanism to introduce a price on carbon.

Its minority report also expresses the Maori Party's concerns "that an ETS remains a stand-in for a more comprehensive climate change policy, and that complementary measures rely on the notion that scientific and technological innovation is capable of manipulating the environment to enable the nation to continue as we are. The resources of Papatuanuku are finite".

What next?

Significant work is to be completed if the Government is to achieve its goal of attending the Copenhagen Conference in December 2009 with a settled ETS. The Government will continue to seek political agreement on a way forward which strikes a balance between environmental responsibilities and economic opportunities. Talks between the National and Labour Parties reopen next week. Support from both major Parties is seen as key to the long-term stability and success for an ETS. Without Labour's votes, the Government needs support from either ACT or the Maori Party. Based on their minority reports, this support seems unlikely at present.

All Parties are likely to agree to a six month delay to the current 1 January 2010 entry date for the stationary energy and industrial processes sectors.

New Zealand is not the only country facing challenges in implementing a climate change response. Australia's proposed CPRS has not achieved the numbers it needs, having been voted down last month. A second attempt to introduce the legislation is expected in November or December 2009, although it is unclear whether the CPRS will have the necessary political support by then.

We expect that in the coming months the proposed shape for the amended ETS will become apparent, as progress is made by the Government in negotiating an ETS which has the broad support of Parliament.