Evolution of the New Zealand Emissions Trading Scheme: Linking

Abstract

The New Zealand Emissions Trading Scheme (NZ ETS) was conceived as New Zealand’s gateway to the international carbon market with two objectives: assisting New Zealand to meet its international climate change obligations and reducing domestic net emissions below business-as-usual levels. Underlying these objectives was the principle of least-cost compliance for both the New Zealand government and NZ ETS participants. Uniquely among ETS to date, from 2008 through mid-2015 the NZ ETS operated with buy-and-sell linkages to the Kyoto market that did not constrain domestic emissions and were used to set the domestic price. As international Kyoto unit prices plunged from 2011 onward, so did New Zealanders’ incentives to invest in higher-cost domestic mitigation. Instead, NZ ETS participants complied by purchasing large numbers of Kyoto units. In November 2012, the government announced it would take its post-2012 commitment under the UNFCCC, not the Kyoto Protocol. NZ ETS participants responded by surrendering low-cost Kyoto units and banking NZUs which were expected to remain usable in the longer term. In mid-2015, the NZ ETS delinked from the Kyoto market. Although the New Zealand government has explored bilateral ETS linkages, none has come to fruition to date. As of 2017, the NZ ETS operates as a stand-alone system with a substantial participant-held NZU bank as the legacy of past linking. The government now faces important decisions about the future of unit supply in the NZ ETS and linkages to international markets. This paper examines New Zealand’s experience with linking and de-linking its ETS to capture lessons that could be of value to policy makers in New Zealand and other countries. It finds that the considerable opportunities to a small ETS market from linking can be negated if the environmental, economic and political risks are not managed strategically. It also highlights some of the technical and political challenges of negotiating bilateral linking agreements. New Zealand’s future policy on ETS linking, and more generally support for international mitigation as part of our global contribution, should ensure the integrity of New Zealand’s contribution to global mitigation and support strategic domestic decarbonisation in the longer term.

Changing the record: Narrative policy analysis and the politics of emissions trading in New Zealand

“…New Zealand also has a distinctive emissions profile-81.9% of electricity came from renewables in 2017, whereas agriculture produced 48% of national emissions, mainly biological emissions by ruminant animals (Ministry for the Environment, 2019a). Mitigation challenges for New Zealand thus included further reducing energy emissions given the high level of renewables, addressing transport emissions, and reducing agricultural emissions without harming the sector's international competitiveness or producing emissions leakage overseas (Leining & Kerr, 2018).…”

“…Reflecting these issues, the NZ ETS was designed without a domestic emissions cap and instead operated within the global cap created by the Kyoto Protocol. Instead of constraining domestic emissions through caps, the intention was that pricing emissions would incentivise abatement across the economy where abatement was cost-effective within a scheme that requires targeted sectors to surrender units to cover their actual emissions from prescribed activities (Leining & Kerr, 2018). In the 2008 legislation, the total allowances allocated freely to each sector was fixed and participants surrendered one allowance per tonne of CO 2 -equivalent emitted (Jackson Inderberg, Bailey, & Harmer, 2017).…”

“…Another provision permitted sectors to cover emissions by buying unlimited eligible overseas Kyoto units to help manage costs. However, this was criticised for exposing the scheme to low international prices and linking to the Kyoto market was discontinued in 2015 following the government's decision to take New Zealand's 2013-2020 emissions reduction commitment under the United Nations Framework Convention on Climate Change (UNFCCC) rather than the Kyoto Protocol (Leining & Kerr, 2018). In 2009, the new government established a series of transitional arrangements that included the following: delaying entry of some sectors (notably agriculture); allowing stationary energy, transport, and industrial processes to surrender one NZU for every two tonnes of CO 2 -equivalent; output-based free allocation for emissions-intensive and trade-exposed producers; and a ceiling price for units of NZD25 to protect competitiveness (Bullock, 2012).…”

“…Another subsidiary aspect of the GEN mentioned by interviewees for managing administrative costs was a preference for streamlined regulation, including self-reporting of emissions with the threat of audit (similar to the New Zealand tax system) and placing the point of obligation as far upstream in the supply chain as possible so that most businesses are not required to participate directly in the ETS (Leining & Kerr, 2018). "Villain and victim" arguments expressed by GEN supporters often focused on discrimination against rural communities, reemphasising farmers' exposure to higher production costs from pricing of biological emissions (Cooper & Rosin, 2014) and competitive risks to emissionsintensive, trade-exposed industries.…”

Paying for Mitigation: How New Zealand Can Contribute to Others’ Efforts

“…managed withdrawal from them in mid-2015, has led to extended periods of very low effective emissions prices, a government liability for a large participant-held bank of New Zealand Units (NZUs), and windfall gains to some foresters and recipients of free allocation (Kerr & Ormsby 2016;Leining et al Kerr 2017;.…”