Climate Change Response (Moderated Emissions Trading) Amendment Bill

  • enacted

Explanatory note

General policy statement

This Bill amends the Climate Change Response Act 2002. It modifies the New Zealand Emissions Trading Scheme (NZ ETS), provides further powers to make regulations and administer the principal Act, and makes technical drafting changes to add clarity to the principal Act.

The objectives of the Bill are to—

  • reduce competitiveness impacts of the NZ ETS and provide greater certainty for economic growth:

  • provide a smoother transition for participants into the NZ ETS and protect against price volatility in early years:

  • ensure the NZ ETS is affordable within current fiscal constraints:

  • maintain flexibility to respond to possible changes in post-2012 international climate change arrangements:

  • maximise the degree of harmonisation with the Australian Carbon Pollution Reduction Scheme, in particular to reduce trans-Tasman competitiveness risks:

  • improve the administrative effectiveness of the NZ ETS.

It is intended that certain functions relating to the assessment and processing of individual applications for allocation will be transferred to an Environmental Protection Authority at some point after it is created. It is also likely that other NZ ETS administrative functions will be transferred to that Environmental Protection Authority. No changes are proposed in relation to responsibility for applications for allocation for forest land and fishing quota owners.

The main measures in the Bill—

  • shift the commencement of unit-surrender obligations for the liquid fossil fuels, stationary energy, and industrial processes sectors to 1 July 2010:

  • provide for a transitional phase to operate from 1 July 2010 to 31 December 2012 during which—

    • participants in the liquid fossil fuels, stationary energy, and industrial processes sectors are only required to surrender 1 eligible unit for every 2 tonnes of CO2-e emitted and have an option to pay $25 in lieu of surrendering a unit in satisfaction of unit-surrender obligations; and

    • the export of New Zealand units from the NZ ETS is prohibited, with the exception that the prohibition will not apply to the export of forestry-related New Zealand units:

  • provide a transitional phase to operate from 1 January 2008 to 31 December 2012 during which participants in the forestry sector are required to surrender 1 eligible unit for every tonne of CO2-e emitted and have the option to pay $25 in lieu of surrendering a unit in satisfaction of unit surrender obligations:

  • provide for free allocation of New Zealand units to emissions-intensive, trade-exposed industry on an intensity basis, with eligibility thresholds and phase-out rates for free allocation set at levels to reduce trans-Tasman competitiveness risks:

  • delay the commencement of unit-surrender obligations for the agriculture sector until 1 January 2015:

  • provide for free allocation of New Zealand units to the agriculture sector on an intensity basis:

  • set the point of obligation for the agriculture sector at the processor level initially, with flexibility to move the point of obligation to the farm level in the future:

  • increase free allocation of New Zealand units to the fishing sector to 90% of 2005 emissions levels for 1 July 2010 to 31 December 2012:

  • provide power to make regulations for the setting of emissions reduction targets.

The Bill also provides further administrative powers that are useful to the effective functioning of the principal Act and makes some technical drafting changes to add clarity to the principal Act.

Part by Part analysis

Clause 1 is the Title clause.

Clause 2 provides that the Bill comes into force on the day after the date on which it receives the Royal assent.

Clause 3 provides that the Bill amends the Climate Change Response Act 2002.

Part 1
Amendments to Climate Change Response Act 2002

Allocation

Clause 22 inserts new subpart 2 of Part 4. New subpart 2 sets out new sections that relate to the issuance and allocation of New Zealand units as follows:

  • sections 68 to 70 define terms associated with issuance and allocation of New Zealand units and set out general processes in relation to issuing New Zealand units and notification requirements if the Crown intends to issue, sell, or allocate units:

  • sections 71, 72, 74, and 76 to 80 set out processes and consultation requirements in relation to allocation to owners of pre-1990 forest land and owners of fishing quota:

  • section 73 sets out the number of units to be allocated in respect of each class of forest land within the pre-1990 forestry sector:

  • section 75 sets out the number of units to be allocated to owners of fishing quota:

  • section 81 establishes who is eligible to receive allocation in respect of carrying out an eligible industrial activity:

  • sections 82 to 85A provide a methodology for calculating the number of units a person within the industrial sector is entitled to receive. They also set out how a person’s allocation for a specified year will be provided through a provisional allocation and an allocation adjustment:

  • section 86 provides the methodology for calculating the number of units a person within the agriculture sector is entitled to receive:

  • sections 86A to 86D establish processes, decision criteria, and record keeping requirements in relation to allocation to industry and agriculture:

  • section 86E sets out requirements for the number of Kyoto units or approved overseas units the Crown must hold on a given date relative to the number of New Zealand units issued.

Clause 38 substitutes new sections 160 to 161C, which concern reviews of the operation of the emissions trading scheme and powers and processes in relation to allocation to industry and agriculture. New section 160(5) and (6) provide the process for making any changes to certain aspects of allocation to industry or agriculture as a result of a review of the operation of the emissions trading scheme. New sections 161A to 161C establish powers and processes for providing allocations to industry and agriculture. Among other things, these powers and processes relate to the determination of eligibility, allocative baselines (the number of units a person shall receive per unit of output), and output upon which allocation is based.

Clause 61 inserts new section 222F, which concerns transitional provisions for allocation to industry. The section provides that allocation to industry will be reduced by 50% from 1 July 2010 to 31 December 2012. It also provides the methodology for calculating the number of units a person within the industry sector is entitled to receive in respect of the period 1 July to 31 December 2010.

Commencement of surrender obligations

Clause 57 amends section 217, which relates to transitional provisions for penalties associated with the commencement of surrender obligations for each sector. The amendments update section 217 to reflect the amended dates for the commencement of surrender obligations for the liquid fossil fuels, stationary energy, industrial processes and agriculture sectors.

Clause 59 amends section 219, which relates to mandatory reporting and the commencement of surrender obligations. The amendments establish new dates for the commencement of surrender obligations for the liquid fossil fuels, stationary energy, industrial processes, and agriculture sectors. They also require participants within the liquid fossil fuels, stationary energy, and industrial processes sectors to report emissions for the period 1 July to 31 December 2010 (in addition to existing reporting requirements).

Clause 60 inserts new section 220, which aligns unit entitlements and reporting requirements for other removal activities as set out in Part 2 of Schedule 4 with the commencement of surrender obligations for the stationary energy, industrial processes, and synthetic gases sectors.

Transition phase

Clause 61 inserts new sections 222A to 222G, which set out transitional provisions which apply in respect of emissions and removals from 1 July 2010 to 31 December 2012 as follows:

  • section 222A provides that participants within the liquid fossil fuels, stationary energy, and industrial processes sectors are only required to surrender 1 unit for each 2 whole tonnes of emissions from 1 July 2010 to 31 December 2012:

  • section 222B provides that participants undertaking other removal activities are only entitled to receive 1 unit for each 2 whole tonnes of removals from 1 July 2010 to 31 December 2012:

  • sections 222C to 222E establish a fixed price option whereby obligations to surrender or reimburse units in respect of emissions from 1 July 2010 to 31 December 2012 may be satisfied by paying $25 for each unit:

  • section 222G establishes a prohibition on the export of units from 1 July 2010 to 31 December 2012, with the exception of units received for removals within the post-1989 forestry sector and allocated to the pre-1990 forestry sector.

Forestry

Clause 44 clarifies the exemptions for deforestation of land with tree weeds. In particular, it allows for exemptions when the land has already been deforested and replaces section 184(6) with a new provision that extends the period for the clearing of tree weeds on exempt land. Clearing must commence within 24 months of the date of notification of the exemption and must be completed by the end of the commitment period for which the exemption was granted.

Clause 46 clarifies the provisions for registering as a participant in respect of post-1989 forest land. Subclause (1) specifies that an application must be accompanied by a declaration that the post-1989 forest land complies with a pest management strategy under the Biosecurity Act 1993. Subclause (2) clarifies that records must be kept in respect of carbon accounting areas. Subclause (6) allows participants to redefine the carbon accounting areas of which the person is recorded as a participant.

Clause 47 amends section 189 to allow a person who is considering transferring post-1989 forest land to submit an emissions return prior to the transfer occurring. This allows the net emissions and removals in relation to that land to be established prior to the land being transferred.

Clause 48 replaces sections 190 to 193 with the following new sections:

  • section 190 clarifies the rules regarding the surrender of units in relation to post-1989 forest land. It provides the methodology for calculating the unit balance and the carbon density of carbon accounting areas, and states that a participant is not liable to surrender more units in relation to a carbon accounting area than the unit balance for that area:

  • section 191 specifies the requirements for participants who cease to be registered in respect of post-1989 forest land. It sets out the circumstances under which an emissions return must be submitted, and the requirements of the emissions return:

  • section 192 defines the registered participants and new participants in the event of a transfer of interest in post-1989 forest land and stipulates that an emissions return for the transferred land must be filed in accordance with section 193:

  • section 193 specifies the requirements of the emissions return that must be filed when an interest in post-1989 forest land is transferred in accordance with section 192.

Agriculture

Clause 4 amends section 2A. In particular, it removes the date before which an Order in Council can be made to change agricultural activities for which persons must be participants from the processor-level point of obligation to the farm-level point of obligation. It provides for a date to be appointed by the Governor-General by Order in Council.

Clause 5 specifies the process by which an Order in Council can be made moving the participants from processor to farmer. It requires the Minister to have regard to certain criteria and allows for the staged entry of farmers as participants.

Clause 56 replaces sections 213 and 214 in subpart 4 of Part 5. New section 213 clarifies the participants in respect of agricultural activity. New section 214 clarifies that participants are not required to surrender units in respect of synthetic fertilizer containing nitrogen in some instances.

Clause 58 clarifies voluntary reporting requirements in relation to introduction of farm-level obligations.

Clause 64 adds the exporting of live animals and producing eggs as activities in subpart 3 of Part 5 of Schedule 3.

Clause 65 repeals Part 5 of Schedule 4 removing the ability for a person to opt-in at a farm level point of obligation if a processor level point of obligation applies.

Consolidated groups

Clause 31 provides for participants who give notice of election to form a consolidated group to be treated as a consolidated group for the year in which notice is given if notice is given by 30 September in that year or for the following year if the notice is given after 30 September of that year. It also allows a person who is not a participant but wishes to be treated as a member of a consolidated group immediately upon becoming a participant to do so and to thereby avoid the requirement of opening a holding account upon becoming a participant.

Clause 32 provides for participants who give notice of election to join a consolidated group to be treated as a member of the relevant consolidated group for the year in which notice is given. It also allows a person who is not a participant but wishes to join a consolidated group immediately upon becoming a participant to do so and to thereby avoid the requirement of opening a holding account upon becoming a participant.

Clauses 33 to 35 clarify that only a nominated entity may submit an emissions return on behalf of a consolidated group in respect of one or more activities and removes the ability for a nominated entity to submit an emissions return on behalf of a participant.

Clause 36 imposes restrictions on the time for ceasing membership of a consolidated group.

Joint activities

Clause 37 provides for persons who jointly carry out an activity listed in Schedule 3 or 4 to be treated as an unincorporated body.

Clause 52 amends section 204 which states that the joint and several liability regime in section 157 does not apply to participants who mine natural gas and coal.

Clause 54 clarifies the position in respect of opt-in persons purchasing coal or natural gas.

Technical amendments regarding the operation of the principal Act

Clause 6 makes a number of technical changes to definitions in the Act, including the definition of forest land and waste. It also adds new definitions for Convention, Protocol, and solid biofuels.

The clauses mentioned below contain a number of technical amendments to support the operation of the principal Act and other amendments made in this Bill:

  • clause 8 enables the Registrar to delegate functions, duties and powers:

  • clause 12 enables the making of regulations to amend the principal Act to update the Schedules relating to the Convention and the Protocol:

  • clause 21 amends the annual deadline for surrender of emission units from 30 April to 31 May:

  • clause 24 clarifies that the chief executive is not required to determine questions of fact when making emissions rulings under the Act:

  • clause 40 enables the making of regulations for fees and charges for emissions rulings:

  • clauses 51 and 55 remove the exception from reporting requirements previously included in sections 201 and 212:

  • clause 53 clarifies that persons mining for natural gas other than for export in the territorial limits of New Zealand, in the exclusive economic zone or in, on or above the continental shelf are not to be treated as importing natural gas for the purposes of the Act:

  • clause 64 updates the participants listed in Schedule 3.

Household Fund

Clause 62 repeals section 223 of the Act relating to the Household Fund.

Regulations relating to targets

Clause 63 establishes a power to make regulations for the setting of targets.

Innovation Fund

Clause 22 removes provision for the Innovation Fund.

Part 2
Consequential amendments

Clause 66 makes consequential amendments to the Climate Change (Unit Register) Regulations 2008 by revoking the definition of Crown holding account in regulation 3 as a definition of that term will be included in the principal Act, and replacing regulation 6 with a regulation providing for holding accounts to be held jointly.

Regulatory impact statement—1

Executive summary

The New Zealand Emissions Trading Scheme (NZ ETS) came into force on 26 September 2008. The key purpose of the NZ ETS is to enable New Zealand to comply with its international obligations under the Kyoto Protocol and the United Nations Framework Convention on Climate Change (UNFCCC) (including for reducing and reporting on emissions levels) while providing certainty for economic growth, equity, and flexibility to respond to possible changes in the post-2012 international framework.

There is concern that the NZ ETS as currently designed may not meet these objectives, given the currently weak state of the economy and the recent developments in the Australian Carbon Pollution Reduction Scheme (CPRS). There is a need to ensure that there is a smooth transition for industry into the NZ ETS in order for it to adjust to the scheme while coping with the current economic recession. There is also a need to ensure that the levels of assistance (in the form of free allocation) are appropriate and key sectors of the economy do not experience undue competitive impacts as a result of the NZ ETS. Finally, there is a need to provide business with some certainty regarding the future of the NZ ETS and the levels of emissions reductions that New Zealand will be committed to meeting in the long term.

A number of problems have been identified with the NZ ETS, which the current government has committed to addressing. The issues fall into 2 categories—

  • Economic impacts – This includes concerns that the scheme could have large initial impacts on businesses given the current economic climate and that, in the longer term, it could result in the loss of key industries that are exposed to a carbon price ahead of international competitors. A key initiative since the development of the current NZ ETS is the Australian CPRS. The proposed CPRS will provide greater assistance to emissions-intensive, trade-exposed (EITE) industries than the NZ ETS. This could disadvantage New Zealand firms that compete in markets with Australian firms.

  • Implementation time frames – There are some implementation dates in the Act which will be difficult to achieve as there is not enough time for allocation plans to be developed and for the sectors to prepare to enter the NZ ETS. The most pressing is the entry date of the Stationary Energy and Industrial Processes (SEIP) sectors which will begin to accrue obligations under the NZ ETS from 1 January 2010.

Accordingly, it is proposed to make amendments to the NZ ETS. These are aimed at reducing the impacts and smoothing the transition for industry during the current recession and revising the allocation methods to align with Australia, providing greater protection for the competitiveness of the EITE sectors of the New Zealand economy.

The proposed amendments will allow New Zealand to comply with its international climate change obligations while retaining an incentive for emissions reductions within New Zealand and minimising the impacts on the economy.

The key amendments included in the preferred option are—

  • a transition phase from 1 July 2010 to 31 December 2012 which will lessen the impacts of the NZ ETS on industry in the early years of the scheme. The transition phase includes—

    • a fixed price option of NZ$25 per tonne:

    • a revised core scheme obligation for SEIP and Liquid Fossil Fuels (LFF) participants (who will enter the NZ ETS on 1 July 2010) of only 1 unit for every 2 tonnes of CO2 emitted for the period 1 July 2010 to 31 December 2012:

  • uncapped, intensity-based allocation for EITE industries. Eligibility thresholds will be set to reduce trans-Tasman competitiveness risks:

  • the entry date for the agriculture sector will be changed to 1 January 2015. Free allocation to the agriculture sector will be provided on an intensity basis (consistent with industry), and an initial processor-level point of obligation will apply:

  • the introduction of a domestic target for New Zealand of a 50% reduction of net greenhouse gases from 1990 levels by 2050, set through regulation.

Adequacy statement

A Regulatory Impact Statement (RIS) was prepared for these proposals, and independently reviewed by Treasury’s Regulatory Impact Analysis Team (RIAT). RIAT has formed the view that the level and quality of analysis presented is not commensurate with the significance of the proposals, which represent major design changes to the Emissions Trading Scheme, and that the RIS does not provide an adequate basis for informed decision-making. Some key risks identified by RIAT include (but are not limited to) the following:

  • there is no clear analytical basis for the proposal to align some key design elements of the New Zealand ETS with those in the currently proposed Australian Carbon Pollution Reduction Scheme (CPRS). For example, there is no discussion of the overall suitability or benefits of applying these elements to New Zealand’s unique emissions profile and industrial structures:

  • there is no discussion of the risks of harmonising with an overseas scheme that has not yet been finalised or agreed and may yet be subject to significant revision. Such risks may include the potential impacts on business certainty and investment decisions, and the overall credibility, sustainability and effectiveness of the NZ ETS:

  • there is no information on the implied transition path for firms over the medium-to-long term, particularly given that the proposal is for a temporary period of greater assistance coupled with an ambitious long-term emissions reduction target. Without this, it is hard to assess whether it is likely that the design changes will allow for a smoother transition for business.

Status quo and problem

Outline of current situation

The NZ ETS came into force on 26 September 2008.1 Emissions trading is a market-based approach for achieving environmental objectives where emissions units are traded between participants. In effect, those emitting greenhouse gases have to pay for increases in emissions and are rewarded for decreases. This encourages emissions reductions.

The NZ ETS covers emissions of the following 6 greenhouse gases: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulphur hexafluoride (SF6). These are the greenhouse gases covered by the Kyoto Protocol.2

The NZ ETS covers the following sectors of the economy: forestry, liquid fossil fuels (transport), stationary energy, industrial processes, synthetic gases, agriculture, and waste.

In respect of each sector covered by the NZ ETS, there are a number of participants. Each participant must calculate the emissions from their activities and surrender to the government 1 emission unit for each tonne of greenhouse gas emissions (measured in tonnes of CO2 equivalent (CO2-e)) for which they are responsible. There are various types of units that participants can use to meet their obligations under the emissions trading scheme.

The primary unit of trade for the New Zealand emissions trading scheme is the New Zealand unit (NZU). The NZU is a unit issued and allocated by the government under the scheme. One NZU corresponds to 1 tonne of CO2-e emissions.

In addition, participants can use most types of international Kyoto emissions units for compliance. As with NZUs, this is done by transferring the Kyoto emission units to a surrender account. Kyoto emission units are units established under the rules of the Kyoto Protocol and include units assigned to parties at the start of the commitment period (currently 2008 to 2012) and for certified emissions reductions or removals.

The Act identifies who is required to be a participant under the NZ ETS. For example, in the transport sector, importers of liquid fossil fuels are required to be participants. In general, the point of obligation is established at a high level in the supply chain so that there are relatively few participants in each sector. Householders are not participants under the NZ ETS.

Under the NZ ETS, different sectors start to have obligations under the scheme at different times. The forestry sector has an obligation to surrender units in respect of relevant emissions from 1 January 2008. Under the current legislation, further sectors will enter the scheme as follows:

  • the stationary energy and industrial processes sectors will have obligations to surrender units in respect of their emissions from 1 January 2010:

  • participants in the liquid fossil fuels sector will have obligations to surrender units in respect of emissions from 1 January 2011:

  • participants in the waste, agriculture, and synthetic gases sectors will have obligations to surrender units in respect of emissions from 1 January 2013.

A sector is said to have entered the NZ ETS from a certain date where it has obligations to surrender units in respect of emissions from that date.3

As well as imposing an obligation on participants whose activities are covered by the scheme, the NZ ETS provides for allocation of units to certain participants. Introducing an emissions trading scheme will impact on certain parts of the New Zealand economy and society more than others. Allocation is a means of providing assistance or compensation to strongly affected parties.

There are 2 main reasons for providing assistance to firms. One is to provide compensation where the introduction of a carbon price has reduced the value of assets. The other is to protect the competitiveness of firms, particularly those that are emissions-intensive and trade-exposed as these firms are unable to pass the carbon cost on to consumers. The appropriate method of allocation will depend on the reason for providing it.

Under the current NZ ETS, allocation has been provided in relation to pre-1990 forest land to compensate land owners for the loss in value of their land as a result of the costs imposed by the NZ ETS. A similar equity rationale applies in the case of allocation to the fishing sector. In respect of other sectors, the purpose of allocation is to avoid the loss of industries that would not have occurred if our competitors had adopted equivalent emissions pricing. The detail of how units are to be allocated to these persons will be set out in the relevant allocation plan for that sector. No allocation plans have yet been finalised.

Summary of problem

The key purpose of the NZ ETS is to enable New Zealand to comply with its international obligations under the UNFCCC and the Kyoto Protocol (including for reducing and reporting on emissions levels) at least cost to the economy while providing certainty for economic growth, equity and flexibility to respond to possible changes in the post-2012 international framework.

There is concern that the NZ ETS as currently designed may not meet these objectives, given currently weak state of the economy and the recent developments in the Australian CPRS.

The Government’s objectives for the modified NZ ETS are therefore to—

  • strike a balance between New Zealand’s environmental and economic interests:

  • provide a smoother transition for participants than the original scheme:

  • achieve harmonisation with the proposed CPRS.

A number of problems have been identified with the NZ ETS, which the current government has committed to addressing, in a manner which is consistent with New Zealand’s international trade obligations, including under the World Trade Organisation. The issues fall into 2 categories:

Economic impacts

There are concerns that the NZ ETS as currently designed may cause large negative economic impacts on key sectors and the economy as a whole. These concerns are exacerbated by the current economic downturn and the introduction of the proposed CPRS which provides greater protection to key industries in Australia. There are 2 main areas of concern.

Initial impacts of the NZETS on businesses given the current economic climate

There is a need to provide smoother transition into the scheme while participants are dealing with the current recession and becoming familiar with their obligations and the operations of carbon markets. The concern is that while carbon markets are immature there could be potentially high and volatile carbon prices in early years of the scheme. It may be difficult for firms to manage their liabilities in such an uncertain environment.

The loss of production from key industries

The concern about loss of production is greatest for firms that are both emissions-intensive (where production leads to significant levels of emissions) and trade-exposed (compete against goods produced in other countries that do not face similar emissions costs). The fear is that a loss of competitiveness from these EITE will result in carbon leakage, with market share being lost to countries that do not have emissions reduction policies in place. This will see a loss in production in New Zealand with no global environmental benefit.

There is justification for providing greater protection to avoid the loss of key industries that are expected to be competitive once international competitors adopt equivalent carbon pricing regimes and there is a concern that the phase-out of free allocation under the current scheme may cause key industries to lose competitiveness. Other countries (in particular Australia) are developing emissions trading schemes incorporating greater assistance for at-risk firms than is currently provided under the NZ ETS.

Harmonisation with the Australian Carbon Pollution Reduction Scheme

A key initiative since the development of the current NZ ETS is the Australian CPRS. The proposed CPRS will provide greater assistance to EITE firms than the NZ ETS. This could disadvantage New Zealand firms that compete in markets with Australian firms.

The New Zealand and Australian economies are closely linked, with many companies operating and trading across the Tasman. Further, Australia is New Zealand’s principal export market – 22.9% of New Zealand’s total exports were to Australia in the year to June 2008 – and New Zealand is Australia’s sixth largest export market – 5.6% of its total exports were to New Zealand in the year to June 2008. Australia and New Zealand also compete in third markets. Of the top 10 export markets for each country, New Zealand and Australia have 6 in common. Differences between the emission trading schemes of both countries, particularly levels of protection, could have a large impact on levels of trade between the 2 countries.

EITE industries likely to be affected by the NZ ETS which may form a significant part of trans-Tasman trade include—

  • aluminium oxide:

  • copper:

  • dairy products:

  • petroleum:

  • pulp and paper:

  • iron or non-alloy steel.

Together, these categories of export are worth around NZ$500 million and NZ$1.5 billion per annum to New Zealand and Australian exporters respectively. Seen only in terms of trans-Tasman trade, this represents a significant proportion – around 7% of trans-Tasman exports from New Zealand (possibly rising to 10% of New Zealand exports if it assumed that all ‘confidential exports’ are emissions-intensive) and around 15% of Australian exports.

These figures describe areas of export risk for trans-Tasman trade. They also describe some of the key areas of import substitution risks if the importers concerned are being treated more favourably than domestic producers. However, this is not an exhaustive list – risks to exports and import substitution could change when a carbon price is introduced and could expand to other sectors.

The main source of competitiveness concerns relates to the allocation of permits under the New Zealand and Australian schemes. Stakeholders in both countries have raised this as an issue. The proposed CPRS currently allows for intensity-based allocation. Under this method, allocation is awarded on a unit of production basis for particular activities, based on the industry average emissions for that activity for the period from 2006 to 2008. The total pool of allocation to the industry sector is uncapped and both new and existing firms will be eligible for assistance. Initial levels of assistance are 94.5% of emissions for highly emissions-intensive activities, and 66% for moderately emissions-intensive activities. The free allocation is phased out at the rate of 1.3% per annum.

This method of allocation provides greater protection to levels of competitiveness because it minimises the marginal impacts of an emissions price. It provides an incentive for firms to improve efficiency, but does not provide an incentive to reduce levels of output against business as usual.

In contrast, the NZ ETS currently prescribes a cap on the total pool of free allocation to the industrial sector equivalent to 90% of 2005 emissions from eligible firms. The free allocation is phased out from 2018 to 2030 (a faster rate than under the CPRS). This method aims to avoid large reductions in output and unemployment but otherwise leaves firms facing the full cost of carbon including for new growth. This would invariably lead to some reduction in output.

Differences in allocation methodology between the 2 countries could also affect longer-term investment decisions and there is a risk that industries may shift production across the Tasman. It is difficult to quantify the potential extent of this occurring.

In summary, although competitiveness will depend on a variety of factors, all other things being equal, differences in allocation methodologies could cause certain activities to become more productive in one country over another, leading to one country loosing market share or production shifting across the Tasman.

Allocation under the European Union Emissions Trading Scheme (EU ETS)

Another competing economy with an emissions trading scheme is the European Union. Phase 3 of the EU ETS (2013 to 2020) will provide 2 levels of allocation – for those at significant risk of carbon leakage, and for other covered industries. Firms deemed at significant risk of leakage could receive up to 100% allocation based on 2005 to 2007 emissions. However, the free allocation to individual installations will not exceed the level of a benchmark corresponding to the 10% cleanest technologies in the EU. If an installation emits more than the benchmark level, it will need to acquire allowances up to the level of its actual emissions. The allocation to significantly at risk firms decreases by 1.74% per year. Not-at-risk sectors will receive 80% allocation based on 2005 to 2007 emission levels, decreasing to 30% in 2020 and zero in 2027.

Overall allocation in the scheme is made on an absolute basis, with an effective intensity-based allocation to individual participants within the pool via the top 10% benchmark. This approach would be difficult to implement in New Zealand as some industrial sectors have a small number of participants which could lead to difficulties in establishing a benchmark.

It is difficult to quantify the level of allocation for EU firms deemed to be significantly at risk as this will depend on work yet to be completed on benchmarks and the distribution of emissions efficient technologies within industries. Therefore, it is also difficult to determine whether this approach is more or less generous than the Australian and New Zealand schemes. Nominally, it is more generous than the current NZ ETS allocation methodology, but whether this is the case in practice will depend on the stringency of the benchmarks. However, it is worth noting that at-risk sectors under the EU ETS will represent approximately 75% of total industry emissions covered by the EU ETS, which is a larger proportion than the emissions-intensive industries defined under the CPRS.

Implementation time frames

The third problem with the current NZ ETS is that some implementation dates in the Act will be difficult to achieve as there is not enough time for allocation plans to be developed and for the sectors to prepare to enter the NZ ETS. The most pressing is the entry date of the SEIP sector, which will begin to accrue obligations under the NZ ETS from 1 January 2010. There is not time to prepare an allocation plan for these sectors by 1 January 2010. If this date remains, there is likely to be a significant time lag between obligations beginning to accrue for these participants and an allocation plan being finalised (and units transferred).

Objectives

Under the Kyoto Protocol New Zealand is obliged to return emissions to 1990 levels during the first commitment period (2008 to 2012), or take responsibility for the difference through international offsetting. Additionally, New Zealand is currently participating in negotiations for a future international climate change agreement, which is likely to involve deeper commitments for emissions reductions from 2013 onwards.

The key purpose of the NZ ETS is to enable New Zealand to comply with its international obligations under the UNFCCC and the Kyoto Protocol (including for reducing and reporting on emissions levels) at least cost to the economy while providing certainty for economic growth, equity, and flexibility to respond to possible changes in the post-2012 international framework.

There is concern that the NZ ETS as currently designed may not meet these objectives, given the currently weak state of the economy and the recent developments in the Australian CPRS.

The Government’s objectives for the modified NZ ETS are therefore to—

  • strike a balance between New Zealand’s environmental and economic interests:

  • provide a smoother transition for participants than the original scheme:

  • achieve harmonisation with the proposed CPRS.

These objectives address the need to ensure that there is a smooth transition for industry into the NZ ETS in order for them to adjust to the scheme and cope with the current economic recession. There is also need to ensure that the levels of assistance are appropriate and key sectors of the economy do not experience undue competitive impacts as a result of the NZ ETS. A further objective is to provide business with some certainty regarding the future of the NZ ETS and the levels of emissions reductions that New Zealand will be committed to meeting in the long term. Finally, the scheme must also be workable and affordable.

Alternative options

Option 1—Change implementation dates in existing legislation

The first option is to leave the majority of the NZ ETS as it is currently legislated, and change the entry date for the Stationary Energy and Industrial Processes (SEIP) sectors.

The entry of the SEIP sectors would be delayed by 12 months from 1 January 2010 to 1 January 20114. This would incur a fiscal cost of roughly $175 million. The benefits are that the sector has more time to prepare to enter the NZ ETS, which could reduce the impacts to some extent. It also allows government sufficient time to prepare allocation plans.

This option, however, does not address all of the objectives listed above. It does not improve the competitiveness issues or provide assistance in early years of the scheme. Key differences would remain between the NZ ETS and the CPRS limiting harmonisation between the two schemes leaving the potential for increased transaction costs and competitiveness distortions.

Option 2—Abolish the NZ ETS

The second option is to abolish the NZ ETS. Under this option, the New Zealand government would meet its commitments under the Kyoto Protocol by purchasing emissions credits from international markets.

The fiscal cost of abolishing the NZ ETS is estimated to be $1.5 billion in Commitment Period 1 of the Kyoto Protocol (2008–2012). The costs for future commitment periods would depend on the emissions reductions required under the 2020 target, but it can be assumed that they would be significantly higher than this.

This option is not preferred as it is not the long-term least-cost option for New Zealand to meet its international climate change commitments and it would not encourage any emissions reductions within New Zealand. The NZIER and Infometrics report (2009) found that in the short run (to 2012) there is little difference between the economy-wide welfare impacts of the government paying, and a narrow tax/trading scheme5. However, the government pays option has a key disadvantage as it does not establish a price signal for carbon into the New Zealand economy. This means that firms have little incentive to change their production patterns or invest in emissions-reducing technologies. As the carbon price rises above a certain level6, the modelling showed that an emissions trading scheme becomes the cheaper option.

Climate change is a long-term problem and an international climate change framework of some description will exist long after 2012. In order to meet future international climate change commitments at least-cost to the economy, it is desirable to introduce a carbon price while the cost is still relatively low. This allows sectors time to adjust and smoothly transition to a low carbon economy. Delaying adjustment could be costly in the future as New Zealand would lock in investment choices that are inefficient in the long run when climate change agreements become more stringent and the world moves towards carbon pricing. Retaining the NZ ETS would also bring New Zealand in line with developments in other countries including the European Union, Australia, and the United States.

Option 3—Replace the NZ ETS with a carbon tax

An alternative price-based mechanism to an emissions trading scheme is a carbon tax. This is a very similar instrument to an emissions trading scheme, the fundamental difference being the mechanism by which the price is set. Under a carbon tax, regulators set the price per unit of emissions, whereas under an emissions trading scheme regulators set an allowable level of emissions or ‘permits’. A scarcity of these permits creates a price. A carbon tax therefore provides greater certainty over the price as changes to taxes are usually signalled well in advance, whereas an emissions trading scheme provides greater certainty over the level of emission reductions.

The other important difference is the ability to link the domestic policy response to climate change with the international response. The current global agreement is based around restricting quantities of emissions produced and an international emissions trading scheme. A domestic emissions trading scheme will allow linking with the international regime and other domestic emissions trading schemes. This provides New Zealand firms with access to the cheapest emissions reductions, regardless of where in the world they occur.

Arguments in support of a carbon tax are that greater certainty over price makes the liability easier for businesses to manage, and the administrative costs are likely to be lower than under an emissions trading scheme.

A carbon tax is not the preferred option for the following reasons:

  • an emissions trading scheme can ensure New Zealand access to least-cost abatement (within the constraints of any restrictions placed on imports of units) because it gives New Zealand firms the ability to access the international emissions market:

  • an emissions trading scheme leaves New Zealand well placed to meet commitments to expected future international climate change agreements:

  • emissions trading schemes are increasingly the domestic climate change policy instrument choice of New Zealand’s trading partners. Adopting emissions trading in New Zealand provides the best chance of our businesses facing an emissions price that is in tune with the economic climate that New Zealand businesses and their competitors face.

Option 4—Delay the entry dates of all sectors other than forestry until 1 January 2013

Under this option, all sectors would enter the NZ ETS on 1 January 2013, other than the forestry sector. The entry date for the forestry sector would remain at 1 January 2008.

This option would allow ample time for the preparation for sectors to enter the NZ ETS and solve the timing issues. It would also minimise the impacts of the scheme on trade-exposed sectors until 2013. In theory, the economic implications of this proposal are minor, provided there is no significant deforestation and there is an incentive for the post-1989 forestry sector to continue to invest in forestry projects.

However, there is a risk of greater economic implications. A delay of sectoral entry until 2013 would signal uncertainty about the future existence and design of the NZ ETS, and a future carbon price may not be factored into investment decisions, which would delay the adjustment of the economy and increase the costs to New Zealand of complying with its international commitments in the long run.

This option would give rise to significant fiscal costs. The estimated fiscal cost of a delay to 2013 for the Stationary Energy and Industrial Processes (SEIP) and Liquid fossil Fuels (LFF) sectors is approximately $1.275 billion7 relative to the status quo (ie, existing CCRA provisions).

The fiscal impact could be partially offset by removing the allocation of NZUs under the Forestry Allocation Plan. It is estimated that the CP1 allocation, after allowing deductions for exemptions, will be approximately 16 million units8. Cancelling this would result in savings of approximately $400 million. The total fiscal cost of this proposal is therefore approximately $875 million.

This would raise an equity issue for the pre-1990 forestry sector. This would be the only sector facing liabilities under the NZ ETS from 2008 to 2013. If the allocation of units were not provided the sector would not be given any compensation for the loss in the value of their assets.

If sectoral entry dates are delayed, there will be no domestic demand for units generated from the post-1989 forestry sector. In order to ensure sufficient buyers for these units, the Government could consider setting up guaranteed purchasing arrangements for units generated from forestry. There would also be a strong case for permitting exports of units from the post-1989 forestry sector.

From an international perspective, delaying the entry of sectors until 2013 will be seen as a weakening of New Zealand’s commitment to address climate change. This is likely to have some effect on New Zealand’s bargaining position in the negotiations for future international agreements.

If sector entry dates are to be delayed, the current reporting schedules in the Act could still be retained. Mandatory reporting is currently due to commence for the SEIP and LFF sectors on 1 January 2010. For the agriculture sector, voluntary reporting is due to commence on 1 January 2011, followed by mandatory reporting in 2012. Retaining these reporting schedules would assist sectors with managing their emissions and preparing for entry to the NZ ETS in 2013.

Preferred option

The preferred option is to retain the NZ ETS with amendments to reduce the competiveness impacts and smooth the transition into the scheme for industry. It is also desirable to revise the allocation methods to align with Australia, providing greater protection for the competitiveness of the emissions-intensive trade-exposed sectors of the New Zealand economy. This option therefore allows New Zealand to comply with its international obligations and retains an incentive for emissions reductions within New Zealand, while minimising impacts on the economy.

The key amendments included in the preferred option are—

  • the SEIP and LFF sectors will enter the NZ ETS on 1 July 2010:

  • a transition phase from July 2010 to 31 December 2012, which will lessen the impacts of the NZ ETS on industry in the early years of the scheme and smooth the transition. The transition phase includes—

    • a fixed price option of NZ$25 per tonne:

    • a revised core scheme obligation for SEIP and LFF participants (who will enter the NZ ETS on 1 July 2010) of only 1 unit for every 2 tonnes of CO2e emitted for the period 1 July 2010 to 31 December 2012:

  • uncapped, intensity-based allocation for EITE industries. Eligibility thresholds will be set to reduce trans-Tasman competitiveness risks:

  • the agriculture sector will enter the NZ ETS on 1 January 2015. Free allocation to the agriculture sector will be provided on an intensity basis (consistent with industry), and an initial processor-level point of obligation will apply:

  • the introduction of a target for 50% reduction of net greenhouse gasses from 1990 levels by 2050, set through regulations.

SEIP and Liquid Fossil Fuels sectors

The SEIP and LFF sectors will both enter the NZ ETS on 1 July 2010. There will be 2 main changes to these sectors: a transition phase from July 2010 to June 2012 and intensity-based allocation. Participants will still be required to monitor and report emissions from 1 January 2010 as currently provided for under the Act.

Transition phase July 2010 to December 2012

The stationary energy and industrial process (SEIP) and liquid fossil fuel (LFF) sectors would both be brought into the scheme on 1 July 2010 and would face a reduced price for the period from the date of entry to 31 December 2012. For those 2½ years, the price of carbon in the NZ ETS will be moderated through the combination of 2 design changes—

  • a revised core scheme obligation, with participants required to surrender only 1 unit for every 2 tonnes of CO2 emitted (effectively providing a 50% discount):

  • a fixed price option of NZ$25 per tonne.

In order to prevent arbitrage occurring while the fixed price option is in place, a ban will be placed on the export of NZUs converted to AAUs from the SEIP, LFF, and fishing sectors. However, the banking of units freely allocated to these sectors will be permitted. Prohibiting the banking of the free allocation for SEIP, LFF, and fishing sectors would reduce the scale of the market for these participants and lead to opportunities for market manipulation. Allowing banking reduces this risk.

Together, these 2 changes would ensure that the effective price of carbon facing participants in these sectors would never exceed $12.50 per tonne before 1 January 2013, and could be lower if the international carbon price fell below NZ$25 over that period.

These changes will substantially lessen the impact of the NZ ETS on participants in these 2 sectors until the end of 2012, providing a far smoother transition for industry and the economy as a whole. In turn this will help to ensure that households do not face large price increases. The changes will therefore provide a significant improvement for the important first years of the scheme’s operation, when participants are becoming familiar with their obligations and the operation of carbon markets. Although there could potentially be a big jump in the carbon price at the end of the transition phase, this should not have a large impact on the sector as they will have time to prepare and will be able to monitor movements in the carbon price during the transition period.

This change will reduce the level of abatement from the scheme during the transition phase. However, as firms will be aware that they will face a higher carbon price in the future, there will still be an incentive to invest in emissions reducing technology and practices. New Zealand will still meet its commitments under the Kyoto Protocol, but the government may have to purchase emissions units from overseas in order to do so. This is discussed in more detail in the section on wider economic impacts.

Intensity-based allocation approach for industry

The second change is the adoption of an intensity-based approach to the free allocation of units to emissions-intensive, trade-exposed (EITE) industry. This will see New Zealand adopting a similar approach to allocation to that which is expected to be put in place in Australia.

Under an intensity-based approach the number of units each firm receives will be updated each year to reflect changes in output levels, effectively reducing the price of carbon faced by those firms eligible to receive assistance. The key elements of the proposed intensity-based approach include—

  • activities will be eligible to receive assistance if they meet trade exposure and emissions intensity tests, or are eligible under the CPRS:

  • more emissions-intensive activities (likely to be in industries such as food beverage and tobacco manufacturing, petroleum, coal, and chemical manufacturing, and machinery and equipment manufacturing) will receive a higher rate of assistance than less emissions-intensive activities. Initial levels of assistance under the CPRS have been increased to 94.5% and 66% respectively through the Global Recession Buffer Mechanism. However, given the reduced price period until December 2012 and absence of any initial phase-out of free allocation, the initial levels of assistance of 90% and 60% respectively are appropriate under the NZ ETS:

  • the level of assistance will be reduced by 50% during the transition phase (from 1 July 2010 to 31 December 2012) and the credits earned from removal activities will also be reduced by 50% during this period:

  • the number of units individual firms are entitled to receive will be calculated on the basis of industry average emissions for each activity or evidence of industry average emissions from Australia:

  • new entrants, or firms that are expanding, will automatically see their allocation increased, while shrinking firms will see their allocation decreased:

  • the level of assistance will phase out at a rate of 1.3% per annum beginning in 2013:

  • the phase out of free allocation will also be considered through a 5-yearly review, with the first review conducted in 2011. Any significant changes to the provision of free allocation will require a 5 year notice period.

This adoption of an intensity-based approach to allocation will provide ongoing protection for the subset of New Zealand firms that would otherwise be most at risk of suffering a substantial loss of competitiveness under the NZ ETS. This is because intensity-based allocation will reduce the marginal cost impacts of an emissions price. An increase in output of a firm will lead to both an increase in the liability to surrender emissions units, and the number of emissions units issued. The marginal cost and competitive effects are therefore reduced by the free allocation. Additionally, free allocation can be provided to both existing firms and new entrants. As this form of assistance takes into account expansion of production of emissions-intensive trade-exposed industries, it supports growth in these industries and reduces the likelihood of carbon leakage.

An intensity-based approach to allocation will therefore help to avoid undue disruption to the economy, and maintain the ability of businesses in sectors where New Zealand currently has a clear competitive advantage to continue to grow. This change would provide savings over the early years of the scheme’s operation, but impose increasingly large fiscal costs over the long term.

The allocation methodology and thresholds would be based as much as is sensible on the Australian CPRS model. The CPRS approach is based on extensive analysis, and drawing from the CPRS approach will assist in implementing intensity-based allocation within the limited time available.

The CPRS model uses allocative baselines based on the historical industry average of emissions per unit of output. This method provides an incentive for firms to be more efficient than the industry average while still maintaining competitiveness with international firms.

This change is likely to reduce the level of abatement from the scheme particularly beyond 2018 (when the current allocation is due to start phasing out). New Zealand will still meet its commitments under the Kyoto Protocol, but the government may have to purchase a greater amount of emissions units from overseas in order to do so. Again, this is discussed further in the section on wider economic impacts.

Implementing the Australian allocation methodology would bring about benefits from reduced transaction costs for businesses operating across the Tasman and reduced trans-Tasman competitiveness distortions, particularly for emissions-intensive companies.

Given the increased benefits that industry will receive under intensity-based allocation, the current Innovation Fund will be removed from the Act as it is no longer necessary. In addition, the provision for the Household fund under section 223 of the Act will be removed.

Forestry sector

Only minor changes will be made to the treatment of forestry under the modified NZ ETS—

  • emissions liabilities from the pre-1990 and post-1989 forestry sectors will be covered by the NZ$25 fixed price option that accrue before 1 January 2013:

  • the reduced 1:2 core obligation will not apply to either pre-1990 or post-1989 forests. This mitigates the risk that a short-term reduction in price could drive short-term deforestation, causing an increase in emissions:

  • the forestry allocation plan process will be continued.

These changes are expected to have only minimal impacts on the sector and the wider economy. The $25 fixed price option is in line with the expected international price, so the sector faces the same incentive to reduce emissions as under the current scheme. It will provide a modest benefit to forest owners wishing to deforest during Commitment Period 1 (CP1), through greater price certainty.

The forestry sector will be permitted to bank and export units during the transition phase. The arbitrage risks associated with this are low, and restrictions on banking and exports would reduce the economic incentives for this sector adding costs to the economy as a whole. Allowing banking is desirable to assist with managing the long-term nature of forestry investments. However, it may be necessary to ban exports from the forestry sector in the future in the event that the NZ ETS and the CPRS are linked. In this case, foresters would be able to sell units to the Australasian market.

To reduce litigation risk and to retain flexibility over the second tranche of allocation, it is necessary to amend the draft allocation plan. It is further recommended to amend the Act to include as much detail as possible on forestry allocation, specifically to make explicit that only 21 million units will be transferred during CP1 and the approach to distributing units.

Agriculture sector

As agriculture makes up nearly 50% of New Zealand’s emissions, it is important that it is covered by the NZ ETS. However, the impact of the NZ ETS as currently legislated on the agriculture sector could be significant, given that the sector has limited abatement options available to them. Therefore there is a strong case for facilitating a gentler transition for agriculture into the ETS than is currently proposed. There is also a case for ensuring we can reflect on Australian decisions expected in 2013 about possible inclusion of agriculture in the CPRS from 2015, before agriculture enters the NZ ETS.

The entry date for the agriculture sector will therefore be changed to 1 January 2015. The delayed start will substantially lessen the impact of the NZ ETS on the agriculture sector until the end of 2015, providing far smoother transition for the sector and the economy as a whole.

A further amendment to the agriculture sector is to shift to an intensity-based approach to allocation. The approach to phase-out will be consistent with industry. In line with the industry allocation provisions, there would be a review of allocation policies every 5 years.

The adoption of an intensity-based approach will protect the competitiveness of this industry until more effective emission abatement technologies have been developed, or until there is more effective global action on agricultural emissions, including by developing countries, than is the case with the current international framework.

A processor level point of obligation9 will initially be adopted for the agriculture sector (as the Act currently allows for), and the Act will be amended to keep open the option of a farm-level point of obligation at a later stage, subject to stakeholder views and a number of key administrative challenges being successfully addressed. The options for a hybrid point of obligation will be removed from the Act.

Allocation to agriculture should be based on the current year’s output, rather than historic output levels. To ensure that agriculture sector participants can receive allocation well in advance of surrendering units, the surrender obligation for all sectors should be extended from the end of April to the end of May.

The legislation will specify certain criteria to which the Minister must have before making an Order in Council moving the point of obligation to the farm, including—

  • the ability to enforce compliance:

  • the costs including administrative and compliance costs:

  • the benefits in terms of additional mitigation.

The reporting dates for the sector will remain unchanged. Voluntary reporting by the agriculture sector is due to commence on 1 January 2011, followed by mandatory reporting in 2012.

Fishing sector

As fishing is an emissions-intensive trade-exposed sector, the allocation will be increased from the current level of 50%, to 90% of 2005 emissions for two and a half years (July 2010 to December 2012). The transition phase (ie, 50% progressive obligation) will also apply to this sector and the number of units allocated to this sector will be reduced by 50% during the transition phase. The fiscal and economic impacts of this change are likely to be small.

It is proposed that legislation will specify a total number of units for free allocation to the fishing sector and that this number will be equivalent to 90% of 2005 emissions for two and a half years (ie, to match the reduced price period), adjusted for a 2:1 progressive obligation being in place. It is further proposed that the number placed in legislation be based on a Ministry of Fisheries fuel consumption estimate for 2005 of 216 million litres. This is believed to be the best estimate available. This amount of fuel would result in 700 000 emissions units being granted to the sector.

Introduction of a 50 by 50 emissions reduction target for New Zealand

The New Zealand government intends to introduce a 50% reduction in New Zealand’s carbon-equivalent net emissions, as compared to 1990 levels, by 2050. The 50 by 50 target is intended to—

  • make a definitive and credible statement about New Zealand’s long-term contribution to addressing climate change:

  • give taxpayers, business, industries and farmers clear, long-term certainty about where domestic climate change policy is headed so that they can plan and invest accordingly.

Key criteria in the development of the 50 by 50 target were that it needs to be internationally credible, suitable to New Zealand’s unique economic profile and time-bound. A 50 by 50 target is not inconsistent with the IPCC’s 450 parts per million climate stabilisation scenario and New Zealand’s international negotiating position proposes supports a global long-term concentration target of not more than 450ppm. It is also broadly equivalent to the Australian long-term target of a 60% reduction by 2050 compared to 2000 emission levels.

It is proposed that a regulation making power for setting targets be introduced. The regulation making power would also require the target to be reviewed following the release of future Intergovernmental Panel on Climate Change Assessment Reports. The regulation making power would have the same legal effect as a target under the existing gazette mechanism but has the benefit of having a perceived higher status than a target set under the existing mechanism. Furthermore, a regulation making power would provide flexibility to amend the target in response to future IPCC assessment reports.

Fiscal impacts

The table below sets out an assessment of the fiscal implications of the preferred option:

Fiscal costs

($m, costs shown as positive, savings as negative)

 Pre-2013 2013 2015 2017 2013-2017 2020 2030
SEIP entry dates and p.o.588 0 0 0 0 0 0
Ind allocation-177 -181 to -351 -179 to -350 -177 to -348 -896 to -1748 -49 to -221 411 to 586
Ag entry date0 281 0 0 573 0 0
Ag allocation0 0 106 74 270 305 1,581
Fishing allocation4 -14 0 0 -14 0 0
Total415 86 to -84 -73 to -244 -103 to -274 -67 to -919 84 to 256 1992 to 2167
Note: Costs are based on a unit price of $25 until 31 December 2012 and $50 from 1 January 2013.
Implications for the wider economy

The modified NZ ETS will cover all sectors and all gases within a reasonable time frame. It will therefore achieve its original objective of reducing emissions and allowing New Zealand to comply with its international obligations in a manner that is least-cost to the economy, equitable and flexible. It sends a clear signal that the economy will face a carbon price into the future, providing businesses with certainty to plan investment decisions.

The transition phase under the modified NZ ETS will smooth the transition for participants in early years of the scheme and minimise the chance of high or volatile carbon prices. This will give firms time to adjust to their obligations under the NZ ETS while minimising the impact of the scheme during this period.

In addition, moving to an intensity-based allocation model will minimise the impacts of competitiveness on New Zealand firms and industries that are exposed to international competitors who do not face equivalent carbon charges. Intensity-based allocation provides an incentive for firms to improve efficiency, but does not provide an incentive to reduce levels of output, and can be better targeted at those sectors whose international competitiveness is most at risk from the introduction of a price on carbon. Recent economic analysis10 has shown that intensity-based allocation will assist with lowering the costs of the NZ ETS and protecting EITE industries.

These 2 changes will assist with achieving the objectives of striking a balance between New Zealand’s environmental and economic interests, and providing a smoother transition and greater certainty for economic growth into the future.

Transition phase

The transition phase will operate for a relatively short period of time, and there is expected to be minimal change in total costs to the economy between this option and the status quo. The difference will be where the costs fall within the economy.

The transition phase will result in lower cost to industry than the NZ ETS as currently legislated for this period if the international carbon price is above $12.50 per tonne (which is expected to be the case). Firms in the SEIP sector are expected to benefit the most. The duration of the transition phase is too short to affect investment decisions, and as firms will be aware that they will face a higher carbon price in the future there will still be an incentive to invest in low emissions and energy efficient technologies.

The transition phase will result in a smaller increase in fuel costs than the current NZ ETS, lowering the cost to households. Petrol is expected to rise by about 3c/litre (1.8%) which is less than the 6.1c/ litre (4%) that is estimated to result from a carbon price of $25 per tonne, and the increase in electricity prices is estimated to be 0.8c/KWh (3.6%) compared to 1.4c/KWh (6.3%) from a carbon price of $25. These figures assume that the carbon costs are fully passed through.

However, while the transition will reduce costs to industry the government will have to meet any difference between the fixed price option and the international carbon price in order to meet New Zealand’s liability under the Kyoto Protocol.

Forestry

One sector that could experience significant impacts is the forestry sector. This sector can adjust quickly to changes in the carbon price, so there is the potential that a short-term reduction in price could drive short-term deforestation as foresters seek to convert land while the prices are relatively low. This would cause a short-term increase in emissions. The forestry sector has therefore been excluded from the reduced obligation but will be able to access the $25 fixed price option, which approximates the expected international carbon price over this period providing the same incentive to reduce emissions as the current NZ ETS.

Unlike the SEIP sector, the pre-1990 forest sector will also receive a full allocation of units during the transition phase as the free allocation represents compensation for the long-term reduction in land values faced by the sector.

The ownership of post-1989 forests is currently the only net removal activity allowed under the NZ ETS. In contrast to the rest of the economy, owners of these forests benefit from a higher price on carbon. Reduction of expected returns to forestry or high levels of uncertainty among investors could reduce investment in new planning and participation of existing post-1989 foresters in the ETS – both outcomes come at a high economic cost. It is difficult to quantify this impact. However, it should be noted that even relatively small changes to the new planting rate can create a significant economic impact. If the new planting rate under the modified scheme is 10,000 ha per year lower than the new planting rate under a scheme that allows exports, an economic benefit to New Zealand (potentially in the order of $125-$200 million11) would be delayed.

In order to provide some certainty for investment decisions, the banking and exporting of emission units will be permitted for both the pre-1990 and post-1989 forestry sectors during the transition phase. The risk of arbitrage from allowing exports during the transition phase is considered to be low as the level of deforestation for pre-1990 forests is not expected to be significant. Allowing exports for post-1989 foresters will ensure that the sector receives the full economic incentive for new investment.

Intensity-based allocation

Intensity-based allocation for industry is likely to give rise to a fiscal saving from 2010 to 2012 of $177 million, as initially a smaller proportion of firms will receive assistance. It is also estimated that there will be savings of $181–$351 million in 2013 and $49 to $221 million in 2020. By 2030 there will be a fiscal cost of approximately $411–586 million. The fiscal cost arises from the government taking responsibility for a proportion of emissions from the firms that receive free allocation and the cost will depend on the chosen rates of assistance.

An intensity-based allocation approach will provide greater protection to the competitiveness of the industries that receive assistance and will lower the cost of the emissions trading scheme on these participants. Protecting the competitiveness of more firms by providing a higher rate of assistance for a longer period will benefit eligible firms, but will come at a cost to the economy as a whole, by delaying the transition of the New Zealand economy to a carbon constrained world. The consistency with New Zealand’s international trade obligations would also need to be taken into account. The review mechanism will allow for future changes to free allocation.

The costs and benefits of intensity-based allocation on the wider economy are somewhat ambiguous. Economic theory suggests that placing responsibility for emissions with those who reduce them is the least-cost way to meet emissions targets; however, this ignores adjustment costs, economic regrets when other countries may introduce emissions pricing in the future and some general equilibrium effects, particularly around reduction in exports. Recent economic modelling by NZIER and Infometrics suggests that these factors may be significant, and that it may be beneficial to freely allocate units to emissions-intensive trade-exposed firms. NZIER and Infometrics also found that free allocation based on a lump sum payment to compensate firms for stranded assets is more costly than production-linked free allocation.

The Infometrics/NZIER report (2009) concluded that competiveness at risk issues need to be considered. Free allocation, linked to production can be a cost-reducing mechanism of dealing with high costs of abatement and lack of action by other countries. The report also found that free allocation for stranded assets (provided as a lump sum payment) is more costly than production-linked free allocation. As technology options become available and the rest of the world takes steps to implement equivalent pricing regimes, the benefit of free allocation becomes reduced. Although the phase out of free allocation under this option is gradual, it will be subject to a 5-yearly review and can be changed if New Zealand’s economic circumstances are such that this level of assistance is no longer beneficial.

Under an intensity model, highly emissions-intensive firms will receive more assistance than under the previous allocation approach. However, some firms that would have received assistance under the previous approach will fall below the emissions-intensity thresholds and will be ineligible to receive assistance under the new approach. The firms that do not receive allocation will however still benefit from the transition phase in the first two and a half years after SEIP and LFF enter the scheme.

Preliminary analysis from the Ministry for Economic Development suggests that the firms eligible for assistance would come from the following industries:

  • food, beverage, and tobacco:

  • non metallic mineral products:

  • petroleum, coal, and chemical manufacturing:

  • machinery and equipment manufacturing:

  • aluminium drawing, rolling, and extruding:

  • basic iron and steel manufacturing.

Using the same approach as Australia for allocation methodologies and price controls could bring about benefits from reduced transaction costs for businesses operating across the Tasman and reduced trans-Tasman competitiveness distortions, particularly for emissions-intensive companies. It will also enable New Zealand to draw on the Australian experience and analysis when developing allocation methodology.

There is no single perfect approach to allocation, and no single perfect approach to determining eligibility. Having said this, use of the Australian approach has some attraction in that Australian analysis suggests that their thresholds are likely to cover those sectors whose international competitiveness is most at risk from the introduction of a price on carbon. To quote the Australian Treasury (Australia's Low Pollution Future, the Economics of Climate Change Mitigation, 2008, p. xiv)

In the absence of unified global action, an emission price may distort the international competitiveness of Australia's emissions-intensive trade-exposed sectors (EITEs). There is little evidence of carbon leakage. Nevertheless, allocation of some free permits to EITEs, in accordance with the shielding arrangements proposed …. eases the transition to a low-emission economy for shielded sectors while maintaining incentives for emission reductions.

Introduction of a 50 by 50 emissions reduction target

As it is proposed that the target be set through regulation, with a review mechanism, it is unlikely that the economic consequences will be significant. The economic implications of setting the 50 by 50 target in the purpose provisions of the CCRA are likely to depend on New Zealand’s obligations under any future international climate change agreement. If New Zealand’s international emission reduction obligations are less stringent than 50% by 2050 then the target could impose costs on the economy. To prevent this, the Government could adjust the target to reflect New Zealand’s international commitment.

It is difficult to estimate the economic impacts of such a target due to the long time frame involved, and no economic modelling of the costs and benefits of a 50 by 50 target has been completed for New Zealand. However, studies completed internationally, including work by the Garnaut Climate Change Review and the Australian Treasury suggest that economies continue to grow when taking on large emissions reductions targets, albeit at a slower rate. For example the Australian Treasury found that with an emissions reduction target of 60% below 2000 levels by 2050, average annual economic growth is reduced from 1.3% to 1.1% for Australia. This model assumed staged international participation of carbon pricing by the rest of the world.

The costs to New Zealand of such a target will be influenced by the actions of the rest of the world and will be lower if other countries take on similar targets. However, economic modelling still indicates that the economy will continue to grow even when international participation is limited. Although the recent modelling by NZIER and Infometrics only modelled scenarios out to 2020, the results showed that the New Zealand economy continued to grow under all scenarios, even under a $100 carbon price and no action by the rest of the world.

The 2006 Stern Review found that if the world does not act to address climate change, the overall risk could be equivalent to losing at least 5% of global GDP per annum now and forever. If a wider range of risks are taken into account, this could rise to 20% or more. Similarly the Garnuat Climate Change Review conducted in 2008 also found that the costs of inaction were greater than the costs of action.

Although New Zealand is only responsible for a small proportion of global emissions, there is a risk that New Zealand could suffer significant environmental effects as a result of climate change. Additionally, if the global economy is affected this will have flow-on effects to the New Zealand economy. The only way to address these environmental and economic risks is through a global agreement and New Zealand’s ability to influence global agreements relies on its active participation in negotiations, and its reputation as a country that is willing to do its fair share and meet its international obligations.

In addition, there are international and trade risks if New Zealand is not perceived to be doing its fair share to address climate change. New Zealand is a small, open economy that relies on international agreements and treaties to support its trade. There is also a risk that trade barriers could be established against countries that have not taken on emissions reduction commitments.

Risks

Fiscal cost to the Crown being higher than anticipated. Both the transition phase and the intensity-based allocation shift some of the costs of New Zealand’s international liability from emitters to the crown, and subsequently increase the risk to the Crown. This is a particular risk for intensity-based allocation. If the cost is on emitters, emitters have the choice as to whether to purchase permits to cover their emissions, reduce output or invest in mitigation options. The Crown has fewer options for managing emissions, and will be liable for any emissions that exceed the level of emissions specified in Kyoto and successive agreements.

The transition phase will operate for a relatively short period of time so the risk is not large. Intensity-based allocation is a long term provision that could potentially expose the crown to large risks. However, the 5 year review will provide a mechanism for the policy to be changed if the cost is becoming excessive.

Arbitrage arising from the fixed price option. If units issued through the fixed price option fall below the international price the units could be sold at a profit at the Crown’s expense. The level of arbitrage risk will depend on the difference between the fixed price option and the expected international price. In order to mitigate this risk, the export of units will be banned from all sectors who can access the fixed price option, other than forestry. This will not reduce the risk of arbitrage completely (since banking is still possible), but might reduce the level of administrative complexity. It is desirable to allow banking for SEIP and LFF sectors, as a ban on banking would reduce the size of the market for these participants and may lead to opportunities for market manipulation.

Compressed timetable. Although delaying the entry date for the SEIP sector by 6 months will allow more time to develop an allocation plan, and there is a greater chance of achieving this time frame than the time frame under the current Act. However, there is still a risk that the allocation process would not be complete by the entry date of 1 July 2010.

The most likely option for mitigating this risk is to draw on work completed under the Australian CPRS. The Australians have made significant progress towards producing activity definitions and allocative baselines and are expected to complete the majority of this work by the end of 2009. Drawing on Australian work as much as possible is likely to allow the timetable to be met.

Opposition to intensity-based free allocation: There is a risk of opposition to this approach from industry stakeholders who may expect free allocation under the current model, but will receive no allocation under the proposed new approach. This is mitigated to some extent by the transition phase.

Implementation and review

The Bill for substantive amendments to the NZ ETS will be introduced into the House in late September, and is due to be passed in December 2009.

Updated draft regulations for the stationary energy and industrial processes sectors involvement in the NZ ETS were released for consultation alongside draft regulations on unique emissions factors and other removal activities on 2 June 2009. These regulations are due to be published by 1 October 2009.

Transition phase

The fixed price option would operate by participants being able to pay a fixed charge to fulfil surrender obligations. The export of units would be banned from the LFF, SEIP and fishing sectors in order to minimise the risk of arbitrage, and units issued under the fixed price option would be for immediate surrender. A ban on the exports of units could be achieved through existing regulatory powers, but legislative changes may be needed to ban the conversion of NZUs to AAUs for export.

Intensity-based allocation

The provision for allocation to industry will be further developed following passage of the Bill, with a view to providing firms with as much certainty as possible by July 2010.

Review

It is necessary to review the NZ ETS and the allocation model on a regular basis. Five yearly reviews are proposed, which is in line with the Australian CPRS. In terms of operation, the scheme will be effective if participants are calculating emissions and surrendering returns on a timely basis.

Consultation

The New Zealand government announced a Special Select Committee Review of the Emissions Trading Scheme and related matters on 12 December 2008. The Review has very broad terms of reference, which include (among other things)—

  • consider the impact on the New Zealand economy and New Zealand households of any climate change policies, having regard to the weak state of the economy, the need to safeguard New Zealand’s international competitiveness, the position of trade-exposed industries, and the actions of competing countries:

  • examine the relative merits of a mitigation or adaptation approach to climate change for New Zealand:

  • examine the relative merits of an emissions trading scheme or a tax on carbon or energy as a New Zealand response to climate change.

The period for public submissions closed on 27 February 2009. In total 278 submissions on the terms of reference were received and 102 submissions were heard by the Select Committee. Key industry submissions highlighted concerns about loss competitiveness if faced with a price on carbon prior to international competitors. Additionally many were in favour of a smoother transition into the NZ ETS and many submitters supported fixed price options in early years of the scheme and an output-based approach to free allocation. The Review reported to Parliament on 31 August 2009. The submissions to the Review and the findings from the Review have been reflected in the development of these amendments. The Government has also engaged with the Climate Change Iwi Leadership Group on modifications to the NZ ETS.

In addition, updated draft regulations for the stationary energy and industrial processes sectors involvement in the NZ ETS were released for consultation alongside draft regulations on unique emissions factors and other removal activities on 2 June 2009. Submissions on this package of draft regulations closed on 13 July 2009.

The Ministry of Economic Development, Ministry of Transport, Ministry of Agriculture and Forestry, Ministry of Fisheries, Ministry of Foreign Affairs and Trade, Te Puni Kōkiri and the Treasury were consulted on these proposals.

Regulatory impact statement—2

Second order amendments

Executive summary

The New Zealand Emissions Trading Scheme (NZ ETS) came into force on 26 September 2008. The key purpose of the NZ ETS is to enable New Zealand to comply with international obligations (such as those under the Kyoto Protocol) while providing certainty for economic growth, equity, and flexibility to respond to possible changes in the post-2012 international framework.

The governing legislation for the NZ ETS contains a number of administrative provisions which enable the implementation of the NZ ETS. Administrative powers and responsibilities are vested in a number of different government agencies. These powers and responsibilities include functions such as registering and deregistering participants, specifying the data required to comply with obligations and receive entitlements and the manner in which that data is collected, and administering exemptions to obligations under the NZ ETS.

Since the NZ ETS was introduced, a number of areas have been identified where:

  • the provisions of the governing legislation do not provide desirable levels of certainty and clarity regarding administrative powers and processes:

  • the absence of certain administrative powers or processes in the governing legislation makes it difficult to effectively implement the NZ ETS:

  • there is a lack of clarity regarding the inclusion of certain activities in the NZ ETS.

The preferred option is to amend the governing legislation for the NZ ETS to:

  • clarify certain administrative powers and processes:

  • introduce administrative powers or processes useful for effective implementation of the NZ ETS; and

  • clarify the inclusion and exclusion of certain activities in the NZ ETS.

Adequacy statement

The Ministry for the Environment has reviewed the RIS and considers that, given the purpose and scale of the proposals, the RIS is adequate according to the adequacy criteria.

Status quo and problem

Outline of current situation

The New Zealand Emissions Trading Scheme (NZ ETS) came into force on 26 September 200812. ‘Emissions trading’ is a market-based approach for achieving environmental objectives where emission units are traded between participants. In effect, those emitting greenhouse gases have to pay for increases in emissions and are rewarded for decreases. This encourages emissions reductions.

The NZ ETS covers emissions of the following 6 greenhouse gases: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulphur hexafluoride (SF6). These are the greenhouse gases covered by the Kyoto Protocol13.

The NZ ETS covers the following sectors of the economy: forestry, liquid fossil fuels (transport), stationary energy, industrial processes, synthetic gases, agriculture and waste.

In respect of each sector covered by the NZ ETS, there are a number of ‘participants’. Each participant must calculate the emissions from their activities and surrender to the government 1 emission unit for each tonne of greenhouse gas emissions (measured as CO2e) for which they are responsible. There are various types of units that participants can use to meet their obligations under the emissions trading scheme.

The primary unit of trade for the New Zealand emissions trading scheme is the New Zealand Unit (NZU). The NZU is a unit issued and allocated by the government under the scheme. One NZU corresponds to 1 tonne of carbon dioxide equivalent emissions.

In addition, participants can use most types of Kyoto emission units for compliance. As with NZUs, this is done by transferring the Kyoto emission units to a surrender account. Kyoto emission units are units established under the rules of the Kyoto Protocol.

The Climate Change Response Act identifies who is required to be a participant under the NZ ETS. For example, in the transport sector, importers of liquid fossil fuels are required to be participants. In general, the ‘point of obligation’ is established at a high level in the supply chain so that there are relatively few participants in each sector. Householders are not participants under the NZ ETS.

Under the NZ ETS, different sectors start to have obligations under the scheme at different times. The forestry sector has an obligation to surrender units in respect of relevant emissions from 1 January 2008. Under the current legislation, further sectors will enter the scheme as follows:

  • the stationary energy and industrial processes sectors will have obligations to surrender units in respect of their emissions from 1 January 2010:

  • participants in the liquid fossil fuels sector will have obligations to surrender units in respect of emissions from 1 January 2011:

  • participants in the waste, agriculture and synthetic gases sectors will have obligations to surrender units in respect of emissions from 1 January 2013.

A sector is said to have entered the NZ ETS from a certain date where it has obligations to surrender units in respect of emissions from that date.14

As well as imposing an obligation on participants whose activities are covered by the scheme, the NZ ETS provides for ‘allocation’ of units to certain participants. Introducing an emissions trading scheme will impact on certain parts of the New Zealand economy and society more than others. Allocation is a means of providing assistance or compensation to strongly affected parties.

The governing legislation for the NZ ETS contains a number of administrative provisions which enable the implementation of the NZ ETS. Administrative powers and responsibilities are vested in a number of different government agencies. These powers and responsibilities include functions such as registering and deregistering participants, specifying the data required to comply with obligations and receive entitlements and the manner in which that data is collected, and administering exemptions to obligations under the NZ ETS.

Summary of problem

Since the NZ ETS was introduced, a number of areas have been identified where—

  • the provisions of the governing legislation do not provide desirable levels of certainty and clarity regarding administrative powers and processes:

  • the absence of certain administrative powers or processes in the governing legislation makes it difficult to effectively implement the NZ ETS:

  • there is a lack of clarity regarding the inclusion of certain activities in the NZ ETS.

The issues noted above make it more difficult for the NZ ETS to function effectively.

If the NZ ETS is implemented in its current form, administrators and participants would have to reach their own views as to the correct interpretation of certain ambiguous provisions. This is not considered a desirable outcome because different views may be reached leading to confusion and likely legal challenge of exercise of administrative powers. The absence of administrative mechanisms could lead to a number of inequitable outcomes for participants and costs incurred by the Crown. Finally, a lack of clarity regarding coverage of certain activities would create confusion and could have inequitable outcomes.

Objectives

The objective of the proposal is to increase certainty for participants and administrators and enable more effective implementation of the NZ ETS, thereby enhancing the credibility and effectiveness of the NZ ETS.

Alternative options

An alternative option would be that any administrative powers considered to be ambiguous are not exercised. However, the administrative powers in question are necessary to the functioning of the Act. Accordingly, taking this option would result in an NZ ETS that is not functional in certain respects. It is also likely that there could be legal challenge of the failure to exercise some of the powers in question.

Preferred option

The preferred option is to amend the governing legislation for the NZ ETS to—

  • clarify certain administrative powers and processes:

  • introduce administrative powers or processes necessary to effectively implement the NZ ETS; and

  • clarify the inclusion and exclusion of certain activities in the NZ ETS.

Further information regarding the amendments falling into each of these categories is set out below.

Clarifying administrative powers and processes

Amendments are proposed to clarify certain provisions where the current wording could be considered to be ambiguous. These amendments are primarily recommended to reduce the risk of legal challenge to the exercise of administrative powers. Although in some cases the risk of challenge is considered to be low, the consequences of a successful challenge would be serious. Clarifying the meaning of these provisions will create greater certainty which will be beneficial for both participants and administrators.

Clarifying cost benefit analysis requirements in exemption provision

Section 60 provides for exempting persons from NZ ETS obligations by Order in Council. Amongst other things, the process under section 60 requires the Minister to be satisfied of certain matters before recommending the making of an order, and includes requirements for a comparison of costs and benefits. However, as currently drafted the cost-benefit analysis requirements are unclear. Consequently, there is a high risk that it will not be possible to satisfy the process requirements for making an exemption.

It is recommended that section 60 be amended to clarify the Minister must be satisfied the costs of an exemption do not exceed the benefits of an exemption. Costs may include economic costs as a result of exempted persons not facing incentives for mitigation. Benefits may include reduced administrative and compliance costs from not requiring exempted participants to monitor and report emissions.

Clarifying the chief executive’s forestry-related reporting obligations

Section 89 requires the chief executive to report information separately for each of the activities in Part 1 of Schedule 4 (which covers removal activities in post-1989 forests). There are four forest removal activities listed under that Schedule: owning post-1989 forest land; holding a registered forestry right or being the leaseholder under a registered lease of post-1989 forest land; and being a party to a Crown conservation contract.

A number of parties are likely to undertake more than 1 of those 4 activities, but only provide 1 combined emissions return. The chief executive will in practice therefore not have sufficient information to meet an obligation to report separately for each of these activities.

An amendment is desirable to specify that the chief executive only needs to report emissions and removals in relation to the four activities in Part 1 of Schedule 4 in aggregate, rather than separately for each activity.

Clarifying ability to make changes to composition of joint participant registrations

Under the Act, a participant can be made up of more than 1 person (natural or corporate). All of these persons are jointly and severally liable for the obligations of the participant. The Act does not contain provisions specifying how the chief executive is to manage changes to the composition of a multi-person participant. A risk exists that the adding of people to, or removing of people from, a participant by the chief executive is unlawful and not valid. The risk of invalidity—

  • to people leaving the participant is that they remain liable for the other people who continue to be the participant:

  • to people remaining as the participant is that the leaving person continues to have rights to participant benefits:

  • to the Government is that if a person suffers loss due to an unlawful process, then that person may seek to recover that costs from the Government.

Therefore it is recommended that the Act be amended to specify the process for changing the people who make up a multi-person participant.

Clarifying ability to specify the Land Transfer Date in the Forestry Allocation Plan

Section 71 of the Act sets out the issues that must or may be set out in the Forestry Allocation Plan. One of the issues that may be covered in the Draft Allocation Plan is a date or event on which the land is to be treated as transferred.

The proposal set out in the Draft Allocation Plan confirms the Act’s default that the land is to be treated as transferred on the settlement date, which in a sale and purchase situation would have been agreed by the seller and purchaser. This is effectively the date when the new owner would have taken control of the land and paid any outstanding monies.

The transfer date is important because it affects the amount of allocation that pre-1990 land receives. The rationale behind the decreased allocation for land that was transferred after 31 October 2002 was that once the previous government first announced its intention to introduce policies to control rates of deforestation, a willing buyer could have factored that into the purchase price they were willing to pay for the land. However, this rationale does not apply to land that was transferred after 31 October 2002 by operation of law, for example by order of the court, or by transmission on the death of a joint owner.

The drafting of section 71 may inadvertently catch such situations and could result in such a new owner receiving a reduced allocation. Recent legal advice casts doubt over whether the wording of section 71 unambiguously gives the Minister the power to clarify the meaning of transfer via the Allocation Plan to ensure that the above policy intent is met, and that land that has been transferred by operation of law is not automatically ineligible for a higher allocation of units.

In order to remove the risk of legal challenge on this point, it would be desirable to amend section 71 to clarify that the Forestry Allocation Plan whether issued before or after this amendment may define what is meant by the concept of ‘transfer’ for the purposes of allocation.

Clarifying that the chief executive has power to specify and approve locations in the forest area where information will be collected

MAF is developing methodology to measure emissions and removals for forest land, rather than relying on generalised lookup tables. This methodology will be reflected in the forestry sector regulations. One of the features of this measurement approach is the requirement that an applicant’s forest land-holding be divided, and information collected at locations within each divided area, in a manner to be further prescribed in regulations and/or standards. Information collected at the specified locations will be used to calculate forest emissions and removals.

The Act does not currently provide the chief executive with a clear authority to specify either how an applicant’s land-holding should be divided, or the locations in the forest where prescribed information should be collected. The division of forest land area and the location of the information collected will have a significant impact on the carbon measurement accuracy. This power is therefore crucial to ensuring that the areas and locations within which the information is collected are not the subject of debate or challenge by participants, nor to arbitrary relocation, say to a less representative forest area. This issue can be addressed by making a small amendment to the regulation making power, to make it clear that the chief executive can specify the areas and locations from which data must be collected.

Clarifying of the treatment of mining natural gas within the exclusive economic zone (EEZ)

It is necessary to amend the Act to clarify that a person carrying out the activity of mining natural gas, other than for export, within the exclusive economic zone (EEZ) or in, on or above the continental shelf is not also carrying out the activity of importing natural gas under Part 3 of Schedule 3.

The Act, as currently drafted, is ambiguous on this point as the provisions regarding the activity of 'importation' are defined by reference to the Customs and Excise Act 1996 which could result in gas mined in New Zealand's gas fields located outside a 12 nautical mile limit being considered to be 'imported'. However, section 205 of the Act expressly provides that the activity of mining natural gas that occurs in the EEZ is mining activity for the purposes of the Act. There is an argument that a person mining gas in the EEZ falls under both the activity of mining and is also technically importing gas which would require that person to register as an importer of gas and comply with the provisions of the Act.

This ambiguity should be clarified by an amendment to provide that a person carrying out the activity of mining natural gas that occurs in the EEZ does not also carry out the activity of importing natural gas simply because it is mining gas from a field located outside the 12 nautical mile limit.

Clarifying relevance of subsequent commitment periods to NZU issuance

Section 69 prescribes the process for the issuance of NZUs into a Crown holding account, in accordance with a direction from the Minister for Climate Change Issues to the New Zealand Emissions Unit Registrar. Section 69(2)(c)(i)–(iv) lists a number of matters the Minister must have regard to if there is no subsequent commitment period specified or determined under the Protocol or no successor international agreement to the Protocol. This subsection was only intended to guide the issuance of units in subsequent commitment periods (rather than be considered as part of the CP1 issuance process). The section needs to be amended to clarify this policy intention.

Clarifying that only a nominated entity can submit a return for a consolidated group

The consolidated group provisions are proving very difficult for MAF and MED to operationalise for what is likely to be a very small number of participants who would qualify, and elect to form, a consolidated group for emissions reporting purposes. Allowing multiple corporate entities that are participants in multiple sectors with different reporting timetables and bases is proving unworkable.

At the very least, the Act should be amended to clarify that only the nominated entity can submit an emissions return on behalf of the members of the consolidated group, and that only one emissions return per calendar year can be submitted for the consolidated group.

Clarifying the ability to delay registration of forestry participant until fees and charges paid

Section 167 empowers the making of regulations to prescribe fees and charges. Regulations under this section have already been brought into force for post-1989 forest participants. Those regulations specify that an applicant wanting to join the scheme must pay an upfront fee with his or her application. If the processing of their application is particularly time consuming, they will then be charged an additional amount based on the number of hours worked.

Under the Act as currently drafted it is not clear that the scheme administrator has the ability not to register a forestry participant in the scheme if that participant has failed to pay any additional amount charged. This is likely to make it more difficult for the administrator to recover any outstanding charges.

An amendment is desirable to make it clear that the administrator is not required to register a participant until all fees and charges relating to the application have been paid.

Confirming pro-rata approach for NZUs earned when land within a Carbon Accounting Area is transferred

NZUs are earned for increases in carbon stocks in a Carbon Accounting Area (CAA). Where part of the land of a CAA is transferred to another participant it is necessary to apportion NZUs earned between the transferor and transferee. It was always envisaged that the apportionment should be made on a pro-rata per hectare basis. As drafted, the Act permits a pro-rata apportionment, but does not exclude the possibility of another basis for apportionment and officials consider that the Act should be amended to explicitly provide that the apportionment will only be made on a pro-rata per hectare basis.

Requiring the Registrar to give effect to directions

While it is implicit in the Act that the Registrar must follow a chief executive’s direction under section 18B, unlike every other direction from ministers and the chief executive referred to in the Act, it is not explicitly stated that the Registrar must follow the direction. Clarity, and consistency with all other directions in the Act, is important here because section 18B directions can relate to actions that include closing a person’s holding account and potential forfeit of that person’s emissions units to the Crown.

Clarifying obligation to retain records

For the avoidance of doubt, it should be made clear that the obligation in section 67(2) to retain records continues whether or not the person continues to be a participant.

Clarifying that 1 emissions return only to be filed per year

For the avoidance of doubt, it should be made clear in section 189 that a specific post-1989 participant can only file 1 emissions return per year (this reduces implementation complexity), albeit that they can still mix and match the Carbon Accounting Areas they include in each return.

Clarifying treatment of returns in respect of less than a hectare

Clarify the Act so that a person must calculate the number of units to be surrendered where the area of post-1989 forest land is being deregistered by making the calculation in relation to a whole or part of a hectare. Currently, section 190(2) assumes that the areas of post-1989 forest land being deregistered are whole hectares when this will not always be the case.

Amending timing of surrender relative to date of emissions return

In section 191(3), replace by the same with within 20 working days of (at present the final surrender date is the same as the final date for submission of the emissions return).

Clarifying timing for notification of ceasing to carry out activity

Insert as soon as practicable after must notify in section 188(3)(b) (at present the timing for notification is not specified).

Introducing or amending administrative powers and processes

Amendments are proposed to make the administration of the Act more straightforward. Although the Act is workable in its current form, there are a number of areas where administration of the Act is cumbersome and/or could prove costly or create unintended liabilities for participants. Some changes are therefore required to make the Act work more effectively.

Creating the ability to waive fees and charges

It is proposed to introduce regulation-making powers that provide a power to exempt, waive and refund fees and charges to correct administrative errors (eg, inadvertent double payments by an ETS participant). Similar powers exist under many enactments including the Biosecurity Regulations. MAF’s internal legal advice has been that without an explicit power, MAF is unable to make refunds to correct administrative mistakes. This has already raised issues of equity and fairness in 1 case. While this is a minor technical amendment it is important to avoid any risk of bringing the ETS into disrepute through perceptions of inequity or unfairness in the administration of the ETS.

Creating the ability to apply for a tree weed exemption for deforestation between 1 January 2008 and the date exemptions are granted

The NZ ETS contains provisions to allow deforestation of tree weeds (eg, wilding pines) to apply for and receive an exemption from the deforestation provisions of the Act (becoming a mandatory participant, filing an emissions return and surrendering emissions units). These exemption provisions were inserted so that efforts to eradicate tree weeds would not be discouraged by the NZ ETS.

As currently drafted, the Act restricts the availability of exemptions to land that was forested at the time the exemption is granted. Exemptions therefore cannot be granted to landowners who have already deforested since 1 January 2008 (this amounts to an estimated 800 ha to date). This situation means that land owners may be penalised for carrying out weed eradication activities because, due to timing issues, the tree weed exemption is not available to them. This is particularly concerning because landowners are often required to deforest weed trees by regional councils as part of the regional pest management strategy to manage the spread of the trees. Further, it affects the ability of government departments like DOC and LINZ to pursue their mandates of removing tree weeds under other legislation and government policy.

The existing situation is unfair to those landowners who have continued their efforts to eradicate tree weeds and now face a liability. It also risks worsening the spread of tree weeds where control programmes have ceased.

Accordingly, it is proposed that the Act be amended to allow tree weed forest land that has been deforested since 1 January 2008 to be eligible for an exemption (once an exemption process is available). This does not result in an increased level of deforestation or increased fiscal costs over and above what was estimated to be incurred by the tree weed exemption overall – as the area of pre-1990 tree weed forest is finite.

Creating the ability to charge fees for emissions rulings

The Act currently provides for fees to be charged in respect of persons who opt-in to the NZ ETS. However, the Act does not currently provide for fees to be charged in respect of persons who are mandatory participants in the NZ ETS. This presents a problem because mandatory participants are able to make binding ruling applications. These applications are likely to be complex and will require significant time to process. It is also likely that external legal advice (from the Crown Law Office) and expert technical advice may be required in respect of some or all applications. Accordingly, it is strongly recommended that the Act be amended to allow for cost recovery in respect of applications for binding rulings by mandatory participants.

Enabling the delegation of the Registrar’s Powers

Under the Act as currently drafted, the Registrar of the Emission Unit Register cannot delegate his or her powers.

Officials consider that a delegation of the Registrar’s powers is critical for the workability of implementing the NZ ETS. The complexity and volume of work required of the Registrar means that these tasks will need to be completed by staff reporting to the Registrar.

It is therefore recommended that the Act be amended to include the ability for the Registrar to delegate his or her powers. If no ability to delegate powers is included in the Bill, either the Registrar’s responsibilities will go unfulfilled or there will be a question about the validity of the Registrar's actions (eg, transfers of emission units).

Defining farming in relation to land ownership

If the participant in the agriculture sector is at farm level rather than processor level, then subpart 4 of Part 5 of Schedule 3 currently defines the activity as farming, raising or growing animals for reward or trade. This definition identifies farmers operating under a range of farm ownership structures and contractual arrangements. For example it identifies both farmer landowners and farmers who do not own land, but do raise livestock. For simplification of administration, an amendment would be desirable to make it clear that the participant is the person owning land on which animals are farmed. An amendment would provide the ability to move the obligation to another party in the event of long-term land use agreements.

The amendment would significantly enhance the ability to cross check legal participants against registrations to ensure full participation, and improve consistency with treatment of the forestry sector. This is important given the number of farm level agriculture participants. The Agriculture Technical Advisory Group on emissions trading also recommended this amendment in order to minimise the compliance costs of the scheme and ensure comprehensive coverage of emissions.

Providing for removal from the Register of Participants after obligations have been met

Certain persons who become mandatory participants of the ETS are obliged to notify that they should be entered on the Register of Participants by the administrator. They then have an obligation to file an emissions return and surrender emissions units to satisfy their obligation.

Under section 59 a participant is entitled to notify the administrator that the participant has ceased to be a participant and should be removed from the Register of Participants, regardless of whether or not the participant has yet filed their emissions return and/or surrendered sufficient emissions units to meet the participant’s liabilities.

A more efficient and effective de-registration mechanism would be for the participant to remain on the Register of Participants until such time as the participant has met all the obligations. At that time the administrator would initiate the de-registration. It is recommended that section 59 be amended accordingly.

Restricting timing for electing to have activities removed from consolidated group

To reduce administrative complexity, it is proposed to restrict the timing for members of consolidated groups to elect to cease being a member of that group. It is proposed that elections received by 30 September in a given year would be effective from the beginning of the following year, and elections received after 30 September in a given year would be effective from the beginning of the year following the next year. This is consistent with the timing constraints for entities to join consolidated groups, and would avoid part year reporting – bringing administrative benefits for the groups themselves as well as for the chief executive.

Clarifying that section 64 directions will not be published

Section 64 is concerned with the entitlement of a participant to receive units in respect of removal activities. Under section 64(3), the Minister of Finance directs the Registrar on how many units to transfer to a particular participant’s holding account.

As presently drafted, the Act is ambiguous as to whether directions made under section 64 should be published on the Registrar’s Internet site. It is recommended that the Act be amended to clarify the position. On balance, officials recommend that directions made under section 64 should not be published.

Although principles of transparency would suggest that directions should be published, officials consider that concerns about commercial sensitivity support non-publication of section 64(3) directions. Stakeholders raised concerns regarding commercial sensitivity of emissions and removals information when the NZ ETS was being established. These concerns are reflected in a number of provisions of the Act which protect against disclosure of potentially commercially sensitive information regarding emissions and removals activity (see section 89(3)). Similarly, while the Act requires information to be available regarding individual holdings of Kyoto units, information regarding holdings of NZUs is only required to be made available in aggregate (see section 27(2) and (3)).

Requiring record keeping by primary participant following opt-in

Section 212 of the Act provides that a mandatory participant who mines coal or natural gas (a primary participant) is not required to comply with the requirements of section 62 or file an emissions return in respect of coal or gas that is purchased by an opt-in participant. Section 62 requires a participant to maintain records relevant to emissions and removals associated with the relevant activity (in this case mining coal or natural gas), and calculate the emissions and removals from the relevant activity. An emissions return reports on those emissions and contains an assessment of liability to surrender units.

A primary participant should not be required to surrender units in respect of coal or gas that is purchased by an opt-in participant. However, officials consider it important that the primary participant be required to report on and keep relevant records regarding all coal or gas produced. In the absence of such an obligation, it will be very difficult to reconcile data provided by primary and opt-in participants. There is a real risk that gaps will emerge than cannot be verified and compliance cannot be enforced.

Under the Act as currently drafted, it is not entirely clear whether a primary participant can be required to keep records regarding the coal or gas that is produced and on-sold to opt-in participants. Accordingly it is proposed that the Act be amended to clarify that record keeping and reporting obligations do apply in respect of all gas and coal mined, including that purchased by opt-in participants.

A similar issue arises under section 201 in respect of the liquid fossil fuels sector. Accordingly, it is proposed that a similar amendment be made to section 201.

Streamline the process for updating the schedules to the CCRA to reflect amendments to the KP and the UNFCCC that are in force for New Zealand

The UNFCCC and Kyoto Protocol are included in the Act as Schedules I and II.

It would be desirable to have a streamlined procedure (for example through Order in Council) for updating the Schedules of the Act to reflect changes in the international instruments that are already in force in New Zealand.

For example, the annexes to the UNFCCC set out the developed country Parties with specific obligations under the UNFCCC (Annex I), some of which have additional financial obligations (Annex II). The binding emissions reduction commitments for Annex I Parties are reflected in Annex B to the Kyoto Protocol. As new parties join these Annexes, this will need to be reflected in the Schedules to the Act.

Providing for authorised representatives in respect of joint activities

Under the Act, landowners who are joint participants may be recorded on the register of participants in the manner prescribed in regulations. From an ease-of-implementation perspective it is preferable to require 1 of the joint participants to be appointed when there are more than 25 joint participants. This person will be an authorised representative and will be entered on the Register of Participants (on behalf of all joint owners). This will mean the chief executive can deal with that person in relation to all matters relating to the participation of those persons in the NZ ETS.

Inserting and applying a definition of Crown holding account

It would be desirable for the Act to distinguish between (i) holding accounts held by the Crown and controlled by the Minister of Finance (Administrative Accounts); and (ii) accounts held by Ministers (eg, Minister of Conservation) as participants in the NZ ETS (Participant Accounts).

Administrative Accounts are held by the Crown for—

  • Kyoto compliance; and

  • administrative aspects of the ETS (ie, surrender accounts, conversion accounts, holding accounts for pools of NZUs, etc).

Inserting a definition distinguishing Administrative Accounts from Participant Accounts is desirable because a number of sections in the Act refer to Crown Accounts. These sections contemplate Administrative Accounts, but do not contemplate, and should not apply to, Participant Accounts.

Clarifying when forest land is treated as being deforested before 1 January 2008

The current wording in the Act results in an interpretation contrary to the previously announced policy intent of treating as deforested on 31 December 2007 any area which meets solely the conditions in section 4(5)(a) and (b), namely where—

  • no standing exotic forest species (dead or alive), other than a strip of standing exotic forest species that had, or was likely at maturity to have, tree crown cover of an average width of less than 30 metres; and

  • no other merchantable timber from exotic forest species.

The Act adds in an additional test by requiring that where land-use change has not commenced prior to 31 December 2007, an area that is cleared and meets section 4(5) of the Act should not be regarded as deforested unless independent evidence exists that deforestation had commenced prior to 31 December 2007. This interpretation is proving difficult for participants to prove and MAF to verify.

To minimise confusion and provide clarity for participants it is recommended the Act be amended to clarify that deforestation is deemed to have occurred before 1 January 2008 if on 31 December 2007 the land had—

  • no standing exotic forest species (dead or alive), other than a strip of standing exotic forest species that had, or were likely to have, tree crown cover of an average width of less than 30 metres; and

  • no other merchantable timber from exotic forest species; and

  • conversion to land that is not forest land is complete within 4 years of the date of clearing.

Advice from the national Kyoto inventory agency is that New Zealand will not incur any cost under Kyoto from this amendment.

Amendment to the definition of forest land

The current interpretation of the definition of forest land under the Act unnecessarily disadvantages participants compared with interpretation under the Kyoto Protocol, and is also more difficult to implement operationally than the Kyoto definition. This is because the existing definition of forest land is satisfied by relatively small numbers of juvenile trees being forest species. That is, it does not take many trees to meet the crown cover threshold test at maturity and therefore become forest land.

It is proposed to amend the definition of forest land in the Act to remove problematic and unnecessary differences with the international rules.

Joint venture participants in the natural gas sector and coal sector

Under the current provisions of Act, persons who carry out activities jointly are together treated as being the participant for the purposes of the NZ ETS. The joint participants are required to report jointly on their emissions, and have joint and several liability for the participant’s obligations under the NZ ETS.

The oil and gas sector has advised that requiring joint venture partners carrying out the activity of mining natural gas to be joint participants under the NZ ETS would create a number of problems. The sector argues that the current rules would—

  • result in confidential information being disclosed to the other joint venture partners:

  • require a level of co-operation that joint venture partners in this industry do not usually undertake (because joint venture partners would have to manage their liabilities jointly under the NZ ETS); and

  • give rise to difficulties around opt-in by downstream purchasers (as joint venture parties often separately market their respective offtake).

It is proposed to amend the Act to address these concerns. There remain strong policy reasons for retaining the joint participant requirements in respect of other activities. However, these policy reasons do not apply to the same extent to persons mining natural gas through the vehicle of an unincorporated joint venture. Notably, the number of participants is likely to be manageable and there will be ways to ensure that all emissions are accounted for.

It is therefore recommended that the Act be amended to provide that where more than 1 person is named on a permit relating to mining natural gas, each of the permit holders is to be treated as the person carrying out the activity of mining natural gas and must comply with the obligations of a participant under the Act. Following this amendment, joint venture participants would no longer be required to be joint participants under the NZ ETS, although related companies appearing on the same permit would still have the option to do so.

If the Act is amended as proposed (to provide for individual permit holders to be the participant under the NZ ETS) a number of consequential changes will also be required. These consequential amendments include providing sufficient flexibility regarding joint reporting for related companies carrying out the activity of mining natural gas, as well as ensuring that opt-in provisions work effectively where gas is purchased from a member of the group which is not in fact the participant, such as a parent company of the company carrying out the mining activity.

The coal sector has not made representations on these issues. However, officials have advised that it would be appropriate to extend the proposed amendments to include the coal sector. The problems identified by the natural gas sector are likely to be applicable, at least to some extent, to participants in the coal sector – although the problems are likely to be less widespread because joint ventures are a much less common arrangement in the coal sector. As in the natural gas sector, the proposed amendments would not result in a large increase in participant numbers (at present, the increase in participant numbers in the coal sector would be negligible) and there will be ways to ensure that all emissions are accounted for.

Emissions rulings

The Act contains provisions under which persons can apply for rulings from the chief executive on a number of matters. Rulings can cover whether something a person is doing is an activity listed in Schedule 3 or 4 of the Act, and whether the person is a participant in respect of an activity listed in Schedule 3 or 4 of the Act. Rulings can also cover the correct application of certain regulations made under the Act.

As presently drafted, the Act is not entirely clear regarding the scope of the rulings that can be obtained. In particular, the Act can be interpreted to mean that a ruling could be obtained in respect of technical questions prior to a person’s compliance with the Act. This would be an inappropriate use of the rulings process as it would effectively be a request to verify information prior to compliance. Further, it would be time consuming and technically challenging for the chief executive to provide such a ruling.

Accordingly, it is proposed that the Act be amended to clarify the scope of the binding rulings regime. In particular, it is proposed that the Act be amended to specify that the chief executive will not make an emissions ruling where doing so would require the chief executive to determine questions of fact contained in the information supplied by the person requesting the ruling.

Streamlining access to consolidated groups

The Act makes provision for participants who are members of the same group of companies to form a consolidated group. Formation of a consolidated group allows members to submit a single emissions return, operate a joint holding account, and jointly meet their surrender liabilities under the Act. It is expected that the consolidated group provisions will simplify compliance for groups of companies with a large number of subsidiaries carrying out activities under the NZ ETS.

As presently drafted, the rules regarding the formation of consolidated groups are reasonably restrictive. To some degree, this is necessary in order to ensure administrative efficiency. However, there are some areas where the rules could be relaxed or amended to make it easier to form or become part of a consolidated group. It would also be possible to reduce the time delays that currently apply to the formation or joining of a consolidated group in certain circumstances.

It is proposed to amend the Act to streamline the consolidated group provisions to facilitate use of these provisions whilst maintaining administrative efficiency.

Post-1989 forestry – wilding pines

Under current provisions, the Act requires applicants who register as a participant in respect of post-1989 forest land to declare that any action taken by the applicant after 1 January 2008 in relation to that land (including, but not limited to, removal of any existing vegetation prior to planting of the forest species on the land) complied with the provisions of the Resource Management Act 1991, including any plan under that Act, and the Forests Act 1949, as in force at the time that the action was taken. It is proposed that the Act also require applicants to declare their compliance with a pest management strategy under the Biosecurity Act 1993 in the same way that the Act currently reinforces the need to comply with Resource Management Act and Forestry Act requirements.

The basis for this proposal is that district plans under the Resource Management Act 1991 do not generally require the natural spread of wilding trees to be controlled, whereas the Biosecurity Act 1993 does require these controls. The proposed change does not introduce additional compliance issues, but reinforces the need to comply with pest management strategies.

Pre-1990 tree weed exemption

Amendments are required to ensure the exemption’s effective operation and relate to—

  • extending the time limits on the tree weed exemption so that the current requirement to complete deforestation within 24 months is extended to within the first commitment period; and

  • enabling the chief executive to maintain control over the level of liabilities under this exemption by limiting tree weed exemption approvals per commitment period within a fixed budget.

Carbon accounting areas

A carbon accounting area (CAA) is the area of forest land for which a post-1989 Participant is required to report the change in forest carbon stocks over time. Currently, a Participant can only define a CAA when they first register the forest land into the ETS. Early implementation experience is that some aspects of the provisions relating to CAAs are overly cumbersome, likely to lead to unnecessarily high transaction costs, and could create unintended liabilities for participants. Amendments are therefore proposed to—

  • ensure that an existing participant is able to redefine the way in which their forest land is assigned to CAAs without incurring any additional obligation to surrender emissions units or having to pay any fee for reapplication:

  • clarify that the chief executive must keep an up-to-date record of the net balance of units in relation to a CAA including one that is redefined:

  • make the process of transfers and carbon accounting more transparent and simpler for both a vendor and purchaser. Specifically, the area of land transferred must be an entire CAA, and the transferor will submit an emissions return that accounts for emissions or removals from the date of the last return to the date of transfer. This will be submitted within 20 working days of transfer and surrender any units in accordance with the Act.

Clarifying the inclusion and exclusion of activities

Amendments are proposed to clarify that certain activities are or are not covered by the NZ ETS. These amendments are necessary to create certainty for participants and for departments administering the NZ ETS.

Clarifying the inclusion of emissions from biofuels combusted for electricity generation or industrial heat

The Act is currently ambiguous regarding coverage of emissions from combustion of biofuels. It is unclear whether or not these emissions are covered by Schedule 3, Part 3, which includes emissions from the combustion of …waste for the purpose of generating electricity or industrial heat.

It is proposed that the Act be amended to clarify that emissions from biofuels combusted for electricity generation or industrial heat are covered by the Act.

Including egg producers and live animal exporters in the scheme

Subpart 3 of Part 5 of Schedule 3 currently does not explicitly include egg producers. Subpart 3 of Part 5 of Schedule 3 also does not include the emissions from animals that are then exported as live animals. The policy aims to cover poultry emissions comprehensively but egg producers were inadvertently excluded. Although this does not have large fiscal implications (~$0.5 million at $25/tonne), it would be highly inequitable for poultry meat producers.

Excluding the export of live animals may create an incentive to slaughter animals off-shore in countries not facing a price on carbon. An amendment is required to close this loophole.

Removing Producing cable using a nitrogen cure process as a mandatory activity

Independent expert advice has been obtained on the industrial process of producing cable using a nitrogen cure process. This advice states that nitrogen used in the production of cable does not, of itself, generate greenhouse gas emissions.

New Zealand does not report any emissions from this source in the national GHG inventory. Officials made inquiries internationally last year and did not find any other developed parties (to the Kyoto Protocol) explicitly reporting emissions from this source in their inventories.

Consequently the activity of producing cable using a nitrogen cure process should be removed from the scope of the Act.

Nitrogen fertilisers

Currently, the activity description attributes a nitrous oxide emission to all imported and manufactured nitrogen fertilisers. However, fertiliser imported or manufactured for industrial purposes would not have an agricultural nitrous oxide emission and should not be included. Clarifying that the use of fertiliser in manufacturing and industrial processes is not subject to obligations under the Act would resolve this.

Fiscal impacts

Given the administrative nature of the amendments, none of the changes have significant fiscal impacts, although the changes do eliminate some small fiscal risks.

The table below identifies the changes that do have a fiscal impact and sets out an assessment of the fiscal implications of those changes—

  Risk of fiscal cost eliminated before 31 December 2012  Risk of fiscal cost eliminated from 1 January 2013
  ($) ($)
Inclusion of emissions from biofuel combustion Eliminates risk of lost revenue of approx $0.75m pa Eliminates risk of lost revenue of approx $0.75m pa
Inclusion of egg producers  n/a Eliminates risk of lost revenue of $0.5m pa
Ability to charge fees for emissions rulings Eliminates risk of administrative costs in the region of $0.5m – $1m pa* Eliminates risk of administrative costs in the region of $0.5m – $1m pa*
Total Risk of Fiscal Cost eliminated $1.25m – $1.75m pa $1.75m – $2.15m pa
*It is very difficult to estimate the annual cost of administering the emissions rulings regime because rulings applications are demand driven so that it is difficult to estimate the volume, scope, and complexity of the rulings applications that would be received. Accordingly the figures provided are an indicative range only.
Implications for the wider economy

The proposed amendments to the NZ ETS will increase certainty for participants and administrators and enable more effective implementation of the NZ ETS. This will enhance the credibility of the NZ ETS which will have benefits to the wider economy. No negative implications for the wider economy have been identified.

Risk assessment

No significant risks have been identified in respect of this proposal. Conversely, the proposal is expected to reduce risks in respect of implementing the NZ ETS.

Implementation and review

A Bill making substantive amendments to the NZ ETS is expected to be introduced into the House in late September, and is due to be passed in December 2009. The amendments proposed in this statement will be included as part of that Bill.

It will be important to inform the relevant sectors regarding clarification of inclusions and exclusions from the NZ ETS. Plans are in place to contact relevant parties once policy is clarified. As regards administrative processes, changes and clarifications will be communicated as part of the ongoing process of implementing the NZ ETS.

Agencies responsible for administering the NZ ETS will continue to monitor the effectiveness of the administrative provisions in the governing legislation and make further recommendations for amendment if required. The effectiveness of administrative provisions may also be reviewed in the context of the scheduled reviews of the operation and effectiveness of the NZ ETS, as required by section 160 of the Act. The first review is to be completed by the end of 2011.

Consultation

The Ministry for Agriculture and Forestry and the Ministry of Economic Development have important roles in implementing the NZ ETS and a large number of the proposed amendments to the governing legislation are recommended changes initiated by these agencies. The Ministry for the Environment has worked with these agencies to develop the proposed amendments, which are agreed on by all agencies involved. The following further government departments have been consulted on the proposals and have not raised any concerns: the Treasury, the Ministry of Foreign Affairs and Trade, the Ministry of Transport, the Department of the Prime Minister and Cabinet, and Te Puni Kōkiri.

The proposed amendments are largely administrative in nature. Accordingly, there has been no formal stakeholder consultation. However, some of the proposed clarificatory amendments result from questions raised by stakeholders in the course of consultation on specific aspects of the NZ ETS. In particular, a number of amendments arise from consultation with the stationary energy and industrial processes sector on draft regulations relating to that sector (for example, the amendment to remove the activity of producing cable using a nitrogen cure process and the amendment to clarify the treatment of emissions from the combustion of biofuels).


  • 1  Except for the sections of the Act relating to GST which came into force on 1 January 2009.

  • 2  Under the Kyoto Protocol New Zealand has committed to limit its emissions to 1990 levels in the first commitment period (2008–2012). This can be achieved through domestic emissions reductions or international offsetting.

  • 3  A sector may have obligations to report on its emissions (but not surrender units) prior to its entry date.

  • 4  If the only change to the CCRA (2002) is to delay then the current allocation framework would have to be adhered to. A 12-month delay would therefore be necessary. If there is a change to the allocation framework in the Act, then a shorter time frame for the entry of this sector is possible.

  • 5  NZIER and Infometrics (2009) – Economic modelling of New Zealand climate change policy.

  • 6  The point at which a carbon price becomes preferable differed between the models. At $25/tonne Infometrics’ model ranks a carbon price equal to a government pays scenario while the NZIER model slightly favours the latter. At higher prices both models show that carbon pricing is least cost.

  • 7  Assumes a carbon price of $25.

  • 8  This is based on approximate estimates of the deforestation that could occur on exempt areas.

  • 9  The point of obligation refers to the participant who is obliged to surrender units for the emissions related to their production. For the agriculture sector, this could be at the farm level or the food processor level.

  • 10  NZIER and Infometrics (2009) Economic Modelling of New Zealand Climate Change Policy.

  • 11  This is based on findings from both Scion (2008) and University of Canterbury that the expected value of forestry land with a $30 international price on carbon would increase by $5,000-$8,000. To estimate the economic cost of a decrease planting these values are multiplied by the number of new hectares planted over CP1 (25,000 ha).

  • 12  Except for the sections of the Act relating to GST which came into force on 1 January 2009.

  • 13  Under the Kyoto Protocol New Zealand is obliged to take responsibility for all emissions above 1990 levels for the first commitment period (2008-2012)

  • 14   A sector may have obligations to report on its emissions (but not surrender units) prior to its entry date.