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NZ Emissions Trading Scheme fact sheet

This fact sheet is designed to help journalists and general readers understand the New Zealand Emissions Trading Scheme (the NZETS), especially when comparing it with other countries’ climate change policies. If you have any questions or would like to explore any of the issues further, please contact:

David Venables, Executive Director, Greenhouse Policy Coalition

Phone (04) 473 0600, Mobile (027) 848 2368

Email david@greenhousepolicy.org.nz

[Download this fact sheet as a PDF (140k) or Word file (73k)]

Background to the ETS

As a signatory to the Kyoto Protocol, New Zealand has undertaken to reduce its net emissions of carbon to 1990 levels over the period 2008-2012. Net emissions means that New Zealand’s emissions must match 1990 levels once carbon sequestered in forests is subtracted from the raw figure for our total emissions. Failure to meet the Kyoto target would create a national liability and New Zealand would have to pay the difference. Meeting the target, or exceeding it, would mean New Zealand pays nothing.

As part of the Kyoto Protocol the Government received 309 million emission units to cover the period 2008-2012, i.e. five times the country’s 1990 emissions of 61.9 million tonnes CO2-equivalent, or CO2e. [NB emissions are always expressed as CO2e. There are six global warming gases currently recognized by the United Nations, with the emissions of each measured in terms of their equivalence to CO2’s global warming potential.]

The Ministry for the Environment’s latest Net Position Report for emissions during the 2008-2012 period projects a surplus of 11.2 million units under the Kyoto Protocol (valued at $218 million as of 31 May 2010). As things stand, New Zealand looks poised to face no Kyoto liability.

It is clear that without forest carbon sinks being taken into account, New Zealand would have no hope of meeting its Kyoto target. Our total (or gross) emissions keep rising because of increasing emissions in transportation and electricity generation.

The Government could take a number of paths to reduce emissions:

· Use subsidies to encourage tree planting and low carbon technology/processes and use penalties/regulations to discourage emissions;

· Put a price on carbon via a tax on emissions;

· Put a price on carbon through an emissions trading scheme (ETS); or

· A combination of the above.

After some discussion about having a carbon tax, the Clark Government chose to set up an ETS. This scheme was reviewed by the Key Government, which sees an ETS as the least cost approach that will deliver some reduction in emissions, which it estimates at 19 million tonnes CO2e over the next three years. The new Government moderated the scheme to lessen the impact on households and businesses, though some areas, such as the key food processing sector, effectively missed out on getting support.

As part of this, rather than keeping the 309 million Kyoto emission units for itself, the Government is allocating them to forest owners, and to energy intensive, trade-exposed companies to help the latter while they adjust to carbon pricing. This support is not a cost to the taxpayer as the Government is using units it received free through the Kyoto Protocol. The taxpayer faces no cost unless New Zealand’s Kyoto account for 2008-2012 is in deficit. As noted above, the current projection suggests New Zealand will have a Kyoto surplus.

Not all exposed businesses will get free emission units. The food processing sector, for example, will receive little or no allocation. Fonterra, the country’s biggest export earner, has estimated that the ETS will cost it $38 million in the first year (1 July 2010 – 30 June 2011), rising to $107 million in 2015.

Comparing the NZETS and other countries

Most countries do not use an ETS to achieve their emissions reduction targets, New Zealand’s major trading partners among them. Australia has put off bringing in an ETS until at least 2013 and Labor wants a public consensus before it proceeds. In the United States, the Democrats have given up trying to get a cap-and-trade climate bill through the current Senate. There are suggestions that China might bring in carbon pricing in its next five-year plan, which starts in 2011, but no details have been confirmed. Japan has also failed to pass national cap-and-trade legislation.

There are some trading schemes around the world, though many operate at a sub-national level (e.g. California). The one big scheme that is often cited is the European Union’s ETS (the EUETS), which covers the 27 countries of the EU (the EU-27), plus Norway, Liechtenstein and Iceland, with Switzerland also planning to join. The other scheme the NZETS could be compared with is the Australian Carbon Pollution Reduction Scheme (the CPRS), which was put on hold by Kevin Rudd but could be revived after 2012 if Labor is re-elected.

While the principles behind an ETS are reasonably simple, no two schemes are alike. It is important to look at the details of each scheme and to see it in the context of whatever other climate change policies countries use, e.g. subsidies and incentives. The following discussion compares the NZETS with, first, the EUETS, and then with the CPRS. A table of this comparison can be found here (44k).

Comparing the NZETS and the EU ETS

Before comparing the NZ and EU schemes, it is worth noting some important contextual differences between the two economies:

· New Zealand’s emissions are 1.52% of those of the EU-27 (2008 figure).

· New Zealand and the EU have very different emissions profiles. New Zealand’s emissions (2008 figures) primarily come from agricultural gases (46.6%) and energy (45.3%) while the EU’s emissions are largely from energy (79.1%), with agriculture just 9.6%. There are few internationally recognised mitigation options currently available for agricultural emissions, while renewable energy generation is a proven industry.

· New Zealand generates much more electricity from renewable sources – 73% in 2009, with a 90 percent target for 2025, as against a European target of 20% of total energy coming from renewables by 2020 (15% in the UK). Europe therefore has much more scope than New Zealand for increasing renewable generation.

· The EU scheme has been operating since 2005, while the NZETS started in 2008. Furthermore, until 1 July 2010 only forest owners were in the NZETS, while the EUETS started with around 12,000 installations on 1 January 2005.

· The NZ scheme will have its first review incorporating industrial and energy participants in 2011. The EUETS has been reviewed twice already. The EUETS’s first phase (2005-2007) was reviewed before the start of Phase II (2008-2012) and the scheme has already been reviewed again in preparation for Phase III (2013-2020).

· New Zealand Governments do not like using subsidies, while the EU is much more ready to use them, e.g. it provided 2.9 billion euros of support to coal mines in 2008 and is currently discussing whether to continue this sort of assistance.

· New Zealand’s economic prosperity is inferior to Europe’s when measured in terms of Gross Domestic Product per capita. In 2009, New Zealand’s GDP per capita was valued at $27,259. This was much lower than the prosperous EU countries – Norway $79,085, Switzerland $67,559, Sweden $43,986, France $42,747, Germany $40,874, Italy $35,435 and the UK $35,334. New Zealand’s situation was in 2009 more comparable with Greece and Slovenia. GDP per capita figures provide some guide to a country’s ability to handle emissions trading-related price rises.

· New Zealand’s major trading partners are not in the EU. In 2009, New Zealand’s top 10 export destinations included just two EU countries – the UK ranked 5th at 4.3% and Germany ranked 10th at 1.9%. Nearly half the country’s exports went to Australia, the US, China and Japan. The situation was similar with imports. Germany was ranked 5th at 4% and France 8th at 3%, with 51% of imports coming from Australia, the US, China and Japan.

The following is a look at the key components of the NZ and EU schemes:

Emissions coverage

The EU: Covers 43% of emissions, rising to 50% from 2013. There are no plans to cover methane from farm animals or agricultural nitrous oxide from fertilisers or global warming synthetic gases like sulphur hexafluoride.

New Zealand: From 1 January 2015 the NZETS will cover nearly all emissions, including all six gases identified by the United Nations.

Sector coverage

The EU: Combustion and most industrial sectors are currently covered, with aviation due to enter in 2012. From 2013, petrochemicals, aluminium and ammonia will be included. Agriculture will not be covered.

New Zealand: Virtually the entire economy will be covered by 2015. Currently, the scheme covers forestry, industrial processes (includes iron and steel, aluminium, cement, glass and gold), stationary energy (includes coal, natural gas and refining petroleum) and liquid fossil fuels.

Allocation of free emission units

The EU: Historically, free units have been allocated to many companies at levels well above 100% of their emissions. Average allocation across EU countries in 2009 varied between 92% and 152%. Allocation also covers more sectors than in New Zealand. The scheme will feature more auctioning of units (ie companies having to pay for them) from 2013, with a sinking cap, but 100% allocation is still on the cards for significantly trade-exposed sectors, including those the NZETS covers.

New Zealand: Trade-exposed companies are to be allocated units at a 60% or 90% level on an intensity basis, ie emissions relative to output. Many companies miss out, eg the key food processing sector is likely to receive at most a 5% allocation.

Phasing out of allocation

The EU: The number of units allocated to companies will be cut by 1.74% each year from 2013.

New Zealand: Unit allocation will be cut by 1.3% each year from 2013.

Caps on emissions

The EU: Contains a series of national caps on emissions, which is set to become a single EU cap from 2013.

New Zealand: The NZETS has no cap and operates within the national 2012 Kyoto Protocol target, ie the country has agreed to bring net emissions down to 1990 levels over the period 2008-2012.

Carbon pricing

The EU: Has no price caps, but from 2013 member states will be allowed to influence carbon prices by bringing forward auctioning of units within the overall cap.

New Zealand: Has an optional price cap for carbon until the end of 2012, set at $25 per unit (one unit = one tonne of CO2-e), with companies until then required to surrender one unit for every two tonnes of emissions, an effective halving of the $25 price.

A table summarising the differences between the NZETS and EUETS, complete with explanatory notes, can be downloaded here (44k).

Comparing the NZETS and the Australian CPRS

While Australia’s emissions trading scheme is a work in progress that may not see the light of day for years, it is possible to compare the NZETS with the planned CPRS as it was introduced to the Australian Parliament in February 2010. As with the EU, before comparing the NZ and Australian schemes, it is worth noting significant differences between the two economies:

· New Zealand’s emissions are 13.7% of Australia’s (2008 figure)

· New Zealand and Australia have very different emissions profiles. As indicated above, New Zealand’s emissions primarily come from agriculture and energy. Australia’s emissions (2008 figures) are largely from energy (75.8%), with agriculture at 15.9%.

· The Australian economy thrives on the back of mining and selling huge quantities of minerals that are in high demand, e.g. from China. New Zealand’s economy is predominantly focused on selling primary produce, such as dairy and meat products, logs and forest products.

· New Zealand generates much more electricity from renewable sources – 73% in 2009. Australia relies much more on fossil fuels, with coal generating 80.8% of electricity in 2007/2008 and renewables just 5.8%.

· New Zealand’s economic prosperity is inferior to Australia’s when measured in terms of GDP per capita – $27,259 compared with $45,586 in Australia.

The following is a look at the key components of the NZETS and CPRS:

Emissions coverage

CPRS: Would cover 75% of emissions. Methane from farm animals and agricultural nitrous oxide from fertilisers have been indefinitely excluded.

New Zealand: From 1 January 2015 the NZETS will cover nearly all emissions.

Sector coverage

CPRS: Would cover almost all sectors, including forestry, industrial processes, stationary energy, transport and waste, with agriculture the notable gap.

New Zealand: Virtually the entire economy will be covered by 2015.

Allocation of free emission units

CPRS: Would provide an intensity-based allocation to “gassy” coal mines and energy intensive, trade exposed firms of 94.5% and 66%. The electricity sector would get a one-off allocation, LNG projects would get a guaranteed 50%, food processors would receive $150 million of assistance, and the coal sector would also get help. There would be a move towards 100% auctioning of units.

New Zealand: Trade-exposed companies are to be allocated units at a 60% or 90% level on an intensity basis. The food processing sector is likely to receive at most a 5% allocation. There is no assistance for the coal sector.

Phasing out of allocation

CPRS: The number of units allocated to companies would be cut by 1.3% each year.

New Zealand: Unit allocation will be cut by 1.3% each year from 2013.

Caps on emissions

CPRS: Would operate under the national cap of reducing emissions by 5% on 2000 levels by 2020.

New Zealand: No cap and operates within New Zealand’s 2012 Kyoto Protocol target.

Carbon pricing

CPRS: Would offer a fixed price of $10 per tonne for the first year of the scheme, followed by a cap of $40 per tonne for the following four years.

New Zealand: Optional price cap for carbon until the end of 2012, set at $25 per tonne, with an effective price until then of $12.50.

A table summarising the differences between the NZETS and CPRS, complete with explanatory notes, can be downloaded here (44k).


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