Proposed Changes to the ETS

The New Zealand government reviewed the ETS legislation in 2011 and today they released the following recommendations. They are asking for feedback so have a look at their document and let them know what you think. I have outlined the key recommendations and my thoughts on them.

Recommendation one: phase out the ‘transition measures’ more gradually from 2013 to 2015 by accepting the Panel’s recommendation to phase out the ‘one for two’ measure in three equal steps.

My opinion: thumbs down. The transition measures were set to expire in 2012. The argument is that businesses need more time to adapt but in reality, if businesses were transitioned in they would start investing in green technology. The one for two measure also needs to be phased out sooner rather than later. Currently companies do not pay for their full emissions. They only have to pay one unit (NZU) for every two tonnes of carbon emitted. As long as companies get to emit for half price there is less incentive for making the changes needed to lower total emissions. It is keeping the price of NZUs low, causing a disincentive for forestry and more sustainable forms of energy.

Recommendation two: maintain the $25 fixed price option until at least 2015 rather than accepting the Panel’s recommendation to increase the fixed price by $5 each year.

My opinion: thumbs down. The original plan was to increase the fixed price option by $5 per year starting in 2013. In reality the price of carbon is still below $25 per tonne and with the extension of the “one for two” it is not likely the market price would exceed the governments $25 per tonne fixed price.

Recommendation three: introduce more explicit powers to enable auctioning of NZUs within an overall cap subject to further consultation on the detailed settings.

My opinion: tentative thumbs up. A cap and auction means the government sets a cap on emissions and emitters purchase emissions rights from the government in regularly scheduled auctions. I think auctions are a good idea and preferable to giving away free permits but there is not enough detail on the proposed auctions to decide if it is a good idea.

Recommendation four: provide a power for appropriate quantitative restrictions on the use of international units subject to further consultation on details.

My opinion: thumbs up. I am in agreement that there is something wrong with the international units available on the market. International units were designed to help in the early stages if domestic units were not available, but the price is so low on international units that there is no incentive to plant forests or lower emissions and sell the credits. Furthermore, the validity of some international units are questionable. The worst offenders are the CERs from industrial gas projects which the NZ government banned back in December.

Recommendation five: provide more flexibility to convert land to its highest value use by allowing for the ‘offsetting’ of deforestation on pre-1990 forest land, and consistent with the international flexible land-use rules agreed in Durban.

My opinion: thumbs up. Offsetting was one of the most debated topics in Durban and Copenhagen. Opinions are mixed and there is certainly plenty of room for fraud and “greenwashing”, but I think it is a good option for New Zealand. Currently forest landowners in the ETS have to replant the same site after harvesting. With offsetting landowners could replant an equal amount of forests in a different part of their property. This would provide landowners with some flexibility in making land use decisions.

Recommendation six: in light of the introduction of pre-1990 forest ‘offsetting’, which will significantly reduce deforestation liabilities under the ETS, review the number of compensatory NZUs provided to pre-1990 forest landowners.

My opinion: thumbs up. Pre-1990 forests have been a problem for forest landowners. Because Kyoto was signed to reduce emissions to pre-1990 levels, trees planted before then were already considered to be contributing to emissions levels and landowners were penalised for harvesting. The decrease in land value for those landowners was offset by a free allocation of NZUs from the government. If the government decides to allow off-setting, the harvesting obligations for pre-1990 forest landowners will be reduced by as much as 50-75% depending on the price of NZUs. It is fair to rethink the free NZUs allocated to those landowners.

Forest Plantation in Otago

Recommendation seven: provide for a power to delay the entry of emissions from animal livestock and fertiliser use for up to three years if certain criteria are not met, following a review in 2014.

My opinion: thumbs down. I realise that agriculture is the main emitter in New Zealand but delaying entry hurts everyone else. Forest industry, technology for lowering emissions and green energy all pay for a delay, resulting in a free subsidy to the agricultural industry at the expense of other sectors. The argument is that green technology needs to be available to agriculture before inclusion in the ETS. This is terrible economics and logic. Investment in new technology is demand driven.

Recommendation eight: provide for a power to extend, if necessary, the fixed price option beyond 2015 and align it with any price ceiling in Australia if we link with the Australian scheme.

My opinion: thumbs down. Get rid of the fixed price option. Let the market decide.

In summary, the recommendations are a bit mixed. I like the forestry recommendations but the other recommendations seem to be giving agriculture a big subsidy to keep emitting. Research shows that when emitters are required to pay for emissions, they develop emission reducing technology. What do you think? The government is asking for feedback. You have until 11 May 2012 to let them know your opinion.

A mix of land uses on the Canterbury plains

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