Questions and answers about the emissions trading scheme

The basis of an effective response to climate change is simple: we must reduce our greenhouse gas emissions by changing our behaviour.

The emissions trading will ensure New Zealand does its fair share in tackling global climate change. It will provide New Zealanders with a flexible way of reducing their carbon footprint at minimum cost to the economy and society.

It will also help New Zealand meet its international obligations to reduce its greenhouse gas emissions under the United Nations Framework Convention on Climate Change (UNFCCC) and the Kyoto Protocol.

Through emissions trading, New Zealand can make a positive contribution to efforts to reduce global greenhouse gas emissions. On a local level, there are many easy actions we can each take to reduce our emissions at home, at work and on the road.

No single, practical measure will, on its own, achieve the economic changes required to cope with a low-carbon future. This requires a broad range of tools working together and involving every sector of the economy and society.

Other major Government initiatives include the Sustainable Land Management Plan, the New Zealand Energy Strategy, and the New Zealand Energy Efficiency and Conservation Strategy.

Beyond these, individuals, households, businesses and organisations throughout New Zealand are designing and implementing many of their own initiatives aimed at reducing energy use, reducing waste, recycling, and so on.

Emissions trading is more efficient and flexible than a tax. A tax sets the price emitters have to pay per unit of emissions and leaves individuals and companies to decide how much to reduce their emissions. Under the emissions trading scheme, the aggregate quantity of net emissions is set, and the market then determines the price of emission units, and therefore the cost per unit of emissions that firms and individuals will face. With an internationally linked emissions trading scheme, the price of units tracks the international price of emissions.

It would be difficult to set a tax at the correct level to ensure appropriate emissions reductions, and certainty about quantity is important from an environmental perspective.

New Zealand's climate change challenge from an economic perspective is to maximise its economic performance within an ongoing carbon constraint. Other countries may not face the same carbon constraint for a variety of reasons, at least in the short term. There is a concern that a carbon price may cause production from emissions-intensive, trade-exposed sectors to shift from New Zealand to countries without an equivalent carbon pricing regime.

The changes made to the emissions trading scheme under the Climate Change Response (Moderated Emissions Trading) Amendment Bill have been designed to provide greater protection against leakage than the previous scheme .It is not expected that the scheme will drive industry relocation at any significant scale, given the generous assistance package that will be provided. Although the cost of emissions will be factored into firms' decision-making in the same way that other costs such as electricity and labour are, it is likely that there will be far bigger drivers of firms’ location decisions. Where relocation does occur, it’s very possible that this relocation would have occurred regardless of the emissions trading scheme.

We expect the overall macroeconomic impact of emissions trading will be negligible, even though emissions trading will be felt by particular sectors and, over time, flow through the economy and impact on some costs for households. A transition phase will operate for the first two and a half years of the scheme, ensuring participants in the stationary energy, industrial and liquid fossil fuel sectors will face a carbon price of a maximum of $12.50 per tonne. The inflation impacts will be mostly the result of electricity and fuel prices, but are expected to be small. The economy will still continue to grow, and incomes and living standards will grow along with it.

There are lots of easy steps you can take at home and at work to reduce your fuel and electricity bills. Try walking or cycling for short trips instead of using a car, hanging laundry outside instead of using a dryer, and turning off lights when you leave a room.

For most New Zealanders, the cost of the emissions trading scheme will be built into the services and products you buy, such as electricity and fuel. Consequently, most individuals and firms can’t earn New Zealand units through the emissions trading scheme for actions you take at home or work to reduce your emissions. However, you can reduce your emissions and save money by reducing your energy and fuel use, such as by installing insulation in your house or using public transport to get to work.

If you want to take direct responsibility for your emissions, you can buy carbon credits on the Kyoto or voluntary market to offset your emissions, or choose goods and services from providers who are offsetting the emissions associated with their products.

You can’t claim carbon credits directly for small-scale renewable energy projects, but electricity prices will rise as a result of the emissions trading scheme putting a cost on fossil fuels. This will provide an incentive for renewable sources of energy which will become cheaper relative to fossil-fuelled electricity generation.

You have many options available for reducing your emissions, including through your household insulation, the efficiency of your vehicles and appliances, and your choice of fuel and home heating. The Government has programmes in place to help you improve your household energy efficiency and conservation, such as EnergyWise. Will I be paying twice if I take my own actions against climate change and to protect the environment?

Taking your own action is likely to reduce the costs you face under the emissions trading scheme, for example by reducing your electricity consumption.

However, to the extent that you take additional action and want to offset all your emissions, you’re therefore not paying twice, for example to become carbon neutral. You’ll need to use a reliable accounting tool to determine the proportion of your emissions that are accounted for through the increased prices you face under the emissions trading scheme. This is to ensure you’re only voluntarily paying to reduce or offset emissions over and above what’s achieved through the emissions trading scheme. This can be quite complex and, in some cases, and element of double counting may be simpler to implement.

The Ministry of Economic Development is the administering agency for the emissions trading scheme and runs the New Zealand Emission Unit Registry.

Emissions trading scheme policy development is managed by the Ministry for the Environment. The Ministry of Agriculture and Forestry manages the emissions trading scheme for the forestry sector.

In the longer term, the Government has expressed an intention to transfer the administrative functions to an Environmental Protection Authority.

All emission unit records are kept in the New Zealand Emission Unit Registry (NZEUR). If you’re a participant in the emissions trading scheme, you need to have an account in the NZEUR.

The design of the scheme covers all sectors of the economy and all greenhouse gases. It places New Zealand as part of a group of countries introducing emissions trading, giving us a strong voice on the world stage and enhancing New Zealand’s reputation and international brand as pure, clean and green.

To respond to the need to reduce greenhouse gas emissions, many developed nations have either put in place an emissions trading scheme or are planning one. Our major trading partners are moving towards emissions trading as the most effective economic instrument to bring about change.

A study by the Pew Centre for Climate Change has confirmed that the European Union’s scheme covering 27 countries is producing emissions reductions with no harm to the European economy. Norway and Switzerland are joining the EU scheme. US President Barack Obama supports putting in place an emissions trading scheme there. Even China and South Korea, not Annex 1 countries under the Kyoto Protocol, are now considering emissions trading schemes as they recognise that climate change is a problem for all nations and all citizens.

Australia introduced bills to enact the Carbon Pollution Reduction Scheme (CPRS) to Parliament in June 2009.. The CPRS is scheduled to begin in July 2011 with a $10 fixed price period followed by full trading on 1 July 2012, a timeframe that is compatible with New Zealand’s. The Government is now working with Australia on harmonising our emissions trading scheme with their Carbon Pollution Reduction Scheme.

See our page on international examples of emissions trading for full details of emissions trading schemes overseas.

The international climate change policy situation post-2012 is not entirely certain at the moment. There could be a further commitment period under the Kyoto Protocol, a successor international agreement to the Kyoto Protocol and/or other forms of agreement, such as on a regional or sector basis.

What is certain is that climate change is a serious global issue and countries will continue to take action to reduce emissions, both individually and collectively. The emissions trading scheme has been designed so that it can endure and be adapted in light of changes to the future international framework. It will retain appropriate levels of economic incentives in the New Zealand economy to reduce emissions and improve the efficiency of production in line with global efforts, both with and without an international agreement.

Generally, if one person chooses not to act in the fight against climate change, that person can’t fairly expect others to act. Similarly, if New Zealand as a nation chooses not to act, we can’t expect other, big-emitting nations to act. 

We all cause emissions – we should all take action to reduce them. And we all face the consequences if others don’t act.

A failure to act could reduce New Zealand’s international credibility and influence in international forums. And any perception internationally that New Zealand was not acting with environmental integrity could harm overseas consumers’ perceptions of the desirability of our exports, and the desirability of New Zealand as a tourist destination.

Climate change is a global issue: emissions in any part of the world have the same impact on the environment.

We want New Zealanders to be active players in the global response to climate change. We can’t expect developing economies to play their part if we sit at home and worry about only our own emissions.

The emissions trading scheme will allow New Zealanders to seek the best ways to help the global environment. Reducing emissions in a developing country is good for the environment and could be good for New Zealanders if it is a lower-cost way of achieving the same environmental goals.

The emissions trading scheme will be reviewed once during each commitment period of an international agreement and the review must be completed 12 months before the end of that commitment period. For example, we are now in commitment period one of the Kyoto Protocol which ends at the end of 2012. The emissions trading scheme must therefore have been reviewed by the end of 2011. If there is no international commitment period, the emissions trading scheme will be reviewed every five years.

The reviews will look at things like how the emissions trading scheme is affecting the economy and how it links with other emissions trading schemes. They must also consider any social, economic and environmental effects of the scheme, such as its effect on biodiversity.

Under the new proposals, the allocation provisions must be revised every five years, starting in 2011.

The reviews will be conducted by an independent panel of experts.

You can sell emission units (except those bought under the fixed-price option) through direct bilateral agreements with buyers, through a broker or through an exchange. An array of financial service providers in the private sector can help with these transactions.

There are different carbon markets operating with different constraints on unit supply and demand, and different types of emission units around the world that command varying prices. For example, the European Union emissions trading scheme (EU ETS) restricts certain types of Kyoto unit from being traded within the scheme, so the price of emission units traded within the EU ETS is usually higher than the international price.

There can also be differences in price between the carbon markets designed for Kyoto compliance and voluntary carbon markets. These reflect differences in the rules for generating and using emission units, as well as relative supply and demand.

Linking the emissions trading scheme into the world market for carbon is likely to reduce volatility, compared to what would happen if the scheme was restricted to emission units issued by New Zealand.

With international linking, the activities of large New Zealand participants will have little or no impact on world prices. If the scheme were limited to New Zealand units, one large player buying or selling their units would have a material impact on prices.

Participants in the New Zealand emissions trading scheme can surrender Kyoto units to meet their obligations under the scheme, subject to the following restrictions on the source of the units.

• No emission reduction units (ERUs) or certified emission reductions (CERs) from nuclear project activities are allowed to enter the New Zealand Emission Unit Registry, and therefore may not be surrendered to meet participants’ obligations under the emissions trading scheme.
• Neither long-term CERs (lCERs) nor temporary CERs (tCERs) can be surrendered to meet participants’ obligations under the emissions trading scheme.
• Imported assigned amount units (AAUs) can only be surrendered by participants if they meet conditions and requirements to be defined in regulations. Imported AAUs issued during the first commitment period of the Kyoto Protocol (2008-2012) that are permitted in regulations can’t be surrendered to meet participants’ obligations after 2012.

The Government will always have the right to change the regulations surrounding the emissions trading scheme, but regulations can’t be changed retrospectively. There is a consultation process for setting new regulations, so citizens will always be able to have a say on any proposed changes.

You could be fined up to $24,000 if you fail to collect emissions data or other required information, calculate your emissions and/or removals, keep records, register as a participant when you are supposed to, submit an emissions return when required, or notify the administering agency or provide information when you are required to do so.

You could be fined up to $50,000 if you knowingly alter, falsify or provide incomplete or misleading information about any of your obligations under the emissions trading scheme, including your emissions return.

If you deliberately lie about your obligations under the emissions trading scheme to gain financial benefit or avoid financial loss, you could be fined up to $50,000 and/or be put in prison for up to 5 years.

In the first year that a sector enters into the emissions trading scheme, if you mistakenly surrender less units than you are meant to due to a reporting mistake, no financial penalty will apply but you’ll be still required to surrender those units.

If you fail to surrender emission units when you’re required to or have surrendered less units than you were meant to, you’ll have to surrender or cancel those units and pay a penalty of $30 for each emission unit. This penalty may be reduced by up to 100 per cent if you state voluntarily that you’ve failed to surrender the required emission units or made a mistake in your emissions return before the administering agency sends you a penalty notice or you’re visited by an enforcement officer.

The Climate Change Act amends the Income Tax Act 2004, the Income Tax Act 2007 and the Goods and Services Tax Act 1985 to address:

• the income tax consequences of dealing with emission units for the forestry sector
• the GST consequences of dealing with emission units for all sectors.

The 'Tax treatment of emission units' (PDF, 71.9 KB) is managed by the Inland Revenue Department.

For information regarding the tax treatment of Post 1989 Forestry (Ministry of Agriculture and Forestry)

For technical information on tax treatment under the ETS (Inland Revenue Department)

If neither of these sites answer your questions please email july08.bill@ird.govt.nz and an official from IRD will respond to your questions.