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 New Zealand Emissions Trading Scheme (NZ ETS) helps New Zealand do its fair share in tackling global climate change.

It also helps 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.

It is not expected that the scheme will drive industry relocation at any significant scale, given the generous assistance package that is 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.

The overall macroeconomic impact of the emissions trading scheme is negligible. Because the transition phase is being extended indefinitely, participants from non-forestry sectors are expected to face a carbon price at a maximum of $12.50 per tonne. The inflation impacts are 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.

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, 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 if youintend to offset all your emissions. 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, although it limits the possibility of paying twice, in some cases an element of double counting may be simpler to implement.

The Environmental Protection Authority 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 for Primary Industries manages the emissions trading scheme for the forestry sector.

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 New Zealand Emissions Trading Scheme (NZ ETS) is part of the Government's primary response to global climate change.

'Emissions trading' is a financial market-based approach for reducing emissions of greenhouse gases. Emission units – sometimes called 'carbon credits' – are traded between participants in the scheme.

The scheme introduces a price on greenhouse gas emissions to provide an incentive for people to reduce those emissions and plant forests to absorb carbon dioxide.

Emissions trading provides flexibility in how participants in the scheme comply with their obligations, enabling them to choose the least-cost way to reduce their emissions.

The New Zealand scheme covers emissions of the following six 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 to which New Zealand is a signatory.

The New Zealand Emissions Trading Scheme has been designed to support efforts to reduce greenhouse gas emissions while maintaining economic productivity. The NZ ETS:

• is internationally linked
• uses self-assessment for monitoring, reporting and verifying emissions produced by participants.

Under the NZ ETS, all sectors except agriculture have or will have obligations to surrender emission units to match their emissions by the end of 2013. Participants from the forestry sector receive New Zealand Units (NZUs) for increases in the carbon stock of their forest as a result of growth, but are required to surrender NZUs to the Government if carbon stocks fall, as may occur when a forest is harvested or burns down.

Participants from the non-forestry sectors are required to surrender only one emission unit for every two tonnes of emissions they produce. Participants from the forestry sector are required to surrender one emission unit for each tonne of emissions they produce, as they can earn one unit for each tonne of emissions sequestered or removed.

All participants may buy emission units from the Government for a fixed price of $25 or from domestic and international carbon markets at market prices. The Government also provides some sectors with free allocations of emission units to mitigate the risk of businesses losing international competitiveness.

For more information on the Government's changes to the emissions trading scheme see questions and answers about the amendment Act.

An emission unit is a unit of trade within the NZ ETS.

The primary unit of trade in the NZ ETS is a New Zealand unit (NZU) issued by the Crown. Participants are required to surrender NZUs to the Crown to meet their obligations under the scheme. Participants from the forestry sector are required to surrender one NZU for each tonne of greenhouse gas emissions they produce, while participants from non-forestry sectors are required to surrender only one NZU for every two tonnes of greenhouse gas emissions.. Participants can also surrender a range of 'Kyoto units' which they can buy overseas.

For more information see emissions units

The following sectors of the economy have obligations under the NZ ETS: forestry, transport fuels, electricity production, industrial processes, synthetic gases, agriculture and waste.

The Climate Change Response Act 2002 specifies the activities that are automatically included in the emissions trading scheme for each of the sectors above. People carrying out these activities are required to participate in the scheme.

The Act also specifies activities that are optional under the emissions trading scheme. People carrying out these activities can choose to participate in the scheme.

Most participants are required to meet their obligations under the scheme by surrendering emission units. Surrendering a unit means it cannot be used again, for example, it cannot be given to another participant.

Some participants, such as those with forests planted after 1989, are able to earn emission units for carbon dioxide stored or removed from the atmosphere by their activities.

The participant is not necessarily the business at the actual point where emissions are produced. For example, a coal producer would be required to surrender units for the coal it sells, even though the actual emissions will occur when the coal is burned.

Alongside those who are required to participate in the scheme and those who can opt in, other people may also hold and trade emission units. These people are commonly referred to as 'secondary market traders'.

Businesses participate in the emissions trading scheme in different ways.

• Some have a legal obligation to acquire and surrender emission units to cover their direct greenhouse gas emissions or the emissions associated with their products. These participants are generally 'upstream' operators, for example transport fuel producers or importers bringing in products to New Zealand.
• Some have the choice to apply to opt in to the scheme if they carry out a relevant activity.
• Some receive free emission units that can be used to meet their own obligations or to sell to other firms, for example landowners with forests planted before1990.
• Some do not have to take part in the emissions trading scheme, but trade emission units in the same way that stockbrokers or real estate agents trade in their respective markets. These are secondary market traders. They may have specialist expertise in linking those who can reduce their emissions and have spare emission units with those wishing to buy these units.

Participants are required to:

• monitor, record and report activities that produce or remove greenhouse gas emissions
• surrender to the Government emission units to cover emissions associated with their activities each year.

Secondary market traders, such as brokers, can also hold and trade emission units, but do not have to monitor and report emissions and are not required to surrender emission units. They can hold and trade emission units to take advantage of opportunities in the financial market.

The emissions trading scheme can be explained by using a simple example.

• Firm A is an oil company. It needs to buy emission units to cover the greenhouse gas emissions it is responsible for.
• Firm B is a large forestry company that receives emission units for land it is planting in forests. It is also cutting down some trees, leading to emissions for which it has to surrender emission units. Initially, Firm B has a shortfall of units but, as the new forest matures over time, it will have spare units it can sell.
• Firm C is a major industrial user of electricity for which it has to surrender emission units. To help Firm C adapt to these higher costs, the Government gives Firm C a free allocation of emission units, which Firm C can sell to offset its increased electricity costs.

Under the emissions trading scheme, Firm A and Firm B both buy Firm C's units in the short term to cover their emissions. Because it now has to pay higher energy prices, Firm C finds it is cheaper to invest in energy efficiency.

Over time, as its forest matures, Firm B has spare units available and sells them to Firm A.

Some participants are eligible to receive a free allocation of emission units from the Government to cover some of their emissions. To find out more about allocation, read Emissions trading bulletin 12.

Participants can also buy emission units from the Government for NZ$25 each.

In addition, participants and secondary market traders can buy emission units from the following sources.

• Approved overseas sources
• Another participant or secondary market trader, either directly or by trading through a broker or trading exchange

An electronic register records who holds emission units and is like a share registry. It is called the New Zealand Emission Unit Register (NZEUR). It records:

• who holds emission units and the number of units they hold
• transfers of emission units between holders both within the NZEUR and between international unit registers
• emission units surrendered by participants to meet their obligations under the emissions trading scheme.

As with a share registry, the NZEUR does not record information about the price or financial value of emission unit trades, nor does it provide a mechanism for exchanging cash for units traded.

The Environmental Protection Authority administers the NZEUR.

The forestry, transport fuels, electricity production and industrial processes sectors have already started facing obligations to report their greenhouse gas emissions and  surrender emission units. The waste and synthetic gases sectors will start facing full obligations under the emissions trading scheme in 2013.

The agricultural sector has already started facing the obligation to report its emissions. However, the Government has yet to make decisions on when the agricultural sector will start facing obligations to surrender emission units.

Timeframe for sectors to enter the emissions trading scheme

The Government provides financial assistance for some sectors in the form of free emission units. It has also substantially lowered the cost for participants by continuing the transition phase indefinitely. During the transition phase, participants in the scheme are able to buy emission units from the Government for a fixed price of NZ$25. In addition, participants from non-forestry sectors will have to surrender only one emission unit for every two tonnes of emissions they produce. This means that participants in these sectors will face a price of carbon that is no higher than NZ$12.50 per tonne.

The emissions trading scheme creates new incentives for participants to reduce their greenhouse gas emissions or to finance emission reductions by other firms. This promotes innovation in energy efficiency and other emission management practices, as well as developing new technology.

The Ministry for the Environment administers the Climate Change Response Act, which established the emissions trading scheme. It is also responsible for developing emission unit allocation plans and regulations under the Act, except for those relating to the forestry sector, which are managed by the Ministry for Primary Industries.

The Environmental Protection Authority manages the day-to-day running of the emissions trading scheme. It is the main compliance and enforcement agency, responsible for verifying that participants are complying with the scheme. It also runs the New Zealand Emission Unit Register.

Emission units are often referred to as carbon credits, allowances or offset credits. An emission unit can represent one metric tonne of carbon dioxide itself, or the equivalent of any other greenhouse gas (carbon dioxide equivalent or CO₂ equivalent). The six greenhouse gases included in the Kyoto Protocol and the emissions trading scheme are carbon dioxide (CO₂), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulphur hexafluoride (SF6).

There are lots of unit types and a variety of emission units are traded throughout the world. The primary type of emission unit used in New Zealand to comply with the emissions trading scheme is called the New Zealand Unit or NZU. Some types of Kyoto unit can also be used to comply with the emissions trading scheme.

For more information see emissions units.

NZUs are used to meet a participant's compliance obligations under the emissions trading scheme. Participants from the forestry sector are required to surrender one NZU for each tonne of greenhouse gas emissions they produce, while participants from non-forestry sectors are currently required to surrender only one NZU for every two tonnes of greenhouse gas emissions.

Kyoto emission units are issued by the UNFCCC Secretariat under the rules of the Kyoto Protocol. Kyoto units can be bought and sold among Governments, firms and individuals in the international carbon market.

For the first commitment period of the Kyoto Protocol (2008-2012), the New Zealand Government received a number of Kyoto units, called assigned amount units (AAUs), set at a level of five times its 1990 emissions. New Zealand will also earn additional Kyoto units called removal units (RMUs) for its eligible forestry activities.

Other types of Kyoto unit called emission reduction units (ERUs), certified emission reductions (CERs), long-term CERs (lCERs) and temporary CERs (tCERs) are generated by project-based activities under Joint Implementation (JI) and the Clean Development Mechanism (CDM).

The New Zealand Government has chosen to allocate some of its Kyoto units to participants in Projects to Reduce Emissions, the Permanent Forest Sink Initiative and Negotiated Greenhouse Agreements.

New Zealand Units (NZUs), the primary domestic emission units under the emissions trading scheme, are issued into the New Zealand Emission Unit Registry by the Government. Then the Government allocates NZUs into the market by giving them to eligible individuals or firms in specific sectors, awarding them to individuals or firms conducting approved removal activities, or by selling them. NZUs can be traded within New Zealand.At present, only the forestry sector may convert the NZUs to Kyoto units to be traded overseas.

Additional types of emission unit can be created and traded in the voluntary market outside the emissions trading scheme and the Kyoto Protocol framework, but aren't accepted for compliance under either the emissions trading scheme or the Kyoto Protocol.

In the short term, the Government is unlikely to sell emission units because the Kyoto units allocated to New Zealand will be needed to support New Zealand's international obligations, as well as allocation to eligible sectors under the emissions trading scheme.

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.

The European Union has implemented an emissions trading scheme covering 30 countries (the 27 EU Member States plus Iceland, Liechtenstein and Norway). Australia, the Republic of Korea and the State of California have all passed legislation to introduce similar schemes over the next few years. Most encouraging is the number of developing countries such as China, Thailand and Indonesia who are looking seriously at how they could use market-based mechanisms to incentivise the reduction of emissions domestically.

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

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.

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.

See 'What sorts of emission unit can be surrendered to comply with the ETS'

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.

Information regarding the tax treatment of post 1989 forestry (Ministry for Primary Industries)

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.