Technical Advisory Group Stationary Energy and Industrial Process Component of the New Zealand Emissions Trading Scheme

Outstanding Issues/Concerns

Industry members of the SEIP TAG have during the past six months raised a number of concerns that are specific to key elements of the draft legislation. As such, many of these issues have been raised with and discussed by Select Committee. These issues, while largely outside the Terms of Reference of the SEIP TAG, are noted here.

A number of concerns have been raised by industry members of the SEIP TAG to date:

  • Concern about the ability to develop an allocation plan within the constraints of the legislation: Specifically while a number of industry members of the TAG agree that there should be a new entrant reserve, and that intensity based allocation is a good option at this stage of the ETS, these members consider that to do either or both of these within a cap set by 90% of TE 2005 emissions is not feasible, or even logical. Their strong view is that it is not possible to develop a plan that prevents leakage and economic regrets if a new entrant reserve and/or intensity based allocation is provided within the 90% cap. However, the TAG as a group has not yet considered in detail or reached any decisions on the feasibility of a new entrant reserve or intensity based allocation methodology within the 90% of 2005 emissions cap.
  • Concern about the availability and quality of firm specific data: Allocation planning requires data and information, particularly with regard to emissions and the risks of leakage. The SEIP TAG’s work programme commenced prior to this data being available. Some data, particularly with regard to emissions, is now available. However, more data is required.
  • Concern that 90% of 2005 emissions will corresponds to significantly less than this level for companies that have increased emissions since 2005, and that setting that the cap at this level will result in an insufficient level of free allocation to prevent closure for some firms.
  • Concern that liquid fossil fuels used in the stationery energy and industrial process sector do not receive a free allocation The advice from the some industry members is that this ‘omission’ in the legislation will lead to economic regrets,
  • Concern that current drafting in the Bill precludes persons who opt-in under schedule 4, part 4 from receiving a free allocation (even though they could be eligible to receive an allocation because of their increased costs if they did not opt-in).
  • Concern that persons who use industrial heat or steam including that from co-generation plants (as a substitute for direct use of coal or gas) are precluded from receiving a free allocation.
  • While the majority of the TAG has reached a provisional agreement that the key criterion for defining eligibility should be a measure of trade exposure some industry members have raised concerns that trade exposure is too narrow a definition to fully encapsulate the government’s economic regrets criteria. These members consider that competitiveness at risk should encompass firms that suffer an adverse impact on profits from investments that were made prior to the introduction of the ETS (leading to stranded assets).
  • A concern has been expressed from some industry members (but not all) that current draft legislation ties a person’s ability to opt-in to having purchased coal or gas directly from participants who mined the coal or natural gas. In their view this does not reconcile with the Select Committee recommendation that ‘current opt-in provisions do not adequately reflect the complexity of the gas market, and specifically that the ability to opt-in only one step down the supply chain is too restrictive”. The Select Committee’s has recommended that this problem be resolved by allowing persons to opt in if they purchase from a wholly owned subsidiary of the miner. However the concern of some industry members is that this does not solve the problem, as the wholesalers are not wholly owned subsidiaries of the miner. However, other industry members believe the issue of gas market complexity is the reason why opt in for the gas sector is necessarily restricted to direct contractual relationships with the miner to prevent compliance uncertainty.

 

Comment from government members of the SEIP TAG:

The Terms of Reference (TOR) of the SEIP TAG do not extend to design features of the NZ ETS that are specifically addressed as provisions in the draft legislation, for example, the size of the total pool of free allocation for industry, and the phase out of free allocation. The reason for defining the TOR of the SEIP TAG in this way is because high level design decisions of this nature involve trade-offs that have equity and economic implications for all sectors of society. The pros and cons of the draft legislative framework for an allocation plan to industry sectors, for example, is of interest to a wide variety of stakeholders and not only those represented on the SEIP TAG.

Most of the outstanding issue/concerns listed above relate to design features of the ETS that are set out in the draft legislation and therefore are outside of the TOR of this group. These concerns are duly noted. Industry members of the TAG have made it clear from the outset that their acceptance of the TOR does not imply their acceptance of design features of the proposed NZ ETS contained in the draft legislation. However, as these issues largely fall outside the TOR of the TAG, government officials have not responded to them in the context of this report. Officials on the TAG note that the government’s rationale for these high level design decisions has been well explained over an extensive period of consultation and engagement. Furthermore, officials note that the Climate Change Leadership Forum (CCLF) was specifically set up to provide advice to the government on these high level design issues. Finally, officials note that the majority of these issues have been raised before the Finance and Expenditure Committee in submissions from industry stakeholders and have been taken into consideration in their deliberations and the report back from the Committee.

 

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Last updated: 15 September 2008