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Climate Change Leadership Forum reports

• February 2008

International Climate Change Issues for New Zealand

Briefing for the Climate Change Leadership Forum
Prepared by the Emissions Trading Group and Government Departments
February 2008

CCLF Feb 21- Paper 1

1. Executive Summary

The purpose of this briefing is to assist the Climate Change Leadership Forum with understanding the international negotiation process that lies ahead and identifying some of the key strategic interests for New Zealand.  This information is intended to support ongoing work by the Forum. 

Background on the UNFCCC¹ and Kyoto Protocol:  The UNFCCC and its Kyoto Protocol are the foundation agreements for international action on climate change.  The Kyoto Protocol provides for further commitments to be adopted for subsequent commitment periods.  However, Parties could also choose to elaborate further action under the broader framework of the UNFCCC. The latter encompasses actions by countries that have not ratified the Protocol, such as the US, and actions by developing countries that have not assumed commitments under the Protocol.

Outcomes from Bali and the decision-making process through 2009:  The Bali meeting agreed in December 2007 on a series of negotiation tracks that will help to shape a post-2012 agreement.  These include (among others): an Ad Hoc Working Group on Long-term Cooperative Action under the UNFCCC, an Ad Hoc Working Group on Further Commitments for Annex I Parties under the Kyoto Protocol, and the second review of the Kyoto Protocol.  Parties are working toward reaching an agreement on the post-2012 policy international framework by the end of 2009.

New Zealand’s position on future commitments:  In Bali, New Zealand participated actively in the negotiations on future action under both the UNFCCC and its Kyoto Protocol.  New Zealand’s position is that an appropriate aggregate range of emissions reductions by Annex I is 25 to 40 % below 1990 levels by 2020, as informed by the work of the IPCC.  This aggregate range is meaningful only in the context of a long term global goal to which all parties have signed up to.  In addition, the rules that will apply post-2012 must be set before further commitments are made – including those for LULUCF – so that countries can commit in the context of knowledge and certainty.  It will also be important to ensure comparability of effort between countries (it remains to be negotiated what factors and criteria to use to determine comparability of effort).  In this regard, New Zealand recognises that individual Annex I country emission reduction commitments may fall outside of the 25 to 40% range, depending on their national circumstances, and in accordance with equitable burden sharing.  

New Zealand’s position on agriculture:  New Zealand has an opportunity to take a leadership position on agriculture and climate change.  The government is investing $1 million per year on international collaboration on agriculture and forestry climate change research.  The major first step is the establishment of Livestock Emissions and Abatement Research Network (LEARN).  LEARN is an international network with the purpose of improving the understanding of greenhouse gas emissions from livestock in order to facilitate the development of cost effective abatement solutions. New Zealand is also preparing a submission on the rules for accounting for agricultural land use (e.g., management of grazing land and cropland) under Article 3.4 of the Kyoto Protocol. 

New Zealand’s position on land use, land-use change and forestry (LULUCF):  For New Zealand, providing more flexibility around land-use change, while maintaining environmental integrity over time, is vitally important.  We believe that that a number of changes are needed to current LULUCF rules, reflecting the better information that we now have available and the experience gained in implementing rules in a domestic context.  Along with other Parties, New Zealand has strongly supported efforts for effective action to address the issue of deforestation and forest degradation in developing countries. Market-based national-level approaches are the most likely to provide a durable and economically efficient response to deforestation. 

Related international issues – Environmental sustainability and markets for New Zealand products: The increasing focus on environmental sustainability by our overseas customers presents both challenges and opportunities for New Zealand exporters.  The government has adopted a partnership approach with New Zealand producers in relation to “food miles” and sustainability. Initially this has involved working together to highlight the shortfalls of the food miles concept and to correct misconceptions and misreporting about New Zealand products overseas, as well as strengthening relationships with key influencers.  As the debate evolves to consideration of wider sustainability issues, the government is continuing this partnership approach with the sectors and supports their moves to demonstrate that their products and services are sustainably produced.

Related international issues – Treatment of fuels for international transportation: Under the current international climate change regime, there are no binding commitments for either developed or developing countries to reduce emissions from fuels used in international aviation and maritime transportation (referred to as “international bunker fuels”). New Zealand has yet to develop a detailed position on the treatment of bunker fuels, but supports in principle their inclusion in a post-2012 agreement.  Particular risks to New Zealand include changes in consumer preference for travel (particularly long-haul air travel), the purchase of New Zealand exports, and rising domestic prices (through increasing oil prices and/or a price on GHG emissions). 

Linking the New Zealand Emissions Trading Scheme internationally:  The evolution of the international climate change negotiations will influence New Zealand’s strategic interests in linking its emerging emissions trading scheme to other trading schemes and to the international post-2012 marketplace more broadly.  One important issue for the Clean Development Mechanism (CDM) and Joint Implementation (JI) markets is the size of the post-2012 market for these units under future international agreements.  New Zealand is assessing the European Commission’s recently announced proposal for phase 3 of the EU ETS (2012-2020).  Under this proposal, linking the NZ ETS with the EU ETS remains a possibility, but further analysis is needed regarding the compatibility of the schemes. New Zealand is also following developments around the Australian government’s intention to develop a national emissions trading scheme starting no later than 2010, with the detailed design finalised by the end of 2008.  New Zealand officials are engaged in dialogue with Australian officials on emissions trading design issues, with a view to sharing experiences and maximising the potential for compatibility between the schemes. Finally, New Zealand is a member of the International Carbon Action Partnership, which includes countries and regions that are actively pursuing the development of carbon markets through implementation of mandatory cap-and-trade systems. The ICAP should provide a useful forum for New Zealand to engage on emissions trading issues and share experiences with other parties that are developing or have implemented emissions trading schemes. 

Potential use of border adjustments:  Border adjustments are charges imposed on imports or exemptions from charges granted to exports to discriminate among products based on the climate policy in the originating or receiving country.  The objective of a border adjustment is to ensure that all goods and services consumed in a country are subject to the same carbon charges.  World Trade Organisation (WTO) rules generally prohibit the implementation of measures which discriminate against goods or services on the basis of country of origin, and require imported products to be treated no less favourably than those which are domestically supplied.  While there are exceptions to these rules, the exceptions would be difficult to use to justify a border adjustments regime.  Given the likelihood that a border adjustments regime would conflict with WTO rules, plus the difficulty of developing a programme that would not distort economic activity by unfairly disadvantaging or advantaging particular goods or services, the unilateral introduction of a border adjustments regime is not currently seen as a desirable option for New Zealand. 

WTO issues relating to subsidies:  Subsidies are subject to WTO rules if they consist of a financial contribution by the government that confers a benefit to the recipient and that targets an enterprise, a group of enterprises or a particular industry.  It is unclear whether the allocation of emission units, such as under the NZ ETS free allocation provisions, would be considered a financial contribution. WTO rules generally prohibit subsidies contingent upon export performance (export subsidies).  As New Zealand defines its free allocation mechanism and detailed allocation plans for the NZ ETS, it will need to give regard to the WTO rules around prohibited subsidies.   

2. Introduction

The negotiations in Bali produced a Bali Action Plan laying out a process for concluding negotiations on a post-2012 agreement by 2009.  The intensive work to be conducted over the next two years will decide whether countries can agree on collective and cooperative action on climate change, and what role other arrangements such as regional partnerships, sectoral agreements, and/or coalitions of like-minded countries will play.  The outcomes of this work will have long-term environmental, economic and social implications for all countries.

At this juncture, New Zealand needs to:

• Identify its primary objectives for a successful global agreement on climate change action post-2012;
• Assess its capacity to contribute to global efforts in mitigation, adaptation, technology development and transfer, and financial assistance to developing countries;
• Ensure the alignment of its domestic policies with its international obligations;
• Integrate its domestic actions on climate change with its broader objectives for sustainable development and economic transformation; and

• Work with other countries to build momentum toward reaching agreement on a post-2012 regime that engages both developed and developing countries.

The purpose of this briefing is to assist the Climate Change Leadership Forum with understanding the international negotiation process that lies ahead and identifying some of the key strategic interests for New Zealand.  This information is intended to support ongoing work by the Forum.  The briefing is structured as follows:

Section 3    Background on the UNFCCC and Kyoto Protocol

Section 4    Outcomes from Bali and the decision-making process through 2009

Section 5    Development of a New Zealand position on future commitments, agriculture, and land use, land-use change and forestry

Section 6    Related international issues: environmental sustainability and markets for New Zealand products, and treatment of fuels for international transportation

Section 7    Linking the New Zealand Emissions Trading Scheme internationally, including consideration of evolving CDM/JI markets, linking to trading schemes in the EU and Australia, participation in the International Carbon Action Partnership, use of border adjustments, and WTO issues relating to subsidies.

3. Background on the UNFCCC and Kyoto Protocol

The foundation international climate change agreement is the 1992 United Nations Framework Convention on Climate Change (UNFCCC).  The UNFCCC core objective is to achieve stabilisation of GHG concentrations in the atmosphere at levels that prevent dangerous human interference with the climate system. 

Despite the establishment of the UNFCCC, greenhouse gas (GHG) emission levels continued to rise and it became increasingly evident that only a firm and binding commitment by developed countries to reduce emissions – with ongoing action by developing countries – would send a strong signal to convince businesses, communities and individuals to act on climate change. 

Therefore, parties to the UNFCCC negotiated the Kyoto Protocol, concluded in 1997.  The Kyoto Protocol takes the UNFCCC one step further, establishing legally binding quantified emission reduction or limitation commitments for each industrialised country listed in its Annex B.  To meet these commitments, governments around the world, including New Zealand’s, are implementing climate change legislation and policies, developing carbon markets, and encouraging businesses to make climate friendly investment decisions.  The Protocol’s first commitment period (CP1) began on 1 January 2008 and ends on 31 December 2012.  Australia’s ratification of the Protocol in December 2007 brought the total number of ratifying countries to 176 plus the European Economic Community. 

The Protocol provides for further commitments to be adopted for subsequent commitment periods.  However, Parties could also choose to elaborate further action under the broader framework of the UNFCCC.  This resulted in the development in 2005 of a two-track policy development process to begin addressing post-2012 commitments: creation of an Ad Hoc Working Group (AWG) on Further Commitments for Annex I Parties under the Kyoto Protocol, and a four-meeting Convention Dialogue on long-term cooperation under the UNFCCC.  The Convention Dialogue process was concluded in Bali.  Countries that have not ratified the Kyoto Protocol, such as the United States, have participated in ongoing discussions under the UNFCCC but not the Kyoto Protocol.

An important third track of work is the periodic review of the Kyoto Protocol provided under Article 9. This review is to be conducted “in the light of the best available scientific information and assessments on climate change and its impacts, as well as relevant technical, social and economic information.”  A first review was conducted in 2006, and a second review will be conducted in 2008 (discussed further below).   

4. Outcomes from Bali and the Decision-Making Process through 2009

4.1 Outcomes from Bali

The annual UN Climate Change Conference² was held in Bali, Indonesia from 3 to 14 December.  Informal ministerial meetings on finance and climate change, and trade and climate change, were also held in Bali.

The Bali meetings produced a collection of decisions under both the UNFCCC and its Kyoto Protocol – representing a number of negotiating tracks.  These are designed to shape the future global response to climate change and aim to conclude in December 2009 in Copenhagen, Denmark.  Completion of negotiations by 2009 would allow time for countries to ratify the agreement such that it could take effect immediately post 2012. 

The outcomes of the Bali meetings include:

• A new Ad Hoc Working Group on Long-term Cooperative Action under the UN Framework Convention on Climate Change (the “Convention AWG”) was launched.  All parties to the UNFCCC will be involved in this negotiation, including the US and major developing countries.  It will focus on developing a global goal for emission reductions, action to reduce emissions by developed³ and developing⁴ countries, adaptation to climate change, technology transfer, and financing. 
• A detailed work programme was agreed for the existing Ad Hoc Working Group on Further Commitments for Annex I Parties under the Kyoto Protocol (the “Kyoto AWG”).  This aims to negotiate new, binding emission reduction commitments for Annex I Parties for the period after 2012.  The Kyoto AWG recognises that the latest scientific findings indicate that avoiding the worst effects of climate change would require developed countries as a group to reduce emissions in a range of 25 to 40 percent below 1990 levels by 2020.  (The aggregate Kyoto Protocol target for 2008 to 2012 is a 5% reduction below 1990 levels; however, note that this calculation assumed the participation of the US.) 
• Parties agreed on the scope and content of the second review of the Kyoto Protocol, which will take place at the UN Climate Change Conference to be held in Poznan, Poland in December 2008. The second review will focus on enhancing implementation and elaborating a number of elements, including adaptation.  It also provides for consideration of the Russian Federation’s proposal to clarify and simplify the procedures for countries to join Annex B (and hence for new Parties to take on commitments). 
• Deforestation in developing countries had a high profile in Bali, and the new Convention AWG includes consideration of policy approaches and positive incentives for reducing emissions from deforestation and forest degradation in developing countries (REDD).
• Agreement was reached on many other issues, including operationalising the Kyoto Protocol Adaptation Fund, and a request to the Global Environment Facility to elaborate a strategic programme to scale up the level of investment for technology transfer to help developing countries address their needs for environmentally sound technologies. 

4.2 Decision-Making Process through 2009

Four negotiating sessions of the Convention and Kyoto AWGs will be held in 2008: in March/April, June, August/September, and December (which is the next annual conference and will be held in Poznan, Poland). 

The 2009 timeline is not elaborated in full, but negotiations will be held at least in June and December 2009 (which is an annual conference to be held in Copenhagen, Denmark). 

The work programme for the Convention AWG will be developed at the March/April 2008 negotiating session. 

The work programme for the Kyoto AWG will proceed as follows:

• In the first part of the 2008 work programme, the Kyoto AWG will focus on the means available to Annex I Parties to reduce their emissions – including emissions trading and the flexibility mechanisms, the rules for land use, land-use change and forestry (LULUCF), international aviation and maritime emissions, and sectoral approaches. 
• Consideration of relevant methodological issues, including the global warming potentials⁵ (GWP) to be used after 2012, will begin at the June session. 
• The work programme aims to conclude negotiations on the means and methodologies for achieving mitigation objectives in August/September. 
• Consideration of potential environmental, economic and social consequences, including spillover effects, from emission-reduction tools, policies, measures and methodologies available to Annex I Parties will begin in August/September. 
• At the December session, conclusions will be adopted on Annex I Parties’ mitigation potential, and consideration of a single emission reduction target for Annex I Parties in aggregate will begin. 

• In 2009, the Kyoto AWG will consider and adopt conclusions on legal implications of its work, and agree a draft decision on further commitments for individual Annex I Parties, which will be considered in Copenhagen. 

Preparations for the second review of the Kyoto Protocol will take place during 2008.  These include written submissions by Parties, a workshop in June, an information paper by the UNFCCC Secretariat in October on the work of the Kyoto AWG, and a workshop immediately prior to the Poznan meetings where the second review will take place. 

5. New Zealand’s International Position

5.1 Future Commitments

New Zealand remains vulnerable to the impacts of climate change on its environment and economy, concerned for the welfare of other countries, and reliant on international action to address the problem.  New Zealand is committed to taking appropriate domestic action to reduce its emissions, and being a constructive player in the global climate change process to achieve the core objective of the UNFCCC. 

5.2 The Scale of the Challenge

The scale of the challenge can be difficult to comprehend.  In its Fourth Assessment Report, the IPCC reported that stabilising global emissions at levels of 445-490 ppm CO₂ equivalent⁶ would require that by 2020, emissions from Annex I countries had been reduced by 25-40% below 1990 levels, and there was substantial deviation from the baseline for emissions from developing countries.⁷  For comparison, global GHG emissions from human activity have increased 70% from 1970 to 2004, and are projected in scenarios to increase by 25-90% from 2000 to 2030.⁸ 

The IPCC assessed studies on the global economic cost of stabilising emissions. In 2050, global average macro-economic costs for mitigation towards stabilisation between 710 and 445 ppm CO₂ equivalent are between a 1% gain and 5.5% decrease of global GDP.  In 2030, these costs are between a 0.6% gain and a 3% decrease of global GDP.  This corresponds to slowing average annual global GDP growth by less than 0.12 percentage points for both years.⁹  Refer to the text box on understanding the costs of climate change mitigation.

The IPCC also reports that modelling studies show global carbon prices rising to 20-80 US$/t CO₂ equivalent by 2030 are consistent with stabilisation at around 550 ppm CO₂ equivalent by 2100. For the same stabilisation level, induced technological change may lower these price ranges to 5-65 US$/tCO₂ equivalent in 2030.

Understanding the Costs of Climate Change Mitigation

When evaluating the costs of climate change mitigation, it is important to bear in mind three considerations. 

First, projected reductions in GDP represent shaved growth in GDP, not an absolute reduction below current GDP levels.  The IPCC SRES scenarios assume baseline GDP growth ranging from 1% to 3.1% per person per year to 2030, which is broadly in line with ranges in other studies.¹⁰  The GDP impact of stabilising emissions (e.g., less than 0.12% per year to 2030/2050) should be interpreted in this context. 

Second, the modelling methodologies have limitations.  The IPCC notes, “Studies on mitigation portfolios and macro-economic costs assessed in the IPCC report are based on top-down modelling. Most models use a global least-cost approach to mitigation portfolios, with universal emissions trading, assuming transparent markets, no transaction cost, and thus perfect implementation of mitigation measures throughout the 21st century. Costs are given for a specific point in time. Global modelled costs will increase if some regions, sectors (e.g. land-use), options or gases are excluded. Global modelled costs will decrease with lower baselines, use of revenues from carbon taxes and auctioned permits, and if induced technological learning is included.”¹¹

Third, the costs of mitigation cited above do not reflect the co-benefits from mitigation, the benefits of avoiding costs from climate change impacts and adaptation, or equity in the distribution of those costs.  On this subject, the IPCC reports:

For increases in global average temperature of less than 1-3°C above 1980-1999 levels, some impacts are projected to produce market benefits in some places and some sectors while, at the same time, imposing costs in other places and other sectors. Global mean losses could be 1-5% of GDP for 4°C of warming, but regional losses could be substantially higher.

Peer-reviewed estimates of the social cost of carbon (net economic costs of damages from climate change aggregated across the globe discounted to the present) for 2005 have an average value of US$12 per tonne of CO₂, but the range from 100 estimates is large (-$3 to $95/tCO₂ ). The range of published evidence indicates that the net damage costs of climate change are projected to be significant and to increase over time.

 It is very likely that globally-aggregated figures underestimate the damage costs because they cannot include many non-quantifiable impacts. It is virtually certain that aggregate estimates of costs mask significant differences in impacts across sectors, regions, countries, and populations. In some locations and amongst some groups of people with high exposure, high sensitivity, and/or low adaptive capacity, net costs will be significantly larger than the global average.

Limited and early analytical results from integrated analyses of the global costs and benefits of mitigation indicate that these are broadly comparable in magnitude, but do not as yet permit an unambiguous determination of an emissions pathway or stabilisation level where benefits exceed costs.

Comparing the costs of mitigation with avoided damages would require the reconciliation of welfare impacts on people living in different places and at different points in time into a global aggregate measure of well-being.

Choices about the scale and timing of GHG mitigation involve balancing the economic costs of more rapid emission reductions now against the corresponding medium-term and long-term climate risks of delay.¹²

5.1.2 Characteristics of a Post-2012 Agreement

A review of recent climate change literature and observations on the current state of negotiations suggest that a durable and effective international agreement for post-2012 action should:

• Be informed by the best available scientific and economic information.
• Be designed to achieve stabilisation of global GHG concentrations at levels that avoid dangerous human interference with the global climate system.
• Support meaningful action to reduce emissions below business-as usual by both developed and developing countries, applying the principle of “common but differentiated responsibilities” which is engrained in the UNFCCC. 
• Promote sustainable development and equity, balancing environmental and economic outcomes that are acceptable to the broader global community.
• Address mitigation, adaptation, technology development and transfer, and financial assistance to developing countries.
• Recognise a broad range of verifiable emission reduction and sink enhancement opportunities, include the use of market-based mechanisms, and enable flexibility in how individual countries achieve their responsibility targets.
• Remain adaptable to accommodate future changes in scientific understanding, technologies, economic development, and sensitivity to risk.

In order to conclude a successful agreement, countries will need to overcome two of the dynamics that currently hinder the negotiations.  First, countries will need to define comparability of effort and come up with ways of reaching burden sharing that all Parties are comfortable with.  Second, developing countries have expressed their priority for economic development, and Parties need to determine how to move forward with the work identified in the Bali Action Plan for developing countries. 

5.1.3 Economic Considerations for New Zealand 

While New Zealand should continue to support an international climate change agreement which aims to prevent dangerous human interference with the climate system, when developing a New Zealand position on some of the key components of an agreement policy makers must understand how specific decisions affect net national welfare. These decisions may include a long-term goal for stabilising atmospheric emissions, a quantitative cap on the aggregate emissions of participating countries¹³, how the emissions within this cap are allocated to participating countries, the types of sink and source activities covered within this cap, and the availability of emission reduction activities from outside the cap. While the responsibility target which New Zealand accepts will certainly have some implications for welfare, how decisions affect the world price of greenhouse gas emissions, and other commodity prices such as dairy products, timber, and wool, may have considerably more impact on welfare. 

In this context, knowing what it is likely to cost to mitigate greenhouse gas emissions within New Zealand by any given amount is important information for New Zealand to have for participating in the international negotiations over post-2012 regimes. 

A whole-of-government project is developing estimates of the cost to NZ Inc. of action to mitigate emissions of greenhouse gases in New Zealand over the period 2013 to 2020. Marginal mitigation cost curves are being estimated for six sources/sinks of emissions: agriculture, energy (excluding transport), transport, deforestation, afforestation, and management of pre-1990 forests.¹⁴  Each sectoral marginal mitigation cost curve will show, for 2013-2020, the average annual emission reduction relative to "business as usual" that is expected from particular policies, measures or technologies and the cost to NZ Inc. of those reductions. 

This work will be carried out iteratively over at least the next 12 months, building initial sectoral cost curves with the information that is most readily available, seeking comment from stakeholders on how best to improve the quality and scope of those estimates, obtaining further information on mitigation costs, developing refined cost curves, and so on. An initial marginal mitigation cost curve has been estimated for the energy sector. It covers five broad sets of energy efficiency measures that are contained in the New Zealand Energy Efficiency and Conservation Strategy and the introduction of an emissions price (at four different levels) into the energy sector.  It is not comprehensive; other policies and measures will be added to it over time. It is a work in progress. 

A companion paper sets out the work on marginal mitigation cost curves in more detail.

5.1.4 New Zealand’s Current Position on Future Commitments

In Bali, New Zealand participated actively in the negotiations on future action under both the UNFCCC and its Kyoto Protocol.  New Zealand’s position is that an appropriate aggregate range of emissions reductions by Annex I is 25 to 40 % below 1990 levels by 2020, as informed by the work of the IPCC.  This aggregate range is meaningful only in the context of a long term global goal to which all parties have signed up to.  In addition, the rules that will apply post-2012 must be set before further commitments are made – including those for LULUCF – so that countries can commit in the context of knowledge and certainty.  It will also be important to ensure comparability of effort between countries (it remains to be negotiated what factors and criteria to use to determine comparability of effort).  In this regard, New Zealand recognises that individual Annex I country emission reduction commitments may fall outside of the 25 to 40% range, depending on their national circumstances, and in accordance with equitable burden sharing.  

5.2 Agriculture

The international climate change work programme for agriculture consists of:

• Establishing and managing the Livestock Emissions and Abatement Research Network; and
• Determining future rules for grazing land and cropland beyond 2012.

5.2.1 Livestock Emissions and Abatement Research Network

New Zealand has an opportunity to take a leadership position on agriculture and climate change to have as much influence on international negotiations as possible. The New Zealand government is investing $1 million per year on international collaboration on agriculture and forestry climate change research. 

The major first step is the establishment of Livestock Emissions and Abatement Research Network (LEARN)¹⁵.  LEARN is an international network with the purpose of improving the understanding of greenhouse gas emissions from livestock in order to facilitate the development of cost effective abatement solutions.

On 1 December 2007, over 50 delegates representing 25 countries from Australasia, Asia, Africa, South, Central and North America, and Europe met in Christchurch, New Zealand, following the Greenhouse Gases and Animal Agriculture Conference, to discuss and agree on the objectives, focus areas, administration and governance of LEARN. 

The meeting agreed the following objectives and focus areas:

Network Objectives

• To improve understanding, measurement and monitoring of non-CO₂ greenhouse gas emissions from animal agriculture at all scales
• To facilitate the development of cost effective and practical greenhouse gas mitigation solutions

Initial Focus Areas

• Methane emissions from ruminant livestock
• Nitrous oxide emissions from ruminant livestock
• Integrated whole farming system impacts at all scales (including region and watershed) 
• National agriculture inventory development

Future Focus Area

• Broaden network activities to other livestock and farm systems

New Zealand is Chair of the LEARN Advisory Group¹⁶ and acts as administrator of LEARN.  New Zealand has committed funding to support the ongoing activities of LEARN including website, conference sponsorship, workshops, secondments and exchanges and is also looking for other governments to contribute funding to support its activities.

5.2.2 Future Rules for Agricultural Land Use – Grazing Land and Cropland

Under the Kyoto Protocol, the rules under Article 3.4 for agricultural land use (e.g., management of grazing land and cropland) apply for the first commitment period and need to be renegotiated for post-2012 commitments.  New Zealand opted not to report emissions and removals under Article 3.4 for the first commitment period, but has an opportunity to influence the rules for the next commitment period and determine the extent of its future participation under Article 3.4. 

New Zealand is preparing a submission for the Kyoto AWG’s work on further commitments for Annex 1 Parties. This submission will outline New Zealand’s views on how the current rules can be improved so as to maximise the contribution that land use activities can make in addressing climate change.

We will be making comments on a number of general, structural matters and on specific “land-use” accounting rules that New Zealand believes need discussion and resolution, including:

• The continuation of voluntary election of activities under Article 3.4.
• Parties having the ability to account for additional activities under Article 3.4 on a project basis rather than having to account on all land in each land use classification (grazing land, cropland etc).

• Where a Party is unable to determine, with sufficient accuracy, an initial value for net-net accounting¹⁷ (due to lack of data or some other reason), it may elect another base year (or base period).  

New Zealand sees value in building an enhanced ability for uptake of Article 3.4 mechanisms; currently they are under utilised and there is a need for more voluntary uptake.

5.3 Land Use, Land-Use Change and Forestry (LULUCF)

The international climate change work programme for forestry consists of two key items:

• Developing future rules for LULUCF beyond 2012; and
• Treatment of avoided deforestation for developing countries.

5.3.1 Future LULUCF Rules

Some aspects of the current LULUCF rules under the Kyoto Protocol are somewhat arbitrary, and have meant that domestic policy implementation of these rules has been complex and challenging.  In particular, the current rules do not reflect the fact that land use is a dynamic process, and that sustainable management practices should seek to ensure the highest value, best use of land, consistent with good environmental practice.   For New Zealand, providing more flexibility around land use change, while maintaining environmental integrity over time, is vitally important.

We believe that that a number of changes are needed to current LULUCF rules, reflecting the better information that we now have available and the experience gained in implementing rules in a domestic context.

The appropriate place for this work to occur is under the “means to achieve mitigation objectives” components of the Kyoto AWG’s work on future commitments for Annex 1 parties.

The first submission to that process is due on 15 February 2008.  In that submission New Zealand will be articulating a number of principles that should underlie discussions about future rules:

• Certainty over time for investors and markets;
• Minimum compliance costs;
• Simple, uncomplicated design which is consistent in its approach;
• Environmental integrity; and

• Maintenance of productive capacity.

We will also be making comments on a number of general, structural matters and on specific aspects of the accounting rules that New Zealand believes need discussion and resolution.  These include:

• The accounting framework and rules that apply post 2012 for LULUCF commitments needs to be negotiated before the negotiation of quantitative targets;
• That longer time periods to be negotiated for both the second commitment period as a whole, as well as the duration of rules pertaining to LULUCF to better reflect the reality of forest growth and harvest and provide greater business investment certainty;
• That future LULUCF rules should continue to allow Parties the ability to use sinks as a means to meet their GHG reduction commitments;
• That there should be reasonable consistency and compatibility between the current LULUCF rules in CP1 and the post-2012 framework;
• That the post-2012 framework should allow for an area of pre-1990 forest to be deforested and offset through afforestation elsewhere.
• That the accounting rules for land use activities under Article 3.4 of the Protocol, especially in relation to forest management of pre-1990 forests, need  redrafting;
• That emissions from forest harvesting and possibly harvest wood products need to addressed; and
• A range of other amendments and improvements are justified to make the Protocol more effective and efficient.

5.3.2 Avoided Deforestation in Developing Countries

Along with other Parties, New Zealand has strongly supported efforts for effective action to address the issue of deforestation and forest degradation in developing countries.  In our view, any measures agreed must provide a significant and ongoing source of funds to incentivise countries to reduce deforestation rates.  At the Bali meeting, New Zealand proposed the development of a possible new Protocol to the UNFCCC dealing specifically with the issue of deforestation and forest degradation in developing countries.  This idea was not picked up in Bali, but the text on avoided deforestation in the Bali Action Plan does provide scope for a range of options in dealing with this issue.  

New Zealand recognises the challenges ahead with resolving this issue.  Parties’ efforts to resolve this issue may need to extend beyond the resulting work programme on technical aspects (that is, considering methodological issues such as measurement, establishing baselines, options to assess leakage, etc).  Market-based national-level approaches are the most likely to provide a durable and economically efficient response to deforestation, and New Zealand would like to see options for such approaches developed and analysed. 

Discussion on this issue will take place under the Bali Action Plan and the first submission on this work programme is due on 22 February 2008.  It should, however, be noted that this issue will be important for setting targets for the second commitment period (a process underway under the Kyoto AWG work programme).

6. Related International Issues

Outside of the core international negotiations, there are some climate change issues that have strategic significance for New Zealand from both environmental and economic perspectives.  Two of these issues assessed in this section are:

• Environmental sustainability and markets for New Zealand products (e.g., “food miles”); and
• The treatment of fuels used for international transportation.

6.1 Environmental Sustainability and Markets for New Zealand Products

Consumers are becoming increasingly aware of the environmental impact of their lifestyles. Retailers and the food and beverage industry (particularly in the UK, but increasingly so in North America and across Europe) are conscious of the commercial opportunities associated with this focus on the environment and sustainability and are seeking to capitalise on it.

The issue of “food miles”¹⁸  fits into this wider picture. While the concept is still drawn upon in some of New Zealand’s export markets (in particular the UK), there appears to be a growing awareness that the concept is flawed. The discussion is broadening towards wider sustainability issues, including a growing recognition of the importance of greenhouse gas (GHG) emissions across the entire life cycle of a product (also known as GHG or carbon footprint). This is a welcome development.

The increasing focus on environmental sustainability by our overseas customers presents both challenges and opportunities for New Zealand exporters.  While flawed, the concept of food miles has therefore not been solely bad for New Zealand. It has forced New Zealand producers to take a closer look at the actual greenhouse gas burden associated with their products and services.  Importantly, it has also helped the sectors realise the opportunities to be gained from being a sustainable producer in a more environmentally-conscious global marketplace. There is nothing we can do to change the distance between New Zealand and most of our key export markets. We can ensure, however, that New Zealand goods and services are produced to high quality and with sustainability as a core product attribute.  

For some producers sustainability is already ‘business as usual’.  Its value as a product attribute has been identified and it is central in marketing and other brand communications.  These producers can legitimately say that they have taken steps towards sustainability and are reaping the commercial rewards from this investment. Others are beginning to realise the potential of sustainability as a marketing attribute and are moving fast to back up claims of ‘clean and green’ with environmental proof.

The government has adopted a partnership approach with New Zealand producers in relation to food miles and sustainability. Initially this involved working together to highlight the shortfalls of the food miles concept and to correct misconceptions and misreporting about New Zealand products overseas, as well as strengthening relationships with key influencers.  As the debate evolves to consideration of wider sustainability issues, the government is continuing this partnership approach with the sectors and supports their moves to demonstrate that their products and services are sustainably produced. A number of initiatives surrounding New Zealand’s overall sustainability credentials are underway.

• For example, in partnership with industry and researchers, MAF has recently developed a comprehensive strategy for GHG footprinting (please see the annex for more detail). This will help producers measure and validate their GHG footprints. It will help identify opportunities to reduce emissions and also identify potential threats to New Zealand primary products. The government has committed $6 million over the next five years for this strategy. This includes funding for GHG footprinting studies in specific sectors (initially dairy, wine, kiwifruit, forestry and lamb), looking at emissions from the farm right through to the destination port and in some cases even further, to the supermarket shelf.
• Looking outwards, officials have secured New Zealand participation in the UK development of a standardised methodology for calculating embodied GHG emissions in products and services.
• The Sustainable Food Exports Group (formerly known as the Food Miles Group) has met regularly (convened by MFAT) since 2004 when the food miles issue gained prominence. It acts as a valuable source of market intelligence and information exchange between government and industry. A similar group exists in London, co-ordinated by NZTE and MFAT.
• MFAT and NZTE have recently stepped up efforts to collect and disseminate market intelligence on food miles and sustainability developments of relevance to the food and beverage sector. Offshore staff have been tasked with reporting regularly on market and regulatory changes. This information is then passed on to New Zealand businesses in quarterly report format (via the Market New Zealand website). It is also distributed to the Sustainable Food Exports Group and via other MFAT and NZTE communication channels.

All initiatives are being carefully co-ordinated across government and with industry to ensure that a NZ Inc. approach is applied. Sustainability and climate change issues will remain a focus for governments, the private sectors and consumers in years to come. The ability of New Zealand businesses to demonstrate that their products and services are sustainably produced will be an important element in ensuring future export success.

6.2 Treatment of Fuels Used for International Transportation

6.2.1 Exclusion from the UNFCCC and Kyoto Protocol

Under the current international climate change regime (i.e., the UNFCCC and its Kyoto Protocol), there are no binding commitments for either developed or developing countries to reduce emissions from international aviation and maritime transportation.  Instead, the Kyoto Protocol requires developed countries to pursue how to limit or reduce emissions from international aviation and maritime sources (often referred to as “international bunker fuels”) by working through the International Civil Aviation Organization (ICAO) and the International Maritime Organization (IMO) respectively.  New Zealand is a member of both of these UN bodies.

This decision to separate out international bunker fuels from the Kyoto Protocol reflects the difficulty in trying to define, measure, and then agree responsibility for emissions generated in international airspace or on the high seas.  These difficulties have also been reflected in ICAO and the IMO discussions, with little progress being made in finding agreement on how to reduce or limit emissions from bunker fuels.  

The IMO has established an Intersessional Group to discuss and compile possible approaches on technical, operational and market based measures to address greenhouse gas emissions from ships, due to report in March-April 2008.  An updated version of IMO’s 2000 study on maritime GHG emissions, mitigation measures and impacts is then due in March-April 2009. In 2007 ICAO established a new group on International Aviation and Climate Change to compliment its existing ICAO Technical Committee.

Technical discussions in the UNFCCC/Kyoto Protocol process on how to collect and report data and allocation issues of bunker fuels, have also progressed slowly.

6.2.2 Strategic Issues for New Zealand

In the absence of an agreed international approach, the EU has proposed to include the international aviation sector in its emissions trading scheme without requiring the consent of third parties. Other fora, such as APEC, have also initiated discussions on the treatment of international aviation.

With bunker fuels unresolved in ICAO and the IMO – plus growing government, NGO and public concern with, and awareness of, projections of rapid and significant emission increases, especially in the aviation sector – there is renewed interest in bringing international bunker fuel emissions into the post-2012 negotiations. The issue is likely to gain increasing prominence in 2008 and beyond as the negotiations develop. 

New Zealand has yet to develop a detailed position on the treatment of bunker fuels, but supports in principle their inclusion in a post-2012 agreement. As an isolated island nation, dependent on air and sea links, the treatment of bunker fuel emissions is of direct relevance to New Zealand's national interest. Particular risks to New Zealand include changes in consumer preference for travel (particularly long-haul air travel), the purchase of New Zealand exports, and rising domestic prices (through increasing oil prices and/or a price on GHG emissions).  While there is a lot of media attention on “travel miles” and cheap airfares, and growing activism against them, there is still considerable uncertainty about just how consumers will respond in their immediate and future travel and purchasing decisions.

7. Linking the NZ ETS Internationally

The evolution of the international climate change negotiations will influence New Zealand’s strategic interests in linking its emerging emissions trading scheme to other trading schemes and to the international post-2012 marketplace more broadly.  This section addresses international linking issues that will face New Zealand post-2012, with a focus on the following issues:

• Developments in Kyoto markets
• Linking to the European Union Emissions Trading Scheme
• Linking to an Australian Emissions Trading Scheme
• Participation in the International Carbon Action Partnership
• Potential use of border adjustments

• Interaction between the NZ ETS and subsidy rules under the World Trade Organisation (WTO).

7.1 Developments in Kyoto Markets

Trade in Clean Development Mechanism¹⁹ (CDM) units (CERs) continues to grow strongly and is now a multibillion dollar industry.  In the first half of 2007, trade in CERs totalled an estimated 372 Mt CO₂ value at €4.1 billion. While trade in primary CERS dominates this market at just under 80%, trade in the secondary market is growing rapidly. Projections for available supply of CERs and ERUs (Joint Implementation (JI) units) during CP1 vary between 1.5 billion tonnes and in excess of 3 billion tonnes. Europe currently dominates the buyer side of the market (buying approximately 86% of CERS generated), followed by Japan.

While the market is growing rapidly, questions continue to be raised about the capacity of the CDM Executive Board to process and approve project applications. Questions also continue to be raised about the extent to which CDM projects are supplying credits that are truly additional (i.e., would not have happened anyway).

However, by far the more significant issue for the CDM and JI markets is whether there will be a post-2012 market for these units. In the absence of a post-2012 agreement, the international market looks to developments in European policy to provide some certainty. The announcement by the EU in 2007 of ambitious targets to reduce emission by 20% by 2020 in the absence of an international agreement and by 30% if an acceptable, international agreement is reached was taken as a positive signal by the market (providing some assurance of ongoing demand for units post-2012). Conversely, early market responses to the announcement from the European Commission in January 2008 (see below) of their proposal to apply tighter restrictions on the import of CDM/JI units into the EU ETS suggest that this policy approach could affect the development of CDM post-2012.

7.2 Linking to the European Union Emissions Trading Scheme

7.2.1 Prospects for Phase 3 of the EU ETS

On 23 January 2008, the European Commission (EC) released its proposals to amend the European Emissions Trading Scheme (EU ETS) for the period beyond 2012 (phase 3).

The key features of the EU ETS proposal for phase 3 are the following:

• Phase 3 of the EU ETS will be from 2012 to 2020.
• There will be a single EU-wide cap.
• The level of the cap (the total number of allowances) is to be reduced each year in line with the EU’s overall objective to reduce emissions by 20% by 2020.
• Allowances for installations that are able to pass on their costs (primarily electricity generators) are to be auctioned rather than gifted (at as present).
• For other installations, the free allocation of allowances is to be phased out by 2020.
• However, installations in sectors “judged to be at a significant risk of carbon leakage” may continue to receive up to 100% of their allowances for free.
• The scope of the EU ETS (currently CO₂ from stationary energy and industry sources only²⁰) will be expanded to include CO₂ emissions from petrochemicals, ammonia and aluminium as well as N2O emissions from the aluminium sector
• Emissions or removals from agriculture and forestry are specifically not included in the proposal.
• There will be significant tightening of the restriction on purchase of JI/CDM credit from third countries.

• There is a proposal to enable linking with any country or administrative entity, opening the door for linking to state-level schemes in the US.

The EC’s proposal is not agreed policy.  It now falls under the co-decision procedure meaning that it must be approved by the Council of the EU (representing the Member States) and the European Parliament to become law.  The Commission hopes that a final decision will be made by 2009.

7.2.2 Strategic Issues for New Zealand

A number of the EC proposals are of particular relevance to New Zealand and participants in the NZ ETS.

The signalled tightening of limits on the purchase of JI/CDM units (called ERUs and CERs, respectively) for the period 2012 to 2020 may have mixed blessings for New Zealand.  On the positive side it is forecast that the EC proposals will push the price of EUAs upwards and the price of CDM /JI units downwards.  At a minimum it is forecast that that there will be a greater spread between the price of European allowances and CER prices.  Any such trends, if realised, will be welcomed by industry and participants in the NZ ETS as it will lower their compliance costs.  The EC proposal has already created something of a shock wave in the international carbon market.  Prices in the secondary market for CERs fell by around 11 percent in late January.²¹ 

Of concern for New Zealand in the long term, however, is what the proposal means for the CDM and JI markets post-2012, in the absence of an international agreement. Market reaction in the week since the announcement reflects that there is now considerable uncertainty as to the value a CER credit will have post-2012, suggesting project developers could hold off investing in new projects.  Having a stable and predictable supply of internationally approved and verified offset credits is in New Zealand’s interest in the long term, to help provide market liquidity and ensure that compliance costs are kept to a minimum.

The EC’s proposal to exclude forestry units from phase 3 is also of significance to New Zealand.  Some market commentators have been very critical of this particular proposal, noting that it fails to reflect the Bali outcomes and is likely to run counter to the positions being taken in other emerging carbon markets.  Some analysts anticipate that this proposal will be contested by some Member States.

A third feature of interest to New Zealand relates to allocation and the proposal to potentially provide assistance to sectors or sub-sectors defined as being at “a significant risk” of carbon leakage indefinitely, either through free allocation or border measures. 

Finally, the proposals related to linking are also of interest. While the current Directive allows for linking with other developed countries that have ratified the Kyoto Protocol, the Commission is now proposing to extend this to include any country or administrative entity (such as a state or group of states under a federal system) which has established a cap and trade system “whose design elements would not undermine the environmental integrity of the EU ETS.”

This proposal is significant in terms of how the international carbon market may evolve post-2012, as it opens the door for the EU to link to other schemes outside of the Kyoto framework. However, it changes little in terms of the potential for linking with the NZ ETS.  Under the new proposal, linking with the EU ETS remains a possibility as the NZ scheme meets the EC’s fundamental requirement of being a cap-and-trade scheme. However, further analysis is required regarding the compatibility of the schemes and the implications of linking. 

New Zealand officials met with officials from the European Commission in Bali in December 2007 to discuss developments in both the EU and New Zealand and linking issues in general terms. We expect these discussions to continue in the future.

7.3 Linking to an Australian Emissions Trading Scheme

Late last year Australia ratified the Kyoto Protocol, and the Australian government has announced its intention to develop a national emissions trading scheme starting no later than 2010, with the detailed design finalised by the end of 2008.  The Australian government has outlined five key tests for a national emissions trading scheme, including that it is cap and trade.  Australian officials are working on further details of the Australian scheme.  New Zealand is significantly further advanced in the development of its scheme than Australia.

New Zealand officials are engaged in dialogue with Australian officials on emissions trading design issues, with a view to sharing experiences and maximising the potential for compatibility between the schemes.  The nature of future linking opportunities between schemes in New Zealand and Australia could depend on relative design decisions regarding: 

• Applying absolute versus intensity-based approaches to defining obligations
• Linking to Kyoto versus non-Kyoto markets
• Applying price control mechanisms, such as price caps
• Enabling borrowing across different commitment periods
• Allocation methodologies
• Non-compliance provisions.

7.4 International Carbon Action Partnership (ICAP)

The International Carbon Action Partnership is made up of countries and regions that are actively pursuing the development of carbon markets through implementation of mandatory cap and trade systems.  The ICAP aims to contribute to the establishment of a well-functioning global cap and trade carbon market and provides the opportunity for members to share best practice and learn from each others’ experiences. Membership includes 24 states and nations, including state participants in the North American Regional Greenhouse Gas and Western Climate Initiatives, members of the EU ETS, Norway and New Zealand.  ICAP will, among other things, hold public workshops on emissions trading issues and develop processes to engage interested stakeholders.

New Zealand is actively engaged in ICAP.  The ICAP should provide a useful forum for New Zealand to engage on emissions trading issues and share experiences with other parties that are developing or have implemented emissions trading schemes.  ICAP may also be useful for New Zealand to gain feedback and international acceptance of approaches proposed for the New Zealand ETS.  It is expected that ICAP will hold its first public workshop later this year.

7.5 Potential Use of Border Adjustments

7.5.1 Purpose of Border Adjustments

Border adjustments are charges imposed on imports or exemptions from charges granted to exports to discriminate among products based on the climate policy in the originating or receiving country.  The objective of a border adjustment is to ensure that all goods and services consumed in a country are subject to the same greenhouse gas emissions charges.  In practice, goods and services imported from countries without an emissions charge might face a border “adjustment” to ensure they are no more competitive than locally produced goods and services.  Goods and services exported to a country without an emissions charge may be exempted from an emissions charge as a means of ensuring the export’s competitiveness is not disadvantaged in the export market. 

Border adjustments have been suggested by some policy makers to prevent what has become known as “emissions leakage” or “carbon leakage”. This “leakage” occurs when a product’s manufacturing is relocated to a country without an emissions price, or with a lower emissions price, and as a result emissions are merely displaced from one country to another, instead of reduced. Border adjustments can help to alter the incentive to displace production on the basis of emissions pricing.

The main proponents of border adjustment measures are those countries that have imposed mechanisms such as carbon taxes or emissions trading schemes to meet their Kyoto obligations, and have concerns that these mechanisms may reduce the competitiveness of products produced domestically against those produced in and imported from other countries where similar mechanisms are not in place.  Pressure has been put on some governments (e.g., France, and the European Communities more broadly) to address this potential curb on industry competitiveness by applying border adjustments to put domestic producers on a level playing field with their international competitors. 

The nature of border adjustments depends on the point of collection for the tax in question and whether the tax or emissions charge is applied on production or consumption. For example, an emissions charge on consumption would apply a charge on imports but would exempt exports, whereas the reverse would be true for an emissions charge on production. If countries impose their own unilateral border adjustments and apply them differently, double charges or penalties on the same product could occur. For this reason it is important to have some form of multilateral consensus on how charges should be applied.

7.5.2 WTO Considerations

In its Fourth Assessment Report, the IPCC provided a brief discussion on border tax adjustments.  The IPCC reported, “To date, World Trade Organisation (WTO) case law has not provided specific rulings on climate-related taxes.  Any proposed border tax adjustments would need careful design and also take WTO law into account.”²²

As a general rule, the WTO prohibits discrimination among “like” products and services on the basis of country of origin. The “most-favoured-nation” principle provides that each WTO Member must accord to the products or services of any other Member treatment no less favourable than that accorded to the products and services of any other WTO Member. The “national treatment” principle provides that each WTO Member must accord to the products or services of any other Member treatment no less favourable than that accorded to its own domestic suppliers.

There are some well known exceptions to these national treatment and most-favoured-nation rules under GATT Article XX and GATS Article XIV relating to measures “necessary to protect human, animal or plant life or health” or “relating to the conservation of exhaustible natural resources” (note that clean air has been deemed an exhaustible natural resource by the WTO Appellate Body in the US – Gasoline case). That said, these exceptions would be difficult to use to justify the application of border adjustments and virtually impossible without some form of multilateral consensus on how – and under what conditions – any border adjustment measures might be applied. 

7.5.3 Strategic Issues for New Zealand

Given the likely conflict of a border adjustments regime with WTO rules and the complexity of developing a scheme that would not unfairly disadvantage or advantage particular classes of imported or locally produced goods, the unilateral introduction of a border adjustments regime currently is not seen as a desirable option for New Zealand.  Were border adjustments seen as a desirable policy instrument, it would be preferable for measures to be adopted as part of a widely adopted multilateral agreement. 

However, there is no substantive dialogue on such an agreement under the WTO at this time and such a dialogue would be fraught given that the main “targets” of any border adjustment measures would be those countries that have not ratified the Kyoto Protocol (e.g., the US) – or do not have quantified emission reduction or limitation commitments (e.g., Brazil, India, China). Developing countries in particular could be expected to strongly oppose any measures which threaten to impose new costs from which they were specifically exempted under the terms of the Kyoto Protocol. 

However, other countries are seriously considering the use of border tax adjustments, and the incentive to do so could increase post-2012, depending on the nature of the international agreement.  In its recent proposal for the third phase of the EU ETS (discussed further below), the European Commission proposed that either trade-exposed sectors in the EU should continue to receive allowances free of charge, or an effective carbon equalisation system (i.e., border adjustment measures) should be introduced. 

A further consideration is the technical challenges inherent in implementing border adjustments. If the adjustment applied to imports, depending on how the adjustment mechanism operated, it might be necessary to develop country-specific emission factors for each commodity, and/or monitor how different countries were applying emissions pricing measures.  While this could be technically feasible, it would likely be complex and controversial, and involve substantial transaction costs. 

7.6 WTO Issues Relating to Subsidies

7.6.1 Defining Subsidies under WTO Rules

According to the WTO Agreement on Subsidies and Countervailing Measures (the “SCM Agreement”), a subsidy is deemed to exist where a financial contribution by a government has been made and that financial contribution confers a benefit.  “Financial contributions” can involve a direct transfer of funds (such as a grant or loan), provision of goods or services, or the government foregoing revenue that is otherwise due (such as through a tax rebate).

It is not yet clear whether the allocation of an emissions unit can be deemed a financial contribution. However, as a tradable item it would have the same effect as if a government allocated cash or provided a good and therefore is possible that it may be considered a financial contribution. A benefit simply means that an individual or company is better off than they otherwise would be, the basis for comparison being the marketplace. Further, with the exception of export subsidies, unless a subsidy is specific (that is, that it is targeted at an enterprise, a group of enterprises or a particular industry), it does not fall within the purview of the subsidies rules.

The free allocation of emission units would clearly benefit recipients as they would be receiving a tradable unit in exchange for nothing. Regardless of whether the government had imposed a burden on the recipient of the units prior to allocation, such an allocation would still put the recipient in a better position than if they had not been allocated such a unit.  As it is yet unclear whether a unit allocation could be considered a financial contribution, it would be difficult to conclude whether or not it would constitute a subsidy.  

What is clear however, is that if unit allocations could be considered financial contributions that conferred a benefit, and if such allocations were made to a particular industry or sector (such as the industrial energy and process sectors) such an allocation would constitute a specific subsidy. The same reasoning would apply to rebates in the form of emission units as rebates would also confer a benefit and would be made to particular industries or sectors.  If considered a financial contribution, both therefore, would fall within the WTO rules on subsidies.

Some subsidies are outright prohibited. These include subsidies contingent upon export performance regardless of whether they are specific or not (i.e., export subsidies with some exceptions for agriculture) and subsidies that promote the use of domestic goods over imports.

However, not all subsidies are prohibited under WTO rules.  Most other subsidies are “actionable” subsidies. These are subsidies that cause “adverse effects” to the interests of other WTO Members, for example by displacing their imports into the market of the subsidising Member. Actionable subsidies must be notified to all WTO Members. Where an actionable subsidy causes an unfair advantage that injures another Member country’s industry, nullifies or impairs benefits that that country would otherwise have had, or causes serious prejudice to the interests of that country, it is deemed to have an adverse effect. Members may impose countervailing duties to offset the advantage given by the subsidy and where an actionable subsidy causes significant damage that subsidy may even be open to challenge by taking WTO dispute settlement action.

As New Zealand defines its free allocation mechanism and detailed allocation plans for the NZ ETS, it will need to give regard to the WTO rules around prohibited subsidies. 

Annex:  Overview of the MAF Greenhouse Gas Footprinting Strategy

As part of the Sustainable Land Management and Climate Change Plan of Action, MAF has been working in partnership with primary sector stakeholders to develop a comprehensive strategy for GHG footprinting.  As part of the GHG footprinting strategy, MAF and MFAT have secured New Zealand participation in the development of a standardised methodology for calculating embodied GHG emissions in products and services. This work is being led by the UK Department of Food, Environment and Rural Affairs, with the Carbon Trust and the British Standards Institute. New Zealand’s engagement in this process (supported by MAF’s Expert Working Group) will help ensure that any international ‘rules’ developed for measuring embodied GHG are fair and transparent.

GHG Footprinting Strategy

The proposed strategy seeks to position New Zealand’s land-based primary sectors to be able to respond to significant and increasing pressure by key export markets for information on the GHG-intensity for primary products. It also responds to a growing need in New Zealand for:

• Maintaining proactive involvement in determining the international standards for GHG footprinting of primary products;
• Primary industries being able to measure and validate the GHG footprint of primary products;
• Identifying weaknesses, threats, opportunities and addressing gaps in current information regarding GHG footprinting of primary products and production; and

• Being able to capitalise on the business opportunities for low carbon-intensive products.

The proposed strategy has been developed by Expert Working Group made up of representatives from primary industries, research and government.  The proposed goal of the GHG footprinting strategy is:

New Zealand primary industries can operate in markets with credibility and where necessary, use internationally recognised, transparent and validated GHG footprinting methodologies.

Demands for sustainability credentials will span wider concerns than solely GHG footprinting.  The proposed GHG footprinting strategy will provide a platform for assessing other environmental information demands for New Zealand’s primary products and the need for strategies for environmental performance of the whole supply chain of New Zealand’s primary products.

Sector Methodologies

The strategy includes funding for GHG footprinting studies in specific sectors  (“sector methodologies”) – looking at emissions from the farm right through to the destination port and in some cases even further, to the supermarket shelf.

The methodology developed for a specific industry (e.g. kiwifruit) can then be used to leverage learning to the wider sector (e.g. horticulture). This approach aims to facilitate sectors to measure, manage and (if desired) mitigate GHG emissions across the supply chain.

The development of sector methodologies across a wide range of New Zealand primary sectors is critical in positioning New Zealand at the forefront of international work in this area.  The development of comprehensive methodologies for GHG footprinting for a range of primary products at a sector level will be a world first. 

It will help position New Zealand as an influential leader in developing robust, transparent and pragmatic GHG footprinting methodologies for primary products.

MAF has initially awarded funding for five projects which will represent 68% of New Zealand’s forestry and agricultural exports and 46% of New Zealand total merchandise exports.  The successful projects for the 2007/08 funding round are: Dairy, Lamb Meat, Kiwifruit, Wine and Forestry.

There is a very high-level of interest and support across the primary sectors for this initiative.  It is likely that there will be considerable ongoing interest in the progress of these projects both in New Zealand and internationally, including amongst key international retailers.

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