Questions and answers about amendments to the New Zealand Emissions Trading Scheme

• The stationary energy, industrial processes (SEIP) and liquid fossil fuels (LFF) sectors will now enter the ETS on 1 July 2010. Monitoring and reporting requirements for these sectors will start on 1 January 2010.
• Agriculture will now enter the scheme on 1 January 2015. Voluntary reporting begins on 1 January 2011 and mandatory reporting begins on 1 January 2012.
• A transition phase will operate until December 2012. The transition phase will be implemented through:
• requiring mandatory participants to surrender only one emission unit for every two tonnes of CO₂-e emitted
• an option for participants to pay a fixed price of $25 per emission unit.
• Exporting New Zealand units (NZUs) will not be permitted during the transition phase. However, this will not apply to forestry-related units. There will be no restrictions on banking units during the transition phase.
• Allocation of emission units to emissions-intensive, trade-exposed industry will be provided on an intensity basis. The number of units allocated to emissions-intensive, trade-exposed industry will be reduced by 50 per cent during the transition phase.
• The level of freely allocated emission units will initially phase out at a rate of 1.3 per cent a year beginning in 2013. This phase-out will be reconsidered in a five-yearly review of free allocation. The first review will happen in 2011. Any significant changes to free allocation will require a five-year notice period.
• Consistent with allocation to emissions-intensive, trade-exposed industry, allocation to agriculture will be provided on an intensity basis and will phase out at a rate of 1.3 per cent a year beginning in 2016.
• A domestic emissions reduction target can be set by regulations.
• Processing applications for allocation to industry and agriculture will be removed from ministerial control. In the longer term, the Government’s intention is to transfer administrative functions associated with the ETS to the Environmental Protection Authority.
• A Treaty of Waitangi clause which recognises the Crown’s responsibility under the Treaty in terms of consultation and the five-yearly review.

• An extra 8000 houses owned by low-income households to be insulated between now and 2013.
• Continued funding for the Enviroschools programme.
• Further exploration of Crown-iwi partnerships to encourage afforestation.
• A National Policy Statement on Biodiversity.
• New clauses in the Act to recognise the Treaty of Waitangi and require consultation with Māori on issues of importance to them.
• A review of the Permanent Forest Sinks Initiative.
• Increased free allocation of emission units to fishing quota owners during the transition phase.
• A special advisory group on agriculture.
• Working together on two research initiatives on agriculture, the Primary Growth Partnership and a Domestic Agricultural Research Centre.
• Five iwi able to farm trees on 35,000 hectares of low conservation value land managed by the Department of Conservation.
• Māori representation in international negotiations.
• The Government to consult with the Māori Party on the National Environmental Standard on sea level rise and the National Policy Statement on renewable energy.
• The Government to consult with the Māori Party to consult on any new proposals for climate change complementary measures, following a stock-take in 2010.

Firms will be eligible to receive allocation if they carry out an eligible industrial activity prescribed in regulations. Allocation will be provided on an output intensity basis, in other words allocation will vary with output.

The level of assistance will be 60 per cent for moderately emissions-intensive activities and 90 per cent for highly emissions-intensive activities and will phase out at 1.3 per cent a year from 2013.

Allocation for a specific activity will be based on the industry average emissions per unit of output and will be uncapped, meaning that there is no set limit on the number of units that may be allocated.

Given the time taken to conduct the special select committee review of the emissions trading scheme and related matters, the entry date to the scheme of 1 January 2010 for the stationary energy and industrial processes sectors was not achievable. The entry date for these sectors has been pushed back by 6 months to allow the necessary administrative time to bring them into the emissions trading scheme. Mandatory reporting for these sectors will start on 1 January 2010, as before.

The entry date for the liquid fossil fuels sector has been brought forward to align it with the date for the stationary energy and industrial processes sectors, which is administratively easier. This has also been done for fiscal reasons.

Amendments have also been made to improve the workability of the ETS and to take account of the global economic recession.

Three factors, as well as fiscal considerations, influenced the decision to bring transport fuels forward by 6 months to July 2010.

First, transport emissions have increased 72 per cent from 1990, the second largest increase after electricity. The Government wants to get a price signal as soon as possible to start influencing decisions over the vehicles people choose, the forms of transport they choose to use, and technology and behaviour to improve energy efficiency.

Secondly, introducing liquid fossil fuels to the ETS is administratively straightforward and can be done by 1 July 2010.

Thirdly, it made sense to introduce to the ETS the stationary energy, industrial processes and transport sectors, which are all sources of CO₂ pollution, at the same time.

The previous Government proposed that the transport sector enter the ETS first on 1 January 2009, but deferred this to 1 January 2011 in response to high fuel prices that have since subsided.

A number of factors influenced this decision. Prominent among these were that the technology available for reducing emissions in the agriculture sector is limited and the Government wants to allow sufficient time for agricultural research to show benefits.

The Government remains of a view that agriculture should be part of an ETS, but is being more realistic about how challenging this job will be. It is also concerned about the costs to the agriculture sector.

The changes align the approach to allocation of emission units more closely with that taken by our main trading partners, including Australia. If an activity that is eligible or being considered for eligibility for free allocation in Australia is carried out in New Zealand, it can be made eligible in New Zealand using the same activity description and allocation baseline, adjusted to take account of the different sources of electricity in New Zealand. This allows us to avoid duplication of the extensive analysis already undertaken in Australia and deliver free allocation of emissions units to at-risk firms faster.

The ETS has been amended to reduce the costs to households and the impact on jobs while ensuring New Zealand takes a responsible approach to the global problem of greenhouse gas pollution and climate change. It provides incentives for industry to reduce emissions without encouraging an exodus of industry and their skilled staff overseas. To ease the transition for firms and households, a progressive obligation to surrender one unit for every two tonnes of emissions and a $25 fixed-price option apply during the first two and half years of the scheme.  

Electricity would have increased in price by 10 per cent (2c/kWh) under the original legislation, but the changes halve that to 5 per cent (1c/kWh) during the transition phase.

Petrol and diesel would have increased in price by 7c/L but the changes halve that to 3.5c/L during the transition phase.

The costs for the average household are expected to reduce from $330 per year to $165 per year during the transition phase.

The savings from the changes may be greater than this if the price of carbon exceeds $25 due to the fixed-price option for emission units.

Post-1989 forests are eligible to earn carbon credits from 1 January 2008, but there is currently no domestic market as no emitting sector requiring units will enter the scheme until 1 July 2010. Finalising sector obligations will create a market and income stream and generate interest in further forest plantings. Foresters will have options to sell units internationally or bank them so will not be overly disadvantaged by the fixed-price option on emission units.

Pre-1990 forests (and post-1989 forests whose owners choose to enter the scheme) incur deforestation liabilities for harvesting and not replanting. These are unaffected by the changes except in having access to the $25 fixed-price option. Allocations for these forest owners will proceed in 2010 and units will be bankable and able to be sold internationally.

No change has been made to the provisions of the Act for offsetting in Commitment Period 1 of the Kyoto Protocol due to the financial risks to the Government and the economy. If international agreements change the rules in Commitment Period 2, that would be reflected in the New Zealand legislation.

There are a number of other changes in the Act detailed in the Guide to Forestry in the Emissions Trading Scheme which is available at www.maf.govt.nz/sustainable-forestry.

Industry benefits from the transitional phase with a 50 per cent obligation during Commitment Period 1 of the Kyoto Protocol and the fixed-price option which provides increased certainty. The sector also gains from the 6-month delay in their entry to the scheme.

The changes in allocation support for trade-exposed, emissions-intensive industry will encourage increased efficiency without penalising production increases. The phase-out changes will give industry confidence that they are not expected to bear costs greater than similar developed countries, particularly Australia.

The fishing industry benefits from the 50 per cent obligation that will halve the cost impact of the ETS. The increase in allocation support from 50 per cent to 90 per cent during Commitment Period 1 of the Kyoto Protocol will also aid the transition to paying the full price for carbon emissions.

Free allocation will be provided to quota owners in the Quota Management System, rather than registered fishing vessel operators. This will ensure the owners of the assets whose value is being impacted will receive compensation. Quota owners will receive free allocation in proportion to the amount of quota weight equivalent that they own.

The Act also specifies the number of emission units that will be allocated for free to the fishing sector – 700,000 – which will provide clarity to those who will receive assistance.

The sector entry date has been pushed back by two years and the allocation of emission units will be done on an intensity rather than an absolute basis, both of which will reduce the impacts of the ETS on the agriculture sector.

Agriculture will face the impact of increased prices for fuel, industrial processes, electricity and energy from 1 July 2010, but these will be reduced with the changes. The cost of emissions for farmers will depend on a range of factors including the size of the farm, the farm type and the intensity of operations.

As in the original legislation, participants may choose to voluntarily report their emissions from 1 January 2011, and must report their emissions from 1 January 2012.

Regulations must be made for each activity eligible to receive an allocation of emission units. The process for developing regulations will depend on the basis on which regulations are developed. There are two potential ‘tracks’ for developing regulations: an Australian and a New Zealand track.

The Australian track can operate where activities have been defined as emissions-intensive and trade-exposed in Australia. Under the Australian track, the first step will be to identify which activities defined as emissions-intensive and trade-exposed in Australia are carried out in New Zealand. The Government will consult on relevant activity descriptions and allocation baselines before making regulations. 

The New Zealand track initially requires identifying activities likely to meet legislated eligibility requirements. Once potentially eligible activities have been identified, specific activity descriptions will be developed. The Government will then request emissions and revenue data from firms carrying out those activities, which will be used to determine eligibility and calculate allocation baselines for including in regulations.

Processes for both the Australian and New Zealand tracks will start with the publication of a consultation paper in December, which will also outline the process in more detail.

Industrial allocation is focused on providing assistance to the parts of the economy most heavily impacted by the ETS. Industrial allocation will be provided on the basis of ‘activities’, not on the basis of firms, facilities and sectors. An ‘activity’ consists of the physical or chemical transformation of inputs into a given set of outputs (eg, the chemical transformation of hydrocarbons into methanol, or the physical and chemical transformation of silicon dioxide to produce glass containers). 

Firms carrying out activities determined to be either moderately or highly emissions intensive will be able to apply for an allocation of emission units for the emissions associated with those activities. Regulations will specify which activities are eligible for free allocation, and how many emission units will be allocated for production from each activity.

From 1 July 2010 to 31 December 2012 a progressive obligation to surrender one emission unit for every two tonnes of emissions and a $25 fixed price for an emission unit applies. This provides some relief for businesses facing a price on emissions for the first time. Free allocation to emissions-intensive, trade-exposed industry will be provided on an intensity basis. The number of units allocated to emissions-intensive, trade-exposed industry will be reduced by 50 per cent during the transition phase when the progressive obligation is in place.

Yes.

The ETS will be reviewed every five years, as stipulated in the original Act. The first review will be undertaken in 2011. Features of the ETS that will be covered by reviews include:

• the effectiveness of the scheme’s operation
• the impact of post-2012 international agreements
• links with other emissions trading schemes, including the Australian Carbon Pollution Reduction Scheme
• allocation of emission units to industry (eg, the phase-out rate).