2012 Amendments to the New Zealand Emissions Trading Scheme (NZ ETS): Questions and answers

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Government's announced changes to the NZ ETS

Overview of the 2012 NZ ETS amendments

The main changes are:

  • to extend transitional measures designed to reduce the cost impacts of the NZ ETS beyond 2012. In particular, these will extend the ability of many of those with NZ ETS obligations to surrender one emissions unit for every two tonnes of emissions (the one-for-two surrender obligation). In addition, participants will also have the choice to meet their obligations by paying the Government $25 per tonne of emissions (the fixed price option)
  • to remove the start date for surrender obligations for biological emissions from agriculture The Government has indicated that biological emissions from agriculture will only incur surrender obligations if there are technologies available to reduce these emissions and our international competitors are taking sufficient action on their emissions.  Agricultural producers are still required to report on their emissions, which they have been doing since the beginning of this year. 
  • to introduce 'offsetting' as an option for pre-1990 forests, giving forest landowners the flexibility to convert their land to a better use, but avoid NZ ETS deforestation costs by planting a carbon-equivalent area of forest elsewhere
  • pre-1990 landowners will continue to receive their allocation of emissions units in full. In recognition of the benefits offered by offsetting, pre-1990 forest landowners who take up offsetting will need to surrender the value of the second tranche of the allocation for the land being offset
  • to introduce a power to allow the Government to increase the supply of New Zealand Units (NZUs), the primary emissions unit used within the NZ ETS, through an auction and within an overall cap on the number of NZUs auctioned and allocated

The Government made these changes because now is not the right time, in an uncertain economic environment, to put more costs on households and businesses.

For the most part, the settings for NZ ETS participants will remain as they are.

As a result of the changes, the NZ ETS participants from the liquid fossil fuel, stationary energy, industrial process, synthetic greenhouse gas (SGG) and waste sectors will face lower costs from the NZ ETS or the SGG levy than they would otherwise have done. This is mainly due to the fact that these participants will continue to have reduced surrender obligations.

Participants will also have more certainty about the price of carbon as the $25 price cap will be extended.

Forest landowners will benefit from a number of the changes, including the introduction of pre-1990 forestry offsetting.

Auctioning will influence the supply of NZUs, reducing the need for NZ ETS participants to purchase international units.

The compliance and administrative costs for the SGG sector will be lower because of changes such as the introduction of the SGG levy.

Under the revised NZ ETS, the carbon price in New Zealand will continue to reflect international carbon prices, although the maintenance of the $25 fixed price option will ensure  the carbon price will not exceed $25 per emission unit in New Zealand.

 

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Transition phase and allocation

The transitional measures are extended beyond 2012 to mitigate the cost impacts of the NZ ETS. This means that:

  • NZ ETS participants from non-forestry sectors will continue to surrender only one emissions unit for every two tonnes of emissions (the 'one for two' surrender obligation) beyond 2012
  • all NZ ETS participants can meet their obligations by paying the Government $25 for each NZU (the fixed price option) beyond 2012
  • while the fixed price option remains in place, the current ban on exports of NZUs from non-forestry sectors will also continue.

The fixed price option will apply to all NZ ETS participants, so long as it remains in force.

The extension of the ‘one for two’ surrender obligation will apply to the liquid fossil fuels, stationary energy and industrial processes sectors. It will also apply to the waste and synthetic greenhouse gas (SGG) sectors, including the SGG levy, when their obligations begin in 2013.

The revised legislation does not specify an end date for the transition phase. This means that the transition phase will continue until at least the next NZ ETS review, which the Government has signalled will take place in 2015.

The extension of the one-for-two means that allocation to emissions-intensive, trade-exposed activities (commonly known as industrial allocation) will continue to be provided at the same level as they receive currently.

Since allocation is proportional to the level of surrender obligation assumed by the non-forestry sectors, the entitlement will continue to be half of the amount that would have been allocated if these sectors had assumed full surrender obligations. Should agriculture enter the NZ ETS in the future, the proportionality rule will also apply to agricultural allocation.

The proportionality rule also applies to the entitlement to receive NZUs for non-forestry removal activities. This means that participants engaging in non-forestry removal activities will continue to receive only one NZU for every two tonnes of removals.

The phase-out of allocation to emissions-intensive, trade-exposed activities (commonly known as industrial allocation) is suspended until the NZ ETS participants face full surrender obligations.

Two additional emissions sources are intended to be taken into account in determining eligibility for allocation and in calculating allocative baselines. For all activities, emissions from stationary energy use of liquid fossil fuels (LFF) will be taken into account.

For eligible industrial allocation activities that use coal as an energy source, fugitive coal seam methane (FCSM) emissions will be taken into account in determining eligibility for allocation, and in calculating allocative baselines.

Previously, the emissions sources eligible for industrial allocation were restricted to the direct use of coal, natural gas, used/waste oil and geothermal fluid and industrial process emissions.

The addition of two emissions sources means that activities that are currently classed as moderately emissions-intensive may be able to be considered as highly emissions-intensive. The Government will continue to consider whether existing activities are eligible for industrial allocation, based on the thresholds stated in the Climate Change Response Act 2002. 

To align with Australia, the Government intends to reclassify the manufacture of steel from cold ferrous feed as a highly emissions-intensive, trade-exposed activity for the purpose of industrial allocation. This activity is currently classed as moderately emissions intensive. This means that the level of assistance for the manufacture of steel from cold ferrous feed will be raised from 60 per cent to 90 per cent, once the Climate Change (Eligible Industrial Activities) Regulations 2010 is updated.

The Government does not intend to change the thresholds for the allocation for emissions-intensive, trade-exposed activities (commonly known as industrial allocation). However, the Government will continue to consider whether new activities are eligible for industrial allocation, based on the thresholds stated in the Climate Change Response Act 2002. If you think your activity might be eligible for industrial allocation, please see New activities for industrial allocation.

 

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Global warming potentials

GWPs identify the relative warming impact of each greenhouse gas compared with carbon dioxide (CO2).   Scientists use GWPs to enable non-CO2 gases to be ‘converted’ into CO2-equivalent quantities for common accounting and reporting purposes.

The treatment of GWPs in the NZ ETS and under the proposed SGG levy is updated to reflect the latest international reporting requirements. This means that from 2013, the GWP value of methane relative to carbon dioxide will increase from 21 to 25, while the relative value of nitrous oxide will decrease from 310 to 298. The GWPs for synthetic greenhouse gases will also be updated.

As part of its international obligations, New Zealand reports on its greenhouse gas emissions. Currently, this reporting uses the GWPs published in the Second Assessment Report of the Intergovernmental Panel on Climate Change (IPCC).

In 2011, New Zealand and other countries agreed that from 1 January 2013, a set of updated GWPs would be used for the international reporting and accounting of greenhouse gases. These GWPs s arise from the IPCC Fourth Assessment Report. The change to the GWPs used in the NZ ETS reflects the change to our international reporting requirements.

This change will increase the surrender obligations for some NZ ETS participants, primarily for waste landfill operators and synthetic greenhouse gas importers.

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Future NZ ETS reviews

The Minister for Climate Change Issues has a discretionary power to initiate a review of the operation and effectiveness of the NZ ETS at any time, by any method. The Government has indicated the next NZ ETS review will occur in 2015 and will include consideration of progress made in completing a new comprehensive international agreement, as mandated in Durban.

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Agriculture sector

The start date for surrender obligations for biological emissions from agriculture is no longer specified in the legislation. The Government has decided that biological emissions from agriculture will have surrender obligations in the NZ ETS only if:

  • there are economically viable and practical technologies for farmers to reduce emissions
  • our trading partners make more progress on tackling their emissions in general.

The Government proposes to review the progress towards these conditions in 2015.

Given that no other country in the world has a price on biological emissions from agriculture, and that as yet, there are no economically viable and practical technologies for farmers to reduce their emissions, the Government has decided now is not the time to introduce surrender obligations for New Zealand’s agricultural sector.

It is important to note that farmers already face costs under the NZ ETS due to the inclusion of stationary energy, liquid fuels and industrial processes. This includes charges relating to farm working expenses from petrol, diesel and electricity, as well as the transport and processing of farm products.

The Government does not want to impose further costs on the agriculture sector at this time.

Yes. 

Processors, mainly milk and meat processors, currently participate in the ETS as they must report emissions from 1 January 2012. The mandatory reporting of emissions is important and will continue at the processor level.

However, egg producers will no longer have mandatory reporting obligations.

No. However, the Government intends to move the point of obligation to farm level as soon as practicable and will continue to explore how this can be done.

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Forestry

Pre-1990 forestry offsetting

Offsetting allows pre-1990 forest landowners to deforest their land and convert to another land use without incurring deforestation liabilities, as long as they plant an equivalent new forest elsewhere.

The Government is introducing offsetting in the NZ ETS to provide greater flexibility for pre-1990 forest landowners wanting to convert to another higher value land-use. Landowners of pre-1990 forest land currently face a liability if they deforest, even if they replant elsewhere.

Offsetting will be an option for pre-1990 forest landowners. Pre-1990 forests are areas that were already established in forest species as at 31 December 1989 and were in exotic forest at 31 December 2007.

Pre-1990 forests harvested before 2013 are eligible for offsetting provided these areas are not already considered to be deforested (ie, already converted to other land use or fallow for over four years).

The main requirements of offsetting are:

  • the new forest area established must be at least the same area and also achieve the same carbon stocks as the harvested land within a specified timeframe
  • the new forest must be established through direct planting (ie, not natural regeneration)
  • both the harvested land and the new forest area will need to be mapped. The new forest will be monitored.

 Pre-1990 land that has been deforested with offsetting and replanted is eligible to earn credits.

Regulations including detailed rules for offsetting are being developed. Decisions are expected in December 2012.

Offsetting is expected to be available from 2013. The exact time when forest owners will be able to apply to take up the offsetting option will be confirmed at a later date.

Second tranche of the pre-1990 forestry allocation

Landowners will continue to receive their second tranche allocation of New Zealand Units (NZUs) in full. Where landowners have approval to take up offsetting, they will be required to surrender or repay NZUs equivalent to those allocated as part of the second tranche for the land that is being offset.

Yes. The transfer of the second tranche to all landowners who have received final determinations will go ahead during 2013. However, once landowners have approval to take up offsetting, they will be required to surrender or repay NZUs equivalent to those allocated as part of the second tranche.

Landowners who take up offsetting must repay or surrender NZUs equivalent to those allocated as part of the second tranche, at the time their offsetting application is approved.

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Synthetic greenhouse gases

For further information on the Government's intended changes to the synthetic greenhouse gases sector, including questions & answers visit our Synthetic greenhouse gases in the ETS web page.

Government's announced changes to the ETS

Last updated: 16 November 2012