New Zealands ETS All Gases All Sectors Basil

New Zealand’s ETS: All Gases, All Sectors Basil Sharp Department of Economics Energy Centre The University of Auckland New Zealand

NZ’s Kyoto Commitment • From January 2008 NZ liable for emissions above its quota. • Initial assigned amount was fixed at: • 310 Mt CO 2–e tonnes based on estimate of emissions for 1990. • Fixed for CP 1 • Changes in position: • • • December 2005 – deficit 64 Mt CO 2–e May 2006 - deficit 64 Mt CO 2–e June 2007* - deficit 45. 5 Mt CO 2–e May 2008 - deficit 21. 7 Mt CO 2–e April 2009 – surplus 9. 6 Mt CO 2–e *Treasury estimate of liability was $NZ 704 million

Emissions 1990 -2005

NZ Emissions by Gas

What has changed since 2008? Source: http: //www. mfe. govt. nz

Projections

Emissions by Gas

Exports and Imports by SITC For 12 months ended 2008, Exports (fob), Imports (cif), NZ$106

Export Destinations; Import origins For 12 months ended 2008, Exports (fob), Imports (cif), NZ$106

Summary of facts • • • NZ accounts for 0. 2% of world’s GHG emissions Ranked 12 th in world for per capita emissions Open economy => trade relationships important Market and non-market values impacted Sectors of importance to NZ (examples) – Forestry: $3. 2 b exports, carbon sink when growing, employs 22, 500 people. – Agriculture: 52% of exports; 49% GHG emissions

Public debate • Polarised debate: – Follower: theory unproved => wait for uncertainties to be resolved. Risk of exposure to climate change in the future. – Leader: take immediate action. • ETS passed into law late 2008 – Principle “all gases all sectors”

Property Rights • Can assess dimensions along the following lines: – Duration: others things being equal, a longer right is more valuable. – Excludable: allows the owner to align benefits with investment. – Transferable: necessary for trade, create derivatives e. g. lease – Quality: security of ownership

Property Rights • Economic value & property rights: Transferable $ Value of property rights A $ Value of property rights B Excludable Duration Quality

Setting initial allocation • Options: – Grand parenting – has been used in NZ e. g. N polluting rights on basis of existing emissions; catch history in seafood industry. – Auction: has been used e. g. radio spectrum. – Sharing schemes: e. g. equal share of rights. • ETS as it stands allocates some permits free, others to be auctioned.

Timeline for entry into NZ ETS Forestry 2008 Stationary energy Industrial 2010 Liquid fossil fuels 2011 Agriculture waste 2013

Point of Obligation (regulation) • Criteria considered: costs, coverage, feasibility & incentives – Energy: 50 – Industrial processors: 35 – Forestry at least 1, 000 owners of pre-1990 forests – Agriculture: upstream fertiliser producers 10 firms or meat/dairy processors 25 firms – Solid waste: around 60.

Definition of Obligation • Choice: – absolute unit e. g. t CO 2 -e – Intensity based unit: e. g. t CO 2 -e per unit of activity. Set benchmark say X units per tonne (or $ value) of output; if (not) exceeded then (don’t) have to surrender units. – Share of cap: e. g. set cap at 1990 level and emitters have a share of cap; if exceeded then have to acquire units.

NZ Adopted absolute-based obligation • Absolute based because: – Greater certainty – Simple – Emitters face same cost at the margin for growth in emissions. • Full obligation in long run: surrender one emission unit for each unit of emission. • Progressive obligations may be used when introducing some sectors into the programme.

Units of Trade • Assigned Amount Units (AAUs) freely allocated to match limitation commitment. Tradable among Annex B countries. • Certified Emission Reductions (CERs) generated by Clean Development Mechanism (CDM) • Emission Reduction Units (ERUs) generated by Joint Implementation projects (JI) • Removal Units (RMUs) awarded to Annex B countries on basis of net removals by sinks in land use, land use change and forestry. NZ will receive these only after the second commitment phase. • NZ Unit = NZU = Kyoto unit

Exposed to International Prices • Open market: could limit trade to NZ interests => thin market. • Decision: participants in NZ ETS surrender Kyoto units => long run goal is to expose NZ economy to the international price of emissions – No price interventions e. g. price floor as in China • Transaction costs may bias trade among domestic players. • Market linking: Bi-lateral arrangements e. g. NZ and Australia

Forestry • Kyoto recognises it as a sink: – If planted at or after 1990 – earn sink credits. – Net = afforestation less harvesting. • Indigenous forests (mainly conservation estate) – Potential deforestation 2008 -2012 creates liability – Inclusion not determined yet. • Pre-1990 exotic forest: government meets the cost of deforestation emissions during CP 1. After CP 1 there will be a limited amount (~34 Mt) of free allocation. • Post-1989 exotic forest: landowners have a choice; enter scheme and be responsible for net change or government assumes responsibility for those not in the scheme, and keeps any credits earned.

Industrial (non-energy) emissions • • • Steel, cement, glass production. Represent 5 -6% of emissions in 2005. Point of obligation: producers level Introduce 2010 Some free allocation units

Transport and Energy • Transport: – Up stream point of obligation i. e. fuel suppliers – five oil companies – Was to be introduced 2010 – delayed – No free allocation to transport fuel. • Stationary energy: – Coal, natural gas, geothermal – Point of obligation uncertain – importer, generator, wholesaler, . . – Introduce 2010 – No free allocation to stationary energy.

Agriculture: Emissions 2005

Agriculture • • • Globally 12% GHGs from agriculture, 49% in NZ. Fertiliser, livestock Emits: NO 2 ‘ CH 4 Entry: 2013 Point of obligation: – Nitrogenous fertiliser: importers and producers – Livestock: prefer processors, (farmers, sector bodies) – Free allocation: 90% of 2005 levels at entry, declining to zero through 2025

Summary of ETS • Participants to hold emission units that match their emission levels. • NZ ETS will include all major sectors, six GHGs, phased in through 2013. • Devolve credits/liabilities that reflect the participant’s net position. • One emission unit = 1 metric tonne of CO 2–e over one year. • NZU = primary domestic unit of trade = Kyoto unit during first commitment period (CP 1). • Sell/buy from international markets. • Binding consequences for non-compliance e. g. penalties • Potential for off-set mechanisms. • Will be adaptable to future international frameworks and will function after CP 1 even if there is a break between CP 1 and next stage.

Concluding Comments • Government keen to contribute to international cooperation aimed at reduces GHG emissions and associated impacts of climate change both globally and locally. • Incentive to transition to low emitting economy, offering trade advantages, business opportunities. • NZ ETS comprehensive & appears to have least cost attribute • Adjustment costs involved, investment more aligned with “low carbon” economy. • Possible adverse impact on domestic investment • Economic impact: mixed views • Competition from non-Annex B countries, lower cost alternative to NZ products (“leakage”) • Legislation being revisited by new government