Retooling the emissions trading scheme to ‘decarbonise’ NZ

May 31, 2017

There are practical ways to change the NZ ETS so it delivers clear and predictable emission price signals. This would ensure that New Zealand’s emitters reduce their greenhouse gases more quickly than is currently happening.

A new paper released today by Motu Economic and Public Policy Research suggests a package of changes to improve the NZ ETS. The proposal emerged from discussions over the past year among diverse cross-sector experts involved in Motu’s ETS Dialogue.

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“Our proposal includes setting a fixed short-term cap on the number of units issued for auctioning and free allocation, putting safeguards in place that limit price risk, and publishing indicative trajectories for caps and price bands. These must be consistent with New Zealand’s targets and will guide longer-term investment,” said Dr Suzi Kerr, a Senior Fellow at Motu and the co-leader of the ETS Dialogue initiative.

There is now no single “international carbon market.” Under current rules for the 2015 Paris Agreement, only governments can buy international emission reductions from other countries. Officials have suggested that purchasing international emission reductions to help meet New Zealand’s 2030 target could cost $3.5-7.5 billion cumulatively over ten years. New Zealand needs to manage this investment well.[1]

“If at some point in the future NZ ETS participants become able to purchase international emission reductions, this should be managed by government,” said Dr Kerr. “This will ensure the integrity of New Zealand’s global contribution, and allow New Zealanders – not other countries’ politicians – to choose our emission reduction pathway.”

“This proposal offers current and future Governments the necessary tools to shape New Zealand’s pathway for reducing emissions, and offers emitters and low-emission investors greater certainty to help them plan for the future,” said Dr Kerr.

“Under the Kyoto carbon market model, New Zealand relied on the international market to drive unit supply and prices in the NZ ETS. The result was heavy use of low-cost overseas units with questionable integrity, and rising domestic emissions. Since New Zealand de-linked from the Kyoto market, NZ ETS participants have had no certainty on what emission prices to expect and how to invest,” said Dr Kerr. “Decision-making is paralysed by uncertainty.”

“The 2015 Paris Agreement has fundamentally changed the framework for both country targets and global carbon markets, and the NZ ETS needs to change accordingly. This package balances the interests and needs of low-emission investors, greenhouse gas emitters and government in the transition to a country that has net zero domestic emissions,” said Catherine Leining, a Motu Policy Fellow, former climate change negotiator and co-leader of the ETS Dialogue.

Another important recommendation is enabling an independent body to provide expert and transparent advice to government on setting unit supply and prices.

Dr Kerr explained, “Our proposal is durable in the long term and much of it is easy to adopt in line with current legislation. We think the best way to govern the ETS is to enable independent technical advice while the government makes the final political decisions concerning the level of ambition for emission reductions and prices,” said Dr Kerr.

The proposed changes can be implemented through a combination of regulation and amendment. Government auctioning of units under a cap could be introduced as early as 18 months from now.

“We hope the proposal attracts cross-party interest and support. We do not think it should be politically contentious. It is essentially the boring technical stuff that will provide a framework for the political decisions to come. We can see the merit in fast-tracking government decisions on these issues to send clear signals for low-emission investment and avoid future stranded assets,” said Dr Kerr.

“While the proposed changes will make the NZ ETS more effective, further government policies will be needed in both ETS and non-ETS sectors to overcome barriers to New Zealand’s low-emission transition.”

Motu led the ETS Dialogue using a unique process that allows stakeholders to work through polarising issues together, build understanding and enable creative solutions to emerge. It does not aim to create consensus among participants, although consensus on some issues is often reached. Participants engaged in their personal capacity.

The group, which included individuals from high-emitting firms, economists, experts from consultancies and research institutions, legal practitioners, NGOs, carbon market traders, Māori business, and policy makers from central and local government, was positive about the ability of the NZ ETS to be adapted to work effectively within new global and domestic policy and market conditions.

The paper “An Effective NZ ETS: Clear Price Signals to Guide Low-Emission Investment” by Suzi Kerr, Catherine Leining, Joanna Silver, Phil Brown, Nigel Brunel, Sandra Cortes-Acosta, Stuart Frazer, Adrian Macey, Guy Salmon, and Paul Young is now available on the Motu website. This research was undertaken through Motu’s programme “Shaping New Zealand’s Low-Emission Future,” which is funded by the Aotearoa Foundation.

[1] Ministry for the Environment. 2016. “Regulatory Impact Statement: Improving alignment of the New Zealand Emissions Trading Scheme with New Zealand’s provisional 2030 emissions reduction target.” Wellington: Ministry for the Environment.