In emissions trading systems, tradable emissions units issued by the government are usually sold at auction or given out for free. In the New Zealand Emissions Trading Scheme (NZ ETS), free allocation is currently given to industrial producers who are emissions intensive or trade exposed.
Industrial free allocation can serve a useful purpose: preventing domestic production and associated emissions from shifting offshore to jurisdictions with less ambitious climate change policies and less efficient production. However, it also poses high costs to Kiwi taxpayers, could make it harder to meet our 2050 climate target, and raises fairness issues across sectors. The government has collected evidence of overallocation of free units which could give windfall gains to some producers.
This new Motu paper examines a range of options for reforming industrial free allocation: changing the eligibility criteria or calculation methodology, substituting alternative measures, or accepting and managing emissions leakage. This paper does not make specific reform design recommendations as further research is needed to evaluate the merits of these options.
This research suggests the Government should consider if the public and private benefits of maintaining and improving industrial free allocation are worth the cost and complexity. Ultimately, any future provision of industrial free allocation should be used to help – not block – the transition to an economy that rewards low-emission innovation.
The paper presents the views of the authors and not the programme funder or He Pou a Rangi New Zealand Climate Change Commission.
21-13 Rontard, Benjamin and Catherine Leining. 2021. "Future Options for Industrial Free Allocation in the NZ ETS". Motu Working Paper 21-13.