The On-again Emissions Reduction Scheme – Review Time

New Zealand’s on-again off-again emissions reduction scheme appears to be on again. Submissions on review of the emissions trading scheme (ETS) close on February 13, with major issues likely to be:
• The way in which free credits are allocated to heavy emitters.
• The desirability of capped system versus an intensity-based scheme.
• The eligibility of new industry entrants to qualify for free credits.
• The ability to change land use without incurring penalties under the ETS
• The impact the scheme could have on Treaty of Waitangi settlements, especially the Ngai Tahu settlement.
• The timetable for introduction of the scheme to various sectors, especially ­agriculture.
• The world economic situation.
The ETS was passed by the Labour-led government in September after several false starts, including an initial plan for carbon tax.
The National Party supported an ETS in principle as way in which to use market signals to encourage emissions reductions, but did not vote for the Labour government’s scheme, promising instead to amend the scheme if it became government.
However, after winning the November election and negotiating confidence-and-supply agreement with the Act Party, which opposes an ETS and questions whether climate change is real, National announced that the review would go much further than expected. The review would include reconsideration of carbon tax instead of an ETS, the new Government said, and could even include re-examination of the validity of the scheme behind climate change.
The announcement shocked markets, prompting the immediate cancellation of $125-million forestry investment, and major world carbon market player indefinitely postponed plans to set up in New Zealand. Trading in NZUs (New Zealand Units) ground to halt.
Amid strong calls from business leaders for certainty, in December the Government moved to calm the waters by saying that it will have an ETS, and by setting relatively stringent terms of reference for the ­special select committee set up to review the scheme.
That committee will be chaired by United Future leader Peter Dunne, who has said that submissions should focus on the details of an ETS, and that he won’t hear from people wanting to argue about whether climate change is real.
The Government has also dropped plans to suspend the current ETS during the review, with Prime Minister John Key saying that because the review will be finished before the stationary energy and industrial processes sectors are due to come into the scheme on January 1 next year, there is no need for suspension.
No submissions had been received by the clerk’s office as NZ Management went to press, but it is understood that many businesses and lobby groups are intending to lodge submissions.
PricewaterhouseCoopers partner and climate change team leader Julia Hoare says that anyone who feels there are issues in the ETS for his or her business should be making submission. Sitting back and hoping the scheme will be ditched altogether is not good idea, she says.
“It seems most likely that we will have something, so trying to be constructive and effect solution that will work is sensible thing to be doing,” she said.
She says the scheduled introduction of stationary energy and industry sectors into the scheme from January 1 next year will involve lot of work for the companies concerned, and most are already well under way in setting up their carbon reporting systems. But with the review of the ETS yet to get under way, and the amended legislation not expected to be in place until September 30, there will be little time for businesses in those sectors to prepare.
“It’s going to be close to the wire,” Hoare said. “Businesses need to get their heads around the different regulations that have been released. We might well see some changes, but it’s worthwhile thinking about the regulations now.”
Among the issues likely to be canvassed in the review are:

The allocation of free credits
The current scheme provides for heavy-emitting industries to be provided with free carbon units to offset their emissions, to help them transition to the carbon economy. The idea is to protect New Zealand industries from unfair competition from companies in countries which are not yet operating an emissions trading scheme. Under the current scheme, officials will draw up recommendations on the way in which the pool of credits will be shared among emitters, with Parliament to have final approval.

Intensity versus capped system
One of the hottest issues for big industries such as cement-makers with plans for expansion. It’s really question of whether business is penalised for the total ‘amount’ of emissions, or for the ‘rate’ at which it emits greenhouse gases. Under capped system, company that spends money on an efficient new plant emitting GHGs at lower rate per unit, but boosts production at the same time so that the total output of emissions increases, will face penalties. Supporters of an intensity-based system say that it would encourage businesses to invest in efficient new plant, and prevent the export of New Zealand jobs to countries with inefficient plant and no ETS. Under the Kyoto Protocol, however, the Government would have to pay for the increase in New Zealand’s total emissions.

The grandfathering of free credits
Under the current scheme, free credits are available only to existing emitters. The argument is that new entrants should be adopting clean technologies rather than being subsidised into dirty old technologies. The counter-argument is that denying new entrants access to the pool of free credits will effectively prevent new companies from starting up in New Zealand.

Land use
Under the Kyoto Protocol, anyone clearing forest to use the land for something else has to surrender credits to cover the carbon lost from the trees. Many landowners say, however, they should be able to offset that debit by replanting forest elsewhere without penalty, allowing landowners to determine the most appropriate use for land without reducing the country’s overall forest level. The problem is that under the Kyoto Protocol, you cannot claim credits for forest planted elsewhere to offset land clearance. If New Zealand landowners were to be allowed to do this, the Government would have to pay the difference between the debit for the cleared land (about 800 tonnes/hectare) and the credits for the planted land (about three tonnes/hectare). New Zealand’s best bet is to get the rules changed for the next commitment period. The New Zealand Forest Owners Association had some success in getting the discussion onto the agenda at the Poznan talks late last year, but there is long way to go.

Treaty of Waitangi
A flow-on from the land-use issue. Several iwi, including Ngai Tahu, say the ETS will wipe millions off the value of their settlements because they will be penalised if they go ahead with plans to convert forest land to pasture. They argue that the Government knew – or at least should have known – of this likely impact of the Kyoto Protocol at the time of the treaty settlements.

Who comes in, and when. At the moment, the timetable is: forestry, January 2008: stationary energy and industrial processes (excluding synthetic gases), January 10, 2010; liquid fossil fuels, January 1, 2011; synthetic gases, agriculture and waste, January 1, 2013. The forestry sector is already covered and, in theory, could be selling credits, but without clear signals about when other sectors will be covered there is no domestic market (sales of NZUs were expected to be well under way by now, but brokers say all interest evaporated with the post-election announcement of the review). The biggest sticking point will be agriculture; while some farming leaders have been keen to steal march on the pack and see advantages in “carbon transparency” for New Zealand export products, others are reluctant to get ahead of Australia, which is not com

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