Towards emissions trading: New Zealands experience

1
Towards emissions trading New Zealands
experience

• Tim Denne
• Director
• Covec Ltd
• Auckland, NZ

2
Kyoto Protocol I

• Starting position national assigned amounts
• They are not targets
• There is one overall cap

3
Kyoto Protocol II

• Countries can exchange parts of assigned amount
  and buy from countries outside the cap
• Individual countriesare not capped

Developing Countries - Non Annex I
4
Emission profiles
New Zealand
Australia
LULUCF is net negative
5
NZs net emissions projections
6
NZ has high costs of emission reduction because
of its profile
Some energy efficiency and fuel
switching/renewables measures in A B Transport
and agriculture emission reductions likely to be
largely in D Allowance purchases (area C) needed
to cover growth in transport and agriculture and
some energy
7
NZ Emissions Trading System

• Objectives
• Some emission reductions in NZ (below business
  as usual)
• Compliance with Kyoto and later agreements
• Least cost in the long term
• In other words least cost compliance with Kyoto

8
Least cost means ...

• All emission sources face the international price
  they then have the incentive to reduce
  emissions if they can for less than that price
• A cap and trade scheme that mirrors the Kyoto
  Protocolmarket is open (easy access to all Kyoto
  units) liquid (its easy to buy sell)
• Transaction costs are lowfor market participants
  and government

9
Key ETS design features I

• Those consistent with least cost
• All gases CO2, CH4, N2O etc
• All sectors industrial, transport, agriculture,
  forestry, waste
• Upstream liability (carbon introducers) and
  therefore few participants (c200)
• Few constraints as possible on international
  purchases (but no nukes!)

10
Key ETS design features II

• Other
• Phase in all sources in by 2013
• Unit of trade NZ Unit (NZU fully backed by
  Kyoto units)
• Some protection to industry, forestry via free
  allocation
• But NZ does not have enough units to put any
  additional units on the market

11
Timetable for introduction
12
Forestry Kyoto treatment

• Pre-1990 forests
• Felling is treated as an immediate emission
• Full liability applies (c800 t CO2/ha) unless
  land replanted
• Cannot transfer between sites, eg cant fell one
  site and plant another
• Post-1989 forests
• Net change in carbon stocks measured to estimate
  absorption/emissions
• NZ government does not receive Removal Units
  (RMUs) until some time after 2012

13
Forestry under ETS

• Entry 1st Jan 2008
• Obligated participants landowners
• Liability for pre-1990 forests
• Can opt out if small
• Voluntary entry for post-1989 forests

14
Post-1989 forests

• Post-1989 forests can join voluntarily (18 months
  to decide). They can claim credits from
  absorption but take on a liability for emissions
• Will be awarded NZUs

15
Forestry (Pre-1990)

• Liability for emissions must hold NZUs if
  deforesting/changing land use
• Can opt out if landholdings lt50ha
• Some free allocation of NZUs based on
  historical rates of deforestation

16
Liquid fuels

• Enter 1st Jan 2009
• Obligated parties are oil companies importers
  of product removals from refinery
• Some potential for opt-in for large users (Air
  New Zealand)
• No free allocation must purchase all they need
  (government not making any available)

17
Stationary Energy Industrial Processes

• Entry 1st Jan 2010
• Obligated parties introducers of carbon (fuel
  importers, coal mines, gas producers, geothermal
  users)
• Some potential for opt-in (eg electricity)
• Some free allocation to firms that are trade
  exposed (cannot pass on costs)
• Industrial processes
• Energy downstream energy users

18
Agriculture

• Entry delayed until 2013
• Point of obligation
• Sale of nitrogenous fertilisers and EITHER
• Processing of meat dairy products OR
• Farming activity
• Some free allocation, as for industry
• Waste also included in 2013

19
Free Allocation

• Free allocation separate from points of
  obligation
• No free allocation to firms that could pass the
  costs on, so no free allocation to
• Liquid fuels (transport)
• Electricity
• Eligible firms
• Stationary energy and industrial process
  emissions electricity use
• Agriculture
• Forestry - deforestation

20
Free allocation - reasons

• Long-term intent to move towards zero free
  allocation on efficiency grounds
• In transition, reasons for free allocation are
• Regrets the rules may change or others take on
  price such that NZ would regret firm closure
• Adjustment costs, particularly those from
  concentrated job losses
• Reputational issues around stranded assets
• Emissions leakage less of a concern

21
Free Allocation - more

• Free allocation stops after firm closure this
  is important in avoiding regrets
• No assistance to new entrants
• Initial concept (but not firm on this approach)
  is
• maximum emissions of 2003-2005
• threshold of 50,000 tonnes
• trade-exposure test.

22
Process

• Legislation introduced to Parliament in 2007
• Select Committee considering the Bill and has
  invited submissions (closed 29th Feb)
• Legislation in place by mid-2008

23

• Tim Denne
• Covec Ltd
• tim_at_covec.co.nz
• www.covec.co.nz