By Guest Author 14/08/2018

Catherine Leining, Motu Economic and Public Policy Research

To chart a successful future for the New Zealand Emissions Trading Scheme (NZ ETS), we need to understand its present and its past.

Researchers from Motu Economic and Public Policy Research have published a new Guide to the New Zealand Emissions Trading Scheme. This guide covers the basics of how emissions trading works and discusses the core design features in operation today and how and why they have evolved over time. The release of this guide coincides with the start of a new round of government consultation on amending the NZ ETS.

Written by myself and Dr Suzi Kerr, who is an international expert in emissions trading, this concise guide offers a straightforward introduction to emissions trading in New Zealand. It draws from Motu’s extensive research on the history and evaluation of the NZ ETS and identifies resources for more information.

In this fresh round of consultation on the future direction of the NZ ETS, key issues include managing unit supply, modifying the current price ceiling mechanism, limiting the future use of international units when such use becomes feasible, determining the phase-out of free allocation, changing forestry accounting rules, improving compliance and market oversight provisions, and using auction revenue.

Motu’s guide offers a foundation for considering the government’s latest proposals but does not address the details of those proposals.

Brief background to the NZ ETS

When it was launched in 2008, the NZ ETS was the first ETS in the world designed to send a rising price signal to reduce greenhouse gas emissions across all sectors of the economy. Where the system stands today differs greatly from the vision of a decade ago.

The NZ ETS currently excludes biological emissions from agriculture, about 49% of New Zealand’s gross emissions. This stage of consultation does not include any discussion of extending unit obligations to the agriculture sector, a subject which is currently under consideration by the Interim Climate Change Committee.

Starting in 2011, domestic emission prices plunged precipitously while the system accepted unlimited low-cost, low-integrity emission units from the international Kyoto market. Kyoto market linkage ended in mid-2015 and international emission units have been excluded since then. As shown in the figure below, emission prices have risen independently of the international market since the prospect of de-linking was first raised in late 2012.

Figure from Leining and Kerr (2018). Data from OM Financial Ltd and Carbon Match Ltd.

With no certainty over future emission unit supply, the market has had no basis for setting an emission price that stimulates efficient low-emission investment. It took until late 2017 for domestic emission prices to recover to starting levels in 2010. They are now rising toward the NZ$25 price ceiling, which poses a fiscal risk to the government. The system’s architecture is fundamentally sound but will require changes to support achievement of New Zealand’s 2030 emission reduction target under the Paris Agreement.

A Guide to the New Zealand Emissions Trading Scheme is now published on the Motu website. The report was prepared for the Ministry for the Environment by Catherine Leining and Suzi Kerr at Motu Economic and Public Policy Research.

Motu Policy Fellow, Catherine Leining, was involved in the development of the NZ ETS and has worked on emissions trading for more than twenty years.