New Zealand's Emissions Trading Scheme – still up in the air?

Simon Watt, Partner and Kate Redgewell, Senior Associate | Wednesday 20 May 2009

New Zealand's Emissions Trading Scheme (NZ ETS) remains under review. While the government awaits the findings of the NZ ETS Parliamentary review committee, trading of New Zealand's Kyoto-compliant units is already underway.

The government expects to amend the scheme by September 2009. We believe the framework is most likely to remain in place however it is possible in the current economic climate, and in light of the volatile carbon market, that the government may implement measures to provide greater financial protection for business.

Outline of the NZ ETS

The NZ ETS is an economy-wide, all-gases scheme. Participants with compliance obligations must surrender emission units equivalent to all emissions calculated to arise from specified activities. Participants carrying out one of the limited removal activities specified in the Climate Change (Emissions Trading) Amendment Act (the Act) will be awarded units for emission reductions.

The primary unit of trade and compliance under the NZ ETS is a New Zealand Unit (NZU). Each NZU is backed by a Kyoto-compliant unit, primarily an Assigned Amount Unit (AAU). NZUs may be traded internationally, in which case they would be converted into AAUs. The following Kyoto-compliant units may also be traded and surrendered under the NZ ETS:

• Certified Emission Reduction Units (CERs) – except CERs from nuclear projects and lCERs from developing countries;

• Removal Units – although in reality this is unlikely to occur;

• Emission Reduction Units (ERUs); and

• AAUs – although AAUs originating outside of New Zealand may only be used for compliance purposes until 2012, and must be of a type specified in regulations (which have yet to be released but are likely to have an associated environmental integrity requirement).

Future international linking with other emissions trading schemes is foreshadowed in the Act by the inclusion of "approved overseas units" as a type of unit that may be surrendered for compliance purposes in the Act.

A relatively unique feature of the NZ ETS is that emission units allocated to forestry owners under the scheme can be exchanged and interchanged like any other non-forestry NZU and are available for trading and for compliance use on the same basis. Unlike lCERs and tCERs, awarded for emission reductions arising from forestry-related Clean Development Mechanism projects, any NZUs or AAUs allocated or awarded to forestry owners will not be temporary in nature.

The government's review and trans-Tasman harmonisation

While the NZ ETS framework is most likely to remain in place, it is possible that the government may introduce measures to provide greater financial protection for business, notably around the price of carbon, by providing for a price cap or a greater allocation of free units to specific industries.

This would also assist with aligning the NZ ETS and the proposed Australian Carbon Pollution Reduction Scheme (CPRS) in future. It is no secret that the New Zealand and Australian governments continue to discuss this as a possibility, particularly with the recently established joint working group of Australian and New Zealand officials to work through options for harmonising the NZ ETS and CPRS. If the findings of this group are adopted, they could significantly alter the NZ ETS.

Specific areas most likely to be the focus of change for harmonising the schemes are the inclusion of a price cap, aligning the types of units acceptable to trade in the schemes, the method for allocating free units to trade-exposed industry, and the timing of sector entry into the schemes. Judging by Australia's recent announcements further delaying the CPRS to mid-2011 with a proposed price cap of AU $10 for the first year, and for New Zealand not to expect any particular "special" treatment over other countries, any alignment of the schemes is unlikely to occur prior to 2013.

International trading

International trading is recognised and permitted by the NZ ETS. There is no restriction under the current form of the Act on the number of units that may be traded internationally (subject to the requirement not to breach the compliance period reserve which ensures New Zealand retains sufficient AAUs to be able to meet its own Kyoto obligations). We expect a number of units to be sold internationally as participants look to trade with international entities to obtain sufficient units for compliance purposes at the end of each annual compliance period.

To date, there has been some selling by New Zealand to international entities, including both ERU and AAU trades, and New Zealand entities have also been in discussions with Eastern European entities to acquire Green Investment Scheme AAUs.

Early ERU trades have arisen from the government's Projects to Reduce Emissions (PRE) tender rounds in 2003 and 2004. The PRE programme was designed to support initiatives that would reduce emissions and attract investment from developed countries, or companies within those countries, on projects that help them meet their greenhouse gas emission reduction commitments. There are 40 projects in the PRE scheme resulting in the following ERU trades:

• Dutch government agency SenterNovem acquired 530,000 ERUs from the Te Apiti Wind Farm.

• Swiss industry initiative Climate Cent Foundation acquired 642,469 ERUs from Project White Hill.

• Electrabel S.A. acquired 228,000 ERUs from Tararua Wind Farm Stage II.

• Kansai Electric Power Co. Inc. acquired 300,000 ERUs from Tararua Wind Farm Stage III.

• British Gas Trading Ltd acquired 200,000 ERUs from the Burwood Landfill Gas Utilisation Project.

• Kommunalkredit Public Consulting GmBH acquired 149,006 ERUs from the Awapuni LFG to Energy Project.

• Barclays Capital PLC acquired 300,000 ERUs in the Putauaki Geothermal Development.

A number of New Zealand and Japanese entities have been negotiating the acquisition of AAUs, primarily from New Zealand forestry participants in the NZ ETS or in the Permanent Forest Sink Initiative.

The first trade of post-1989 NZUs involved the forward sale of 50,000 NZUs at NZ $20 (approximately 9 Euros) per unit. We are expecting the finalisation of other NZU and AAU trades to both domestic and international entities shortly.

Fiscal initiatives

The NZ ETS contemplates a number of fiscal initiatives to assist with the transition to the NZ ETS, including the free allocation of units to the forestry and agricultural sectors, as well as to trade-exposed entities (although only for the proportion of their production which is trade exposed), with a phase-out of free allocation to the agricultural sector and trade-exposed entities expected to start in 2018.

There are also some more unique fiscal initiatives to New Zealand that have been, or may be, introduced by the government, including:

• The NZ ETS legislation created a fund to promote energy efficiency and renewable energy technologies in the home. A total of NZ $1 billion has been allocated over the next 15 years, starting July 2009. The details of the programme have not been finalised yet, but the Act states that the fund can be used for household insulation, energy efficient appliances and lighting, and space and water heating efficiency improvements. Already we have seen the introduction of government funding for the insulation of homes and expect further initiatives to be developed throughout the year.

• New Zealand's unique emissions profile is heavily skewed towards agricultural-based emissions (agricultural greenhouse gases make up at least 49% of New Zealand's total emissions). In recognition of the difficulties in abating such emissions and the need to address abatement in this area, an agricultural research and development fund has been established, with the aim of driving research and development of technological solutions for agricultural emission abatement.

Businesses have been lobbying government for further Projects to Reduce Emissions (PRE) tender rounds (as discussed above), which would incentivise the development of more emission reduction projects. Until now the government has been reluctant to introduce further PRE rounds, as a result of the projected deficit for 2012. However, with the recent announcement that New Zealand is estimated to have a 9.6 million tonnes surplus at the end of 2012 – worth an estimated $241 million, there is a real possibility that the government may revisit the PRE programme, and instigate another tender round for PRE projects.

Pre-1990 forestry deadlines looming

Pre-1990 foresters (including farmers and other landowners with pre-1990 forests on their land) have important decisions to make in light of the looming deadlines in June and July 2009.

With the Act continuing to be in effect, despite the review taking place, those with pre-1990 forests who wish to apply for an under 50 hectare exemption (where they are eligible to do so) must do so by 30 June 2009. For those who do not apply for an exemption from deforestation liabilities, or are not eligible to do so, an application for the one-off allocation of units for pre-1990 forests must be filed by 31 July 2009.

A failure to apply for an exemption (where eligible) could expose a pre-1990 forester to approximately $20,000 in compliance costs per hectare (assuming a price of carbon of $25 a unit) for deforestation of that pre-1990 forest. Similarly, for those who determine the commercial risk to be low and do not apply for the exemption, or are not eligible for an exemption, then a failure to apply for the one-off allocation for their pre-1990 forest could cost them the opportunity to receive around $975 to $1,500 per hectare worth of units (again, assuming a carbon price of $25 per unit and depending on the date on which they acquired the forest).

There is a possibility that the government will push out one or both of the June or July 2009 deadlines as a result of the delayed reporting from the NZ ETS review committee. However, this is yet to have been determined by government and foresters should continue to work towards the first deadline of June 2009.

* Bell Gully's climate change team is available to advise in detail on the ETS and its implications, and on carbon trading in general.

 

For further information, please contact your usual Bell Gully adviser or:

Simon Watt
Partner

Kate Radka
Senior Associate

David Craig
Partner

Garry Downs
Partner

Ian Gault
Partner

Willy Sussman
Partner

Clive Taylor
Partner

Marija Batistich
Senior Associate