Government's Proposed Changes to the Emissions Trading Scheme

Simon Watt, Partner and Kate Redgewell, Senior Associate | Friday 13 July 2012

Last week the Government announced the amendments it wishes to make to the New Zealand Emissions Trading Scheme (NZ ETS).

This much anticipated announcement follows the Government's consideration of the Emissions Trading Scheme Review Panel Report published on 30 June 2011 and feedback received through a consultation process undertaken in April and May this year.

The Ministry for the Environment (MfE) has noted that the purpose of the changes is "to maintain the costs that the ETS places on the economy at current levels. This will ensure business and households do not face additional costs during the continued economic recovery; and that New Zealand continues to do its fair share on climate change". Further, MfE notes that the changes "also make a number of important changes designed to improve the operation of the ETS, providing more flexibility for forest landowners and ensuring the scheme is 'fit for purpose' after 2012".

These sentiments are not dissimilar to some of those expressed by the 2011 Review Panel, yet the changes recommended by it following its review and those proposed by the Government in its announcement last week differ somewhat. That said, the changes proposed by the Government are not surprising in the current economic climate, and simply seek to moderate further the financial impacts of the NZ ETS in the foreseeable short-term. Whilst financially beneficial to most businesses and end consumers, the lack of change to restrict international trading is likely to raise concerns for forestry participants seeking good returns on the trading of their units.

Key proposed changes to NZ ETS

The Government's key proposed changes to the NZ ETS are:

• The extension of the transitional measures beyond 2012 and indefinitely, meaning that the 'one for two' surrender obligations would remain and the $25 per tonne fixed price option (as an alternative to surrendering eligible units) would also remain. This also means a deferral of the phase out of industrial allocations (which was expected to occur at a reduction of 1.3% per annum from 1 January 2013, being the date from which the transitional measures were no longer to apply).

• The indefinite deferral of surrender obligations for biological agricultural emissions. The Government has signalled that it will conduct a review in 2015 but that surrender obligations for biological agricultural emissions would only occur if there are technologies available to reduce those emissions and international competitors are taking sufficient action on such emissions. Additionally the Government has signalled its plans to pass reporting obligations for agricultural emissions on to the farmer as opposed to milk and meat processors. This is a significant change that would affect a large number of people in New Zealand. The Government is still in the process of determining how this change can be implemented and until such time as a pragmatic solution is implemented, reporting obligations will reside with milk and meat processors.

• Introducing an'offsetting' option for pre-1990 forests, which would allow pre-1990 forest landowners to deforest and convert the land to another use without incurring liability. Such an offset option would be available provided a new forest which would achieve the same carbon stocks within a set time is established elsewhere by direct planting on land eligible for post-1989 planting. Pre-1990 forests harvested (but not deforested) before 2013 would be eligible for offsetting.

• Confirming delivery of the second tranche of pre-1990 forest allocations. However, if a pre-1990 forest landowner takes up the option to offset, they will be required to repay the second tranche of NZUs received in relation to that forest land.

• Introducing an 'auction' scheme to enable the Government to increase the supply of New Zealand Units (NZUs) to the market, up to a set cap. The details of this scheme are to be developed later in the year, following consultation.

• Confirmation that there will be no quantity restrictions on the number of international units a participant may surrender for compliance purposes. The Government has not, however, proposed any change to the current restrictions on the type of international units that may be surrendered for compliance purposes. Accordingly, it remains the position that assigned amount units originating from outside New Zealand, and certified emission reduction units from HFC and nitrous oxide related clean development mechanism (CDM) projects, as well as those from nuclear and forestry CDM projects are not eligible to be surrendered in New Zealand.

• Taking into account additional emissions in determining eligibility for emissions-intensive trade-exposed allocations. This includes taking into account emissions from stationary energy use of liquid fossil fuels, and coal seam gas methane emissions in determining allocations for activities using coal as an energy source.

• Completely re-organising the manner in which the synthetic greenhouse gases (SGG) sector is treated. This means (amongst other matters) that:

  • the current NZ ETS obligations which relate to the importation of SGG in goods and motor vehicles will be removed and replaced with a levy applied when a motor vehicle is first registered for on-road use in New Zealand, and in relation to other goods, at the point of import;

  • sulphur hexafluoride obligations will be transferred from the importer to the 'large user', which will affect a number of large businesses in New Zealand;

  • the wilful release of SSG will be banned and penalties will apply; and

  • exporting sulphur hexafluoride in goods will no longer be considered a removal activity.

MfE will be consulting later this year on the regulatory and operational detail of a number (but not necessarily all) of the proposals described above, before a proposed bill is introduced in (what the Government expects to be) late 2012. Affected businesses and individuals should ensure that they obtain and respond to relevant documentation. In our experience well drafted submissions can assist the Government in implementing valuable changes to its proposals.

Government's proposal good news for international trading

The Government's decision not to implement any restriction on the number of eligible international Kyoto units that could be surrendered by a participant under the NZ ETS to meet their compliance obligations is good news for those continuing to enter into international trades. Many New Zealand businesses have been taking advantage of the crashing international carbon price to secure non-HFC/nitrous oxide CERs to meet their compliance obligations. The Government has announced that it intention is to continue to expose the NZ ETS to the international market and as such provide New Zealand businesses with the ability to take advantage of the least cost compliance options.

Mixed bag for forestry participants

In the main, pre-1990 foresters will be pleased with the proposal to introduce offsetting to avoid pre-1990 deforestation obligations, which was one of the best options proposed in the Government's consultation document earlier this year. This option could significantly reduce the financial impact on a landowner who wishes to convert their pre-1990 forest to farming or another commercially viable use, particularly where there they own additional land on which post-1989 forests can be established.

However, where a landowner has to acquire additional land to take advantage of their offsetting option, and in the light of the requirement that they return their second tranche of pre-1990 units to the Crown should they proceed with this option, the financial benefits may not always be significant.

Forestry participants on the whole are likely to be disappointed with the lack of further restrictions on international trading, the lack of any floor price for the trading of units, and the continuation of transitional measures. These are matters which the 2011 Review Panel also addressed. It recommended greater certainty for business in the long-term and some amendments that would protect the carbon investments made by forestry participants, but many of those recommendations have not been taken up by the Government at this time.

Linking with Australia

Australia's carbon tax scheme came into effect on 1 July 2012, and the NZ ETS continues to allow linking with Australia and other international emissions trading schemes. In the short-to-medium term, the Government is simply concentrating on linking with Australia (provided that scheme remains relatively stable over the next 12 months) and has not mentioned any plans at this stage to link with schemes further afield.

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

Simon Watt
Partner

Kate Redgewell
Senior Associate

Claire Harmsworth
Solicitor