Businesses are not likely to feel the effects of the Government's recently announced changes to the Emissions Trading Scheme (ETS) until at least 2020, with significant work still to be done before they can be implemented.
Climate Change Minister Paula Bennett announced a package of changes to the ETS in late July, the second phase of a two-part review of the scheme. The package requires the design of a key new feature for the scheme, and the Government signalled further consultation and engagement will be undertaken to determine how to implement the proposals. It also plans to further develop options affecting forestry next year.
The first stage of the review, announced last year, phased out "one-for-two" surrender obligations which had been introduced for participants in certain sectors as a transitional measure loosening scheme settings in response to the global financial crisis.
Bell Gully's view
The design and consultation elements required mean the changes will not begin to affect businesses until 2020 at the earliest. However, businesses can expect an upward trajectory in the price of carbon to result from the proposals, which reflect a degree of tightening to the ETS.
The key changes
The package of changes has four key proposals, including:
- Introducing the auctioning of units to align the ETS with New Zealand's climate change targets.
- Limiting participants' use of international units to satisfy their obligations under the ETS once the ETS reopens to international carbon markets.
- Developing a different price ceiling to eventually replace the current NZ$25 fixed-price option.
- Co-ordinating decisions on the supply settings for the ETS over a rolling five-year period.
According to the Minister there will be no change to the free allocation of units until the end of 2020, reaffirming the Government's commitment to ensuring certain New Zealand businesses are not disadvantaged compared to international competitors. The free allocation refers to credits that cover 90 per cent of the emissions of trade-exposed businesses that are highly emissions-intensive, and 60 per cent of the emissions of trade-exposed businesses that are moderately emissions-intensive, at no cost to those businesses.
The Minister also stated any changes would be well signalled and take into account what is happening internationally.
A NZ$25 price ceiling for carbon will also remain in place until auctioning or links with international markets are established.
The Minister said more work needs to be done around forestry accounting, and operational improvements to reduce complexity for forestry participants and increase the efficiency of the ETS, with a package of options expected to be developed next year.
Certainty for business
The announcements align with meeting the target adopted by government as part of its ratification of the Paris Agreement in 2016. The Paris Agreement is the key international agreement on carbon reduction under the United Nations Framework Convention on Climate Change that will drive policy going forward. New Zealand's target is a reduction of 30 per cent to the country's 2005 greenhouse gas emissions levels by 2030.
While the four new proposals by no means resolve the issue of certainty around the path to reach that goal, a certainty that is highly desirable for businesses, they head in that direction – it is clear the plans involve a tightening of the scheme over time and they are consistent with moving at a steady pace towards the target.
The changes around international units will also make the ETS better aligned to schemes in other countries, so it will be more compatible for international linking. But the signal that there will be a limit on use of international units once the ETS is reopened to international markets shows the Government is seeking to channel investment in emission reductions into New Zealand. While open use of international credits would offer business the cheapest compliance costs in the short term, there is longer-term value to domestic businesses from this approach. Local investment in carbon reduction in New Zealand may better prepare the economy for an inevitable tightening of policy in a low-carbon future.
The issue of the effects of the scheme on the international competitiveness of businesses exposed to trade with markets that don't have comparable carbon pricing schemes – particularly Australia and parts of Asia – has not gone away. The Government signalled officials will continue to look at changes in this area after 2020, with further advice expected in 2018. There is a good chance next year's announcements will signal the retention of some element of protection but there may be a clearer path to its gradual removal.
Opportunity to engage
With up to a year-and-a-half likely to be taken up with design elements for the new changes alone, we anticipate there will be little real change before 2020.
At this stage there are still significant questions left unanswered including:
- how the complex auction process will be designed,
- the extent and proposed timing of changes to the current NZ$25 carbon price ceiling,
- how the limit on international credits will be set, and
- details on what plans to link to the emissions trading schemes of other countries might look like.
The next two years offer an opportunity to have input into these design issues. This will be a critical period to prepare for what is likely to be a decade of tightening of the carbon price from 2020 until 2030.
If you or your business would like further information or advice on this update, please do not hesitate to contact your usual Bell Gully adviser.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.