Industrial allocation: NZUs for industry

This page has information on industrial allocation including eligibility criteria under the New Zealand Emissions Trading Scheme.

About industrial allocation

Industrial allocation (sometimes referred to as free allocation or EITE allocation) recognises that NZ ETS costs might affect the international competitiveness of some businesses. Those that meet the criteria prescribed in the Climate Change Response Act 2002 [New Zealand Legislation website] may be eligible to receive an industrial allocation of NZUs.

Industrial allocation is targeted at activities (production processes) that are both emission-intensive and trade-exposed (EITE).

An emission-intensive production process has significant fuel and energy use or process emissions, when compared with the overall revenue generated from what is produced.
Trade-exposed means NZ ETS costs are unable to be passed on to consumers. This is because the goods produced face competition from those produced in countries that do not have similar emissions costs.

Industrial allocation aims to reduce competitiveness issues for New Zealand businesses impacted by NZ ETS costs in the global marketplace. New Zealand businesses are unable to pass on increased costs to consumers because they are competing with overseas businesses. This competition could lead to businesses relocating to countries which do not have equivalent climate policies. Relocation would see a loss in production in New Zealand and may also increase global emissions – this is called carbon leakage.

Businesses receiving industrial allocation still face an incentive to reduce their emissions. This is because they still have NZ ETS costs for a proportion of the emissions stemming from the activity. By reducing their emissions they may be able to benefit from selling NZUs allocated to them. The allocation of NZUs is calculated on production levels, so if a business reduces its emissions while maintaining production levels it will have extra NZUs which it can sell.

Those who receive allocated NZUs can use them to meet any NZ ETS obligations they may have. Allocated NZUs can also be sold or traded which helps increase the liquidity of the NZ ETS market.

If you would like information about how to apply for an industrial allocation, see Industrial allocations [Environmental Protection Authority website]

Scale of industrial allocation in New Zealand

As industrial allocation is targeted at emission-intensive and trade-exposed activities, only a minority of New Zealand emitters receive industrial allocation.

Some significant emitting activities such as electricity generation, transport (land, coastal shipping and domestic aviation), waste and most agricultural processing plants do not meet the trade exposure or emissions intensity tests and are ineligible to receive any free units.

Businesses that can pass on the costs of the NZ ETS to their customers (eg, fuel and electricity companies) are not allocated any NZUs even if their activity is emission-intensive.

In 2016, 85 firms received industrial allocated units. Less than 15 of these firms were NZ ETS participants, compared to about 300 total NZ ETS mandatory participants (excluding the over 2000 voluntary NZ ETS participants from the forestry sector). Some of these firms received free allocation for only one or two activities out of several emitting activities for which they have to surrender units, because not all their activities meet the eligibility criteria.

The remaining industrial allocation recipients were firms that do not participate directly in the NZ ETS but receive units because they are affected by costs that are passed through from their use of fuel or electricity. Many of these firms are small horticultural producers (growers of cut roses, cucumbers, capsicums and tomatoes).

This means that industrial allocation is a relatively small proportion of unit supply in the NZ ETS and is proportionately smaller compared to many other ETS around the world. In 2016, the total number of units provided through industrial allocation in the NZ ETS was 4.3 million while the total number of units surrendered from sectors other than forestry was 19.5 million (ie, industrial  allocation only amounted to about 22 per cent of annual unit demand).

Eligibility criteria for industrial allocation

To be eligible to receive industrial allocation, an activity must meet two tests provided in the Climate Change Response Act 2002 [New Zealand Legislation website].

The tests are:

  • an emissions intensity test, showing that the activity produces a large amount of emissions in relation to the revenue it generates

  • a trade exposure test, which considers whether there is international trade of the activity’s output and if importing/exporting the output is viable.

    There are currently 26 eligible activities, the full list is at Eligibility [Environmental Protection Authority website].

    There are two allocation tiers which depend on the emissions intensity of the activity:

  • Highly emissions intensive activities (emissions intensity greater than 1,600 tCO2e / NZ$ 1 million of revenue) receive industrial allocation that covers 90% of the emissions for the activity

  • Moderately emissions intensive activities (emissions are greater than 800 tCO2e / NZ$ 1 million of revenue) receive industrial allocation that covers 60% of the emissions for the activity

    Eligibility for all firms carrying out an activity is based on historical emissions across the sector, generally using emission levels from the 2006-2008 period.

    Individual firms must apply to receive industrial allocation. The exact number of NZUs provided each year is adjusted for production so when firms increase or decrease their output, the amount of assistance that they receive correspondingly rises or falls. This means the industrial allocations are based on actual, current production.

    If you would like information on how to apply for an industrial allocation, see Industrial allocations [Environmental Protection Authority website]

    Method for calculating an allocation

                     Actual allocation = baseline x output x allocation level* x transitional factor†                              
     To reflect one-for-two. In 2018, 0.83 due to the phase-out (previously 0.5)
     * Either 0.6 or 0.9

     

Reviewed:
23/03/16