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Summary of Discussion Papers

Introduction

  • The Transitional Measures discussion paper explores ways to reduce greenhouse gas emissions in the stationary energy supply sector before 2012 (the end of the first commitment period of the Kyoto Protocol). It forms part of the draft New Zealand Energy Strategy.
  • The paper outlines a number of options for meeting the government's objective of moving towards low emissions stationary energy supply, and to facilitate a transition to the cost of greenhouse gas emissions being met by the emitter.
  • The Measures to Reduce Greenhouse Gas Emissions in New Zealand Post-2012 discussion paper aims to start a dialogue on which policy measures would be preferred in New Zealand after 2012 to reduce the country's emissions and to protect and enhance our forest carbon sinks.
  • The paper provides a longer-term context for selecting sectoral policies which will place New Zealand on a desirable pathway to manage our emissions and sinks in a manner consistent with our national interests.
  • The papers are designed to complement other consultation documents on sectoral approaches to reducing emissions:
    • Powering Our Future: The Draft New Zealand Energy Strategy to 2050 and its companion action plan
    • The replacement New Zealand Energy Efficiency and Conservation Strategy
    • Sustainable Land Management and Climate Change. 

Policy options common to both papers

  • Although no decisions have been made, the government takes a positive view on applying an efficient price-based measure (e.g. emissions trading) in the stationary energy supply sector as a transition into a broader application across key sectors of the economy after 2012. However, such a measure would need to be consistent with New Zealand's economic and sustainable development interests and the longer-term international climate change policy framework.
  • Price-based measures, also referred to as market instruments, can be applied to integrate the costs (or opportunity costs) of greenhouse gas emissions into the economy, thereby influencing choices made about production, consumption and technology development. They can operate as "carrots", by rewarding positive behaviour, and "sticks", by imposing a cost on negative behaviour. 
  • Price-based measures can be applied narrowly or more broadly across whole sectors or multiple sectors of the economy. In the longer term, a broad price-based measure such as emissions trading could potentially be applied across the New Zealand economy.  The government expects different sectors may require different pathways towards increasingly stringent emission constraints and emission pricing over time.
  • Both discussion papers evaluate two types of price-based measures - emissions trading and greenhouse gas charges - against directive regulations and emission reduction agreements. 
  • Emissions trading.  An emissions trading scheme would make a group of emitters responsible for holding tradable units or allowances match some or all of their greenhouse gas emissions over a defined period.
  • This would, in effect, cap the quantity of emissions, and allow the market to determine the least-cost means of compliance. The requirement to hold allowances to match emissions would place a cost (or opportunity cost) on emissions, thereby influencing production and consumption.
  • Emissions trading is considered an economically efficient mechanism for achieving emission reductions and a wide range of design options are available.
  • Three trading models are explored by both papers. A broad approach is taken in the post 2012 paper, while the transitional measures paper focuses solely on the stationary energy supply sector.  The three models explored are: cap and trade, baseline and credit trading and offsets trading. 
  • Greenhouse gas charge.  Like emissions trading, a greenhouse gas charge would raise the price of emitting activities to reflect their environmental cost, creating an incentive to reduce emissions if it was cost-effective to do so.
  • A greenhouse gas charge would enable emitters to be more certain about the cost of emissions than under an emissions trading scheme, but the government would be less certain about the level of reductions.
  • Such a charge would offer emitters fewer compliance options than an emissions trading scheme. It would affect behaviour in production and consumption depending on whether emitters were able to become more efficient and avoid the charge, absorb the cost of the charge, or pass the cost on to consumers. 
  • Regulations. Other regulatory options could include amendments to the Resource Management Act 1991 (RMA) or the Electricity Act 1992. For example, regulations could impose offset requirements, emission limits or performance standards. In the case of the RMA, such measures could give local government the responsibility for administering direct emissions of greenhouse gases.
  • Emission reduction agreements. Under an emission reduction agreement, a firm or sector would make a commitment to the government to manage its emissions, or meet specified targets. Commitments could be voluntary or mandatory, and the consequences of non-compliance could be binding or non-binding.
  • Such agreements would potentially be more flexible in setting different emission reduction targets and activities across different emitters according to their circumstances.

Options for transitional measures

  • The transitional measures paper considers three additional categories of policy measures that could be applied to the stationary energy supply sector: renewable obligations, incentives/subsidies, and project-based measures.
  • The paper notes each measure, including the price-based measures, provides a potentially wide number of options depending on design decisions. A key decision would be whether a measure applied to all existing capacity or production, or the focus was only on new capacity or investment.
  • The paper recognises that no single measure is likely to be sufficient to meet the overall objectives of the draft New Zealand Energy Strategy. A combination of measures may be necessary, as well as supporting policies such as providing information and encouraging innovation.
  • The draft New Zealand Energy Strategy proposes a number of principles that could guide the choice of transitional measures. These are:
    • Measures should be compatible with, and enable a transition to, longer-term policy options where the cost of greenhouse gas emissions is reflected in the relative cost of the fuels that produce greenhouse gas emissions.
    • Investors in new generation should face a price signal that reflects the value of greenhouse gas emissions avoided for renewables relative to fossil fuels, either immediately or over a transitional period.
    • Owners of existing fossil fuel generation should follow a transitional path to facing the full cost on greenhouse gas emissions.
    • The effect of any transitional measures on electricity prices should be gradual.
  • Based on the above principles, the government is attracted to measures that would support the early development of emissions trading in the stationary energy sector.

General policy issues

  • The post-2012 discussion paper addresses a series of general policy issues relating to the distribution of costs and opportunities across producers, consumers and the general taxpayer after 2012.
  • Issues include:
    • Reducing emissions at least cost
    • Determining emission reduction goals or targets for sectors
    • Managing the impacts of measures on the international competitiveness of New Zealand firms
    • Defining who participates in different measures
    • Deciding how revenue from policies would be recycled back into the economy
    • Building capacity for emitters to participate in policy measures.
  • The post-2012 paper considers the extent to which decisions on longer-term implementation measures can or should be made now, or left for future decision-makers.
  • Such decisions could include defining which measures to apply, the stringency of those measures, and when to introduce them.
  • Earlier decisions create more certainty for business investment and provide clearer signals about the need to reduce emissions.  However, decisions need be sufficiently flexible to accommodate current uncertainties about the future international framework for addressing climate change. 
  • Possible approaches include: (a) Define the measures' architecture now but leave decisions about their stringency across different sectors until key uncertainties, particularly the nature of the international policy framework, are clarified; or (b) Outline a set of principles for when measures would be applied and how stringently, but not specify actual measures until the international situation is clearer.

Conclusion

  • The challenge facing New Zealand is how to design immediate and longer-term climate change policy measures which capture the potential benefits of emissions pricing, minimise costs, and best enable New Zealand to achieve its integrated sustainable development goals.
  • Long-term policy must recognise the international context of actions taken in New Zealand, including the need for the world's major emitters to take effective action.
  • Policy measures to reduce greenhouse gas emissions from the stationary energy supply sector should provide investment certainty and should not detract from economic development.
  • The government believes the pace and stringency of New Zealand's response to climate change should be aligned with our national interests and in step with what major emitters - including our major trading partners - are doing.