Executive Summary
The New Zealand Emissions Trading Scheme
The New Zealand Emissions Trading Scheme (NZ ETS) is a key part of the Government’s response to global climate change. It is the primary means by which New Zealand will meet its obligations under international agreements such as the Kyoto Protocol.
Under the NZ ETS, some businesses will have a legal obligation to surrender ‘emission units’1 to cover their direct greenhouse gas emissions or the emissions associated with their products. The consequent need to acquire these units will effectively put a price on emissions of these greenhouse gases.
Businesses with legal obligations under the scheme will generally be ‘upstream’ operators, such as transport fuel producers or importers bringing products in to New Zealand. More information about the scheme and who will have legal obligations can be found at www.climatechange.govt.nz/emissions-trading-scheme
From 1 July 2010 the NZ ETS will apply to the stationary energy, industrial processes and liquid fossil fuels sectors. From this date many energy producers (such as transport fuel producers and electricity generators) and some businesses undertaking industrial processes that lead to direct emissions of greenhouse gases (such as the production of iron or steel) will face obligations and a price on emissions. In many cases this price will be passed through to consumers; for example, through higher electricity and gas prices.
Businesses with legal obligations will be able to acquire emission units in a number of ways. They may buy them from other New Zealand firms or from international carbon markets.
The Government intends to give some emission units to those firms that will be particularly adversely affected by the costs imposed by the NZ ETS. This is called ‘allocation’.
This consultation document sets out the Government’s approach to allocation. In summary, it:
- sets out the process for awarding allocation under the moderated NZ ETS
- seeks feedback on a number of technical matters
- invites people who believe they meet the tests for allocation to identify themselves and provide some preliminary data to demonstrate this.
The Climate Change Response Act 2002 (“the Act”) requires the Minister for Climate Change Issues to consult during the development of regulations that make people eligible to receive allocations. This consultation document forms part of this consultation.
Why allocation?
Allocation of emission units will protect the competitiveness of firms that face a large increase in costs as a result of the introduction of the NZ ETS but will not be able to pass those costs on to customers through higher prices. This may apply to firms facing competition from foreign firms that do not face a comparable cost on emissions in their home countries. The impacts will be greatest for those that are very emissions intensive – meaning those that produce a significant amount of emissions and/or use large amounts of energy to produce their products – and therefore face significant increases in costs as a result of the NZ ETS. In other words, the firms that will be most affected by the introduction of the NZ ETS will be those that are both emissions intensive and trade exposed (EITE).
If assistance is not offered to these firms, they may react to the costs imposed by the NZ ETS by reducing their production in New Zealand. This production might then shift to other countries. If these other countries do not place controls on emissions, this may cause emissions leakage: New Zealand emissions fall, but there is no reduction in global emissions since production has simply shifted abroad. The lost business activity may not return to New Zealand in future, even when emissions pricing is more widespread internationally.
Firms that face higher energy prices as a result of the NZ ETS may also be eligible. In determining whether firms are emissions intensive, the Government will take into account direct emissions – such as the use of certain fuels (for example, gas) or emissions from certain industrial processes – but also ‘indirect’ emissions associated with their use of electricity.
Where firms have legal obligations to acquire and surrender emission units under the NZ ETS, allocation can assist them in meeting these obligations at a lower cost. Firms without obligations will be able to sell their allocated units to offset part of the increased costs they face as a result of the NZ ETS.
The provision of allocation will be done in a way that maintains incentives for firms to reduce emissions and improve their efficiency. In addition, it is expected that emissions pricing will be steadily introduced in many other countries, gradually reducing the need to protect the competitiveness of New Zealand firms. The level of allocation will therefore be reduced over time (‘phased out’).
Similarities with Australia
Australia is proposing to introduce an emissions trading system in the form of the Carbon Pollution Reduction Scheme (CPRS). Australia is a key trading partner. New Zealand’s approach to allocation is very similar to the approach being developed in Australia. The Australian Government has also undertaken considerable work to identify activities that should be eligible for allocation and to determine how much allocation they should receive. By making use of this work, the New Zealand Government may be able to speed up the process of providing allocation under the NZ ETS.
However, there is currently uncertainty about whether the CPRS will pass into law in Australia. It is important that New Zealand creates incentives to reduce emissions that are suitable for its specific circumstances. Therefore, the Government intends to implement the NZ ETS even if the CPRS does not proceed. Similarly, the Government intends to move ahead with the provision of allocation in New Zealand, rather than waiting for the position in Australia to become more certain.
The basis for allocation: activities
Allocation of emission units will be awarded on the basis of emissions from activities, rather than on the basis of firms or sites. An example of an activity might be the production of glass or newsprint. Eligible activities will be the most emissions-intensive, trade-exposed processes in the economy. People conducting eligible activities will be able to apply for allocation.
Each eligible activity will be defined by an activity description, which will include a starting point (the input of a specified substance or substances) and an end point (the output of a specified saleable product).
An intensity-based approach to allocation is being adopted because one of the main objectives of allocation is to maintain production in New Zealand. For each eligible activity, allocation will be in the form of a fixed number of emission units per unit of saleable product. This is based on what is called an ‘allocative baseline’. These allocative baselines will generally be based on the average emissions per unit of saleable product across all people conducting the activity in a particular historical period. This will have the effect of rewarding firms that improve the efficiency of their production.
Each person conducting an eligible activity will receive a number of units per unit of saleable product equal to a percentage of the relevant allocative baseline. That percentage will start at 90 per cent or 60 per cent depending on whether they are ‘highly’ or ‘moderately’ emissions intensive, and will reduce by 1.3 per cent per annum after 2012. If an activity does not meet the threshold to be classified moderately emissions intensive, no allocation is available.
The formula for allocating emission units will be:
volume of production x the allocative baseline x a percentage of assistance.
Two possible tracks to eligibility
The NZ ETS provides two routes by which activities can be made eligible for an allocation:
- a ‘New Zealand’ track – which includes tests to identify emissions-intensive trade-exposed activities
- an ‘Australian track’ – activities that are eligible (or likely to be eligible) for allocation in Australia can be made eligible for allocation in New Zealand without the need for additional analysis.
The New Zealand track
Under the New Zealand track, activities can be made eligible for allocation in New Zealand if they meet certain tests set out in legislation.
All activities will need to meet a minimum level of emissions intensity, specified as tonnes of emissions from the process per million dollars of revenue from the output. Depending on their level of emissions intensity, they will be defined as either ‘moderately’ or ‘highly’ emissions intensive.
The definition of ‘revenue’ is discussed in section 5 of this consultation document.
Emissions that will be included in the test are the direct emissions from undertaking the activity, plus indirect emissions associated with the use of electricity. The direct emissions will be those that result from the direct use of certain fossil fuels,2 direct use of geothermal fluids, and those that result directly from certain industrial processes. To determine indirect emissions associated with the use of electricity, an ‘electricity emissions factor’ will be used: a standard quantity of emissions that is attached to each megawatt hour of electricity used.
To determine eligibility, the electricity emissions factor proposed will reflect the electricity generation mix in Australia,3 to ensure fair treatment of activities compared to any that might be made eligible via the Australian track.
Activities that are eligible for allocation in Australia
Rather than wait for the position in Australia to become more certain, the current thinking of the Government is to assess whether activities that are eligible (or likely to be eligible) for allocation under the proposed CPRS can be made eligible under the New Zealand track.
Activities that have been defined as eligible in Australia are listed in table 1 (see section 3). A number of additional activities are being investigated in Australia currently because it is believed they might be eligible; these are listed in Table 2 (see section 3). A full activity description, derived from work undertaken in Australia, for each of these activities is set out in Annex 1.
Where it is appropriate for existing activity descriptions to be utilised from Australia, these activities will have a significant head-start on the activities that need to be defined specifically for New Zealand. The Act sets out how activities are to be defined and we want your feedback on the Australian activity descriptions and other matters in Annex 1 to judge whether they should be progressed down the New Zealand track.
If (taking into account responses to this consultation document and other legal requirements in the Act) the Government judges it to be appropriate, these activities will go through the process of data collection and testing against eligibility thresholds on the New Zealand track. Gazette notices requesting data on emissions and revenue will be issued for all activities before they are considered for eligibility.
The Government will retain the option of using the Australia track should the CPRS eventually pass into law.
Determining allocative baselines
The allocative baselines will be set under the New Zealand track using average data for all firms undertaking the activity in New Zealand during a given historical period. The allocative baselines will be calculated from the same types of emissions as will be included in the emissions intensity test, but the proposed electricity emissions factor (or ‘electricity allocation factor’) reflects the electricity generation mix in New Zealand.4 This ensures that firms will be compensated for the likely rise in electricity costs they will actually face.
If the Australian track were to be used, the allocative baselines would be based on those developed in Australia, but modified to reflect New Zealand’s different mix of electricity generation and natural gas production emissions.
Timing
The Government will aim to give firms certainty over allocation as soon as possible. It is expected that certainty will increase through 2010 as work progresses.
The timing of regulations made via the New Zealand track will depend on the number and complexity of activities and the time required for industry to collect and submit data. The Government will make all reasonable endeavours to give firms certainty over allocation before obligations start under the NZ ETS in July 2010.
Timely input from industry will be important to ensuring that the allocation process is completed as quickly as possible. Thorough responses to this consultation document will assist the Government with this. In addition, those firms conducting an activity in Annex 1 (or other activity they think will be eligible) are urged to begin the process of compiling information on emissions, revenue and output that will be necessary to make decisions on eligibility and allocative baselines.
To mitigate against any unforeseen delays in providing allocation during the first year, allocation will be provided back-dated to 1 July 2010 for those found eligible and the impact of the NZ ETS has been softened during the transitional period when firms will benefit from the progressive obligation to surrender only one unit for every 2 tons of emissions, and a fixed price of $25 per New Zealand unit.
We need your feedback
This consultation document contains a number of specific questions the Government is seeking feedback on. These questions are gathered together in section 8, ‘How to make a submission’. Quality feedback on this consultation document is important. Feedback will help the Government identify activities in Annex 1 that are occurring in New Zealand, identify other activities with potential to meet eligibility tests, and finalise detailed rules on issues like data collection.
Responding to this consultation document is the key opportunity for industry to engage in the allocation process.
1 A ‘New Zealand unit’ or other unit created under the Kyoto Protocol.
2Under the Act these fuels are coal, natural gas, used or waste oil and emissions associated with the use of steam generated from the use of these fuels is included.
3 1 tonne of CO2-e per megawatt hour.
4 0.52 tonnes CO2-e per megawatt hour.
