• About this site|
• Site index|
• Contact us|
• Jobs

1. Foreword

2. Executive Summary

3. Introduction

4. Longer-Term Climate Change Policy Development

5. Policy Development on Devolving the Cost of Emissions

6. Emissions Trading

7. Greenhouse Gas Charge

8. Other Regulatory Approaches

9. Emission Reduction Agreements

10. Comparison of Options

11. The Path Forward for Longer-Term Policy Development

12. Glossary

13. Examples of Emissions Trading Systems

Submission Template

2. Executive Summary

Climate change is a long-term strategic issue for New Zealand within the broader context of sustainable development. As New Zealand continues to shape its climate change policy and reduce its emissions, it needs to prepare for a likely future in which international efforts to reduce greenhouse gas emissions become broader and more stringent.

Changing business-as-usual practices to reduce emissions will impose a moderate economic cost, as well as generating economic and other opportunities. Increasingly, countries are facing the question of how they can achieve least-cost mitigation consistent with sustainable development, and who, either directly or indirectly, should bear the cost. In New Zealand, policy design around this issue will have important implications for the overall economic efficiency of reducing emissions, the distribution of costs and opportunities across key players in the economy, and the international competitiveness of trade-exposed producers.

The government expects that, over time, all sectors of the economy should play a fair part in the national response to climate change, reflecting the fact that some sectors will be able to reduce their emissions more easily than others. An important policy consideration is the competitiveness of sectors in which there are no emissions-reducing technologies available at moderate cost. The government expects different sectors may require different pathways to making the transition towards increasingly stringent emission constraints over time.

Countries can apply price-based measures to support least-cost mitigation and to lessen the risk of investment decisions that could lock assets into emissions-intensive production and harm their international competitiveness in the longer term. Price-based measures, also referred to as market instruments, can be applied to integrate the costs (or opportunity costs) of greenhouse gas emissions into decision making in the marketplace, influencing choices in 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 on a narrow basis or more broadly across whole sectors or multiple sectors of the economy.

The purpose of this discussion paper is to start a dialogue on what policy measures would be preferred in New Zealand after 2012 (the end of the first commitment period of the Kyoto Protocol) to reduce its emissions, and protect and enhance its sinks, across key sectors of the economy. Although New Zealand’s international emission reduction obligations after 2012 are uncertain, it is important to begin discussing future policies now. A clearer specification of future policies provides greater certainty for investment and business planning and better guidance for the development of transitional measures in individual sectors. However, flexibility should be built into long-term policies so they can adapt to changing conditions and allow conditionality in how any particular policy measure might be applied.

This discussion paper was prepared under the government’s climate change work programme on alternatives to the carbon tax, which is considering longer-term policy measures that could be used to reduce New Zealand’s greenhouse gas emissions post-2012. This paper does not address the broader issue of the stringency of New Zealand’s longer-term goals to reduce its emissions and enhance its sinks, or the detailed development of shorter-term policy measures appropriate to individual sectors, which are the subject of other work programmes. However, this discussion paper is relevant to work undertaken through the sectoral work programmes because shorter-term sectoral measures should not preclude the implementation of longer-term, broad price-based measures. It is intended to complement consultation documents being produced under sectoral work programmes and focusing more specifically on shorter-term measures to reduce emissions.

This discussion paper will be of particular interest to stakeholders who are major producers or consumers of energy, and who need to make long-lived investments that will determine their future exposure to increased international pricing of greenhouse gas emissions. It will also be of interest to stakeholders in the transport sector, which presents particular challenges regarding the role of broad emissions pricing in changing behaviour as well as fuel and technology choices in the longer term.

The agriculture and land-use change and forestry sectors will also find this discussion paper relevant. These sectors carry out two types of activities: land management[Land management includes pastoral farming, arable farming, horticulture and forest management activities.] and product processing. The product processing (or manufacturing) operations are major energy consumers (and to some extent, energy producers), and would be treated similarly to other industrial producers in a policy context. With land management activities, the nature and timing of the mechanisms for extending emissions pricing over time is likely to vary. Key considerations would include exposure to international competition, actions by major trading partners, the availability of cost-effective mitigation options, measurement and monitoring issues, and administrative complexities. While it is important to consider these issues at a broad level in the economy-wide context of this discussion paper, they will be analysed in greater depth under the government’s climate change work programmes on agriculture, land-use change and forestry.

Stakeholders are invited to consider this discussion paper alongside other consultation documents being released: Powering Our Future: The Draft New Zealand Energy Strategy to 2050 and its companion action plan, Transitional Measures: Options to move towards low emissions electricity and stationary energy supply and to facilitate a transition to greenhouse gas pricing in the future; the replacement National Energy Efficiency and Conservation Strategy; and Sustainable Land Management and Climate Change. This discussion paper provides a long-term context for selecting sectoral policies that will place New Zealand on a desirable pathway for managing its emissions and sinks in a manner consistent with its national interests.

This discussion paper invites stakeholders to present their views on core questions facing New Zealand policy makers regarding climate change policy post-2012. These questions relate to the following issues:

• What are your assumptions regarding the future direction of international climate change policy? (Section 4)

• To what extent should government policy devolve the costs and opportunities associated with climate change policy to producers, consumers and the general taxpayer post-2012? How should this vary by sector, and over time, to best support the national interest? (Section 5)

• How can broad[Broad measures could apply to all or some of the energy, transport, agriculture, forestry and waste sectors.] price-based measures be used post-2012 to reduce emissions, enhance sink management and accelerate investment in new technologies? How should the coverage and design of price-based measures vary by sector, and over time, to best support the national interest? (Sections 6–10)

• What process should the government use to make decisions on long-term climate change policy? (Section 11)

New Zealand’s long-term strategy for reducing its greenhouse gas emissions and enhancing its sinks could include a mix of sectoral and economy-wide measures, including price-based, voluntary and directive regulatory measures. This discussion paper specifically assesses the following measures (in no particular order):

• Emissions trading. An emissions trading scheme would require a group of emitters to hold tradable units or allowances to match some or all of their greenhouse gas emissions over a defined period. Essentially it would cap the quantity of emissions, and allow the market to determine the least-cost means of compliance. The cap could be defined on an absolute or relative (intensity) basis and could be set at the international, national, or sectoral level. Emission allowances could be freely allocated and/or auctioned. Emissions trading is considered an economically efficient mechanism for achieving emission reductions, and a wide range of design options are available. This paper assesses three trading models: cap and trade, baseline and credit trading and offsets trading. Considerations for New Zealand include the relatively small size of the domestic trading market, the potential to create linkages to trading systems internationally, the feasibility of allocating emissions liability to major emitters in different sectors, the efficiency and equity of different approaches for allocating emission allowances, and the process for recycling any government revenues produced by the scheme.

• Greenhouse gas charge. A greenhouse gas charge would raise the price of emitting activities to reflect their environmental cost, creating an incentive to reduce emissions where it is cost-effective to do so. A greenhouse gas charge could affect behaviour in production and consumption depending on the extent to which emitters improved their efficiency, absorbed the costs, or alternatively, passed the costs on to consumers. A greenhouse gas charge would provide greater certainty to emitters on the cost of emissions, but less certainty to the government on the quantity of emission reductions achieved. The government would be required to set the level of the charge and determine the method for recycling government revenue to the economy. If the charge did not produce the expected level of emission reductions at the national level, then the liability for remaining reductions would fall on the general taxpayer.

• Other regulatory approaches. 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 for major emitters in key sectors. 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 nonbinding. Emission reduction agreements would potentially be more flexible in setting different emission reduction targets and activities across different emitters, according to their circumstances. Key challenges to the design and uptake of these agreements are the process for developing agreements and ensuring compliance, and the level of stringency of such agreements. This includes how efficient and fair they would be compared to measures in other firms and sectors.

This discussion paper assesses the merits and disadvantages of price-based measures alongside the other measures identified above. Although no decisions have yet been made, the government has stated it has a positive view on the use of economically efficient price-based measures applied broadly across key sectors of the economy in the longer term (ie, post-2012), provided such measures are consistent with New Zealand’s economic and sustainable development interests and the longer-term international climate change policy framework.

In addition, the paper addresses a series of general policy issues relating to the distribution of costs and opportunities from climate change measures post-2012. These issues must be considered carefully regardless of which types of measures are selected. The 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

• recycling any revenue from policies back into the economy

• building capacity for emitters to participate in policy measures.

A key question facing policy makers is 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 the architecture of the measures, defining the stringency of the measures, and determining when to introduce the measures in the economy generally and/or in particular sectors. Two possible approaches to this question, for the purpose of discussion, are:

(a) To define the architecture of the measures now but leave decisions about the stringency of the measures across different sectors until key uncertainties, particularly the nature of the international policy framework, are clarified; or

(b) To outline a set of principles for when measures would be applied and how stringently, but not to specify actual measures until the international situation is clearer.

The paper presents an indicative proposal for a path forward for government decisions on longer-term climate change policy. Note that this is not a government policy proposal or preferred approach, but instead is intended to serve as a starting point for discussion on this important issue.

The challenge facing New Zealand is how to design climate change policy measures that reap the potential benefits of emissions pricing, minimise costs, and best enable New Zealand to achieve its integrated sustainable development goals. The 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. The government believes the pace and stringency of New Zealand’s response to climate change should be aligned with our national interest and in step with what major emitters – including our major trading partners – are doing.

Submissions on the discussion paper

The primary objective of this discussion paper is to provide information on options and help to develop a consensus on the direction of longer-term climate change policy. In consequence, the paper does not provide specific government proposals for future climate change policies. Stakeholders are invited to use this paper as the basis for submitting their views to help officials develop recommendations to Cabinet. This paper will also provide a framework for discussions between officials and stakeholders through workshops and smaller focused meetings taking place between December 2006 and February 2007. A detailed government proposal for longer-term measures is expected to be released next year for consultation after submissions on this discussion paper have been considered.

Officials will prepare a public summary of submissions received on this discussion paper. The public summary will not attribute comments to individual submitters. Please note that your comments will be subject to the Official Information Act 1982 and may need to be publicly released. If you object to the release of any material provided in your submission, please specify the material that you consider should be withheld and the grounds for withholding. Please note that even if you do identify specific material that you consider should be withheld, we cannot guarantee that we will withhold this material. All requests under the Official Information Act need to be assessed in terms of the Act and while we will take into account your views, we are not bound by them.