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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

4. Longer-Term Climate Change Policy Development

This section of the discussion paper provides context to the development of long-term climate change policy and the potential role of price-based measures. It also presents considerations for the design of transitional policy.

4.1 The future international climate change policy framework

Intergovernmental discussion on climate change is accelerating and some form of future global framework for reducing emissions beyond 2012 is expected to evolve over time. International actions that are likely to contribute to the evolving discussion include the United Nations Framework Convention on Climate Change, the Kyoto Protocol, the G8 Gleneagles Dialogue and the Asia-Pacific Partnership on Clean Development and Climate (AP6).

Over time, mitigation efforts are likely to cover more countries and become increasingly stringent as countries are required to make a significant impact on the rate of climate change. There is a wide range of possible scenarios for how future frameworks for international climate change policy, and consequently the shape and stringency of any international obligations taken on by New Zealand, may develop. For the purpose of illustration, these could include features such as:

• a continuation of the original Kyoto Protocol framework with further agreed emission targets for Annex I (industrialised) countries and possibly for some developing countries, complemented by international emissions trading and flexibility mechanisms

• differentiated but non-quantitative commitments to climate change mitigation actions for developing countries

• the development of regional or plurilateral arrangements which could vary in approach from applying binding emissions targets to promoting technology development and diffusion

• the development of sectoral arrangements under which particular emitting sectors or industries (such as aluminium or cement) would commit to emission control standards on a sectoral rather than a national basis

• the adoption of intensity targets rather than capped emission commitments by countries under either international or regional agreements

• a technology-centred approach by which incentives or funding are provided for the development of new technologies.

Combinations of these features could coexist within any future international policy framework for climate change.

4.2 The role of price-based measures in New Zealand’s climate change policy

New Zealand and other industrialised countries that have ratified the Kyoto Protocol already face a cost for their greenhouse gas emissions. Countries whose net emissions from the first commitment period, 2008 to 2012, exceed their unit allocation for that period (called their assigned amount) will have to either buy additional units internationally or incur a penalty [Under the first commitment period of the Kyoto Protocol, the penalty for emissions in excess of emission units (including assigned amount units, removal units from eligible domestic sequestration, and purchased units) takes the form of a more stringent emissions reduction requirement for the subsequent commitment period. The penalty consists of deduction from the party’s assigned amount for the second commitment period of a number of tonnes equal to 1.3 times the number of tonnes of excess emissions during the first commitment period. In addition, the party will not able to transfer assigned amount units to other parties under Article 17 (international emissions trading) until it has submitted an acceptable compliance plan demonstrating that it will meet its commitment in the second commitment period. ]. The price of purchased units will depend upon the relative international supply of, and demand for, emission units available to industrialised countries that have accepted targets for the first commitment period. Other countries pursuing a separate regulatory approach to reducing emissions, such as Australia, also face a cost for their greenhouse gas emissions from reducing emissions below the level at which they would otherwise occur.

One of many questions for governments is how to minimise those costs and who should bear them. In New Zealand, the government’s climate change policy will determine the extent to which the cost of greenhouse gas emissions will be devolved to emitters or consumers, or covered by taxpayers more broadly.

While there is uncertainty about the nature of future international climate change obligations, it is reasonable to expect increasing international efforts to mitigate climate change. This will come at an economic cost.

Currently, it is unclear to what extent different countries will apply comparably stringent climate change mitigation measures under the post-2012 international climate change policy framework. Regardless, it is reasonable to expect that many countries will attempt to utilise some level of “flexibility mechanisms” such as international emissions trading, or mechanisms to support emissions mitigation projects, to take advantage of least-cost opportunities for emissions mitigation. This may or may not result in the creation of an identifiable international price of greenhouse gas emissions that can be traded internationally.

Under any future emissions constraint or target, a domestic price-based measure could help New Zealand capture the least-cost mitigation opportunities across the New Zealand economy. Depending on the future international framework for climate change, particularly the extent of international emissions trading or other international flexibility mechanisms, a price-based measure with international linkages could also allow New Zealanders to access least-cost mitigation opportunities in other countries. In the absence of a clear emissions price signal across the economy, it is less likely that mitigation options that are implemented are the lowest-cost options available.

Accordingly, the government is considering whether it would be in New Zealand’s best interests to adopt price-based measures to mitigate greenhouse gas emissions in the future. However, it is not clear that all sectors would readily respond to price-based measures, and it may be necessary in some sectors to retain a diverse portfolio of measures to operate alongside price-based measures, or possibly as a substitute for them.

Forging new pathways for sustainable economic growth will impose some transitional economic costs as well as generating long-term environmental and economic benefits. 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. It will also be important to design the policies to recognise the international context of actions taken in New Zealand, including the need for the world’s major emitters to take effective action.

4.3 Transitional climate change policy development

As noted above, separate work programmes are developing shorter-term policy measures in sectors such as energy, transport, forestry and agriculture. This section of the paper discusses key considerations in the design of shorter-term (ie, pre-2012) measures to support a transition toward a broad price-based measure at some time after 2012.

In the shorter term, a range of measures could help to prepare key sectors or major emitters within those sectors to face a price for their greenhouse gas emissions. Such measures might be designed to meet one or more of the following objectives:

• increase the capacity of major emitters to measure, monitor and report their emissions. This might involve compliance with a standard for emission inventory reporting

• increase the capacity of major emitters to participate in domestic and international emissions trading. Examples include participating in project activities and narrow trading between firms

• influence investments in new plant capacity by ensuring future emission pricing is taken into account when these decisions are made. This would start to achieve mitigation by ensuring that lower-emission alternatives were put in place, and avoid any subsequent complaints that implementation of a price measure would strand investments that would not have been made in circumstances of policy certainty

• influence behaviour at the margin to reduce emissions in the operation of existing assets. There can be opportunities for many firms to reduce their emissions without replacing their current assets prematurely. In addition, the practices and processes established within firms to manage their current emissions can contribute to improved emission management and production efficiency in the longer term

• contribute to the process of allocating emission allowances in a subsequent price-based measure applied broadly across the economy. A shorter-term measure might provide the framework in which firms’ performance in emissions management is recognised, which could influence their treatment in the subsequent allocation of emission allowances.

The effective use of a shorter-term measure to achieve these capacity-building goals may depend on some prior commitment to basic design features of the future price-based measures. For example, the effort firms put into building their capacity to participate in emissions trading could be of limited value if the subsequent measure is a greenhouse gas charge. Firms that could be points of obligation under an emissions trading regime would have different requirements to those not directly participating.

Price-based measures, emission reduction agreements and directive regulatory measures could be used individually or in combination to help meet these goals in the shorter term. Such measures could be designed specifically to phase in a selected long-term price-based measure, or could be designed more generally to be compatible with long-term price-based options.

4.4 Stakeholder assumptions in responses to this paper

Stakeholders’ expectations of future economic conditions and the international climate change policy framework are likely to strongly inform responses to the questions in this document. Those assumptions are vital to the government’s interpretation of responses. Stakeholders are encouraged to report their key understandings and assumptions under the questions below.