Factsheet 16 - Major design features of the emissions trading scheme

September 2008; INFO 318
Revised in October 2008

The New Zealand emissions trading scheme is part of the government’s response to climate change. Emissions trading will help reduce emissions, encourage and support global action on climate change, and help put New Zealand on a path to sustainability. This factsheet explains some of the main design features of the emissions trading scheme.

The New Zealand emissions trading scheme has been designed to support efforts to reduce greenhouse gas emissions while maintaining economic flexibility, equity and environmental integrity at least cost , long term. The emissions trading scheme:

includes all sectors and all gases by 2013
is internationally linked and reflects international climate change rules
prescribes absolute rather than intensity-based unit obligations so sectors face the full price of emissions at the margin
is based on a self-assessment model for monitoring, reporting and verification.

What activities are covered by the emissions trading scheme?

The government has included as many industry sectors as possible in the emissions trading scheme to ensure equal treatment between sectors. Also, the broader the coverage of the scheme, the more opportunities there are to reduce emissions at the least cost.

Once fully implemented in 2013, the scheme will apply to all greenhouse gases specified in the Kyoto Protocol: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulphur hexafluoride (SF6).

By 2013, it will apply to all parts of the economy that emit these gases, including electricity generation and industrial heat and power, transport, industrial processes, forestry, agriculture and waste.

How will the emissions trading scheme be implemented?

Sectors will be introduced into the emissions trading scheme gradually over a period of five years, starting in 2008.

The liquid fossil fuels, industrial processes, agricultural and waste sectors will be able to start reporting their greenhouse emissions voluntarily two years before their obligations to surrender emission units begin, and are required to report their emissions one year prior.

Sectors will enter the scheme as outlined in the table below.

Timeframe for sectors to enter the emissions trading scheme

Sector	Voluntary reporting	Mandatory reporting	Full obligations
Forestry (pre-1990 forests) and forestry removal activities (post-1989 forests)	–	–	2008
Liquid fossil fuels (and opt in for obligation jet fuel)	2009	2010	2011
Stationary energy (and opt in for purchasers of coal or natural gas)	–	–	2010
Industrial processes	–	–	2010
Synthetic gases	2011	2012	2013
Agriculture	2011	2012	2013
Waste	2011	2012	2013

In addition to staging the implementation of the emissions trading scheme, the government will provide short-term help for some sectors in the form of free emission units, as well as financial assistance for households. This will help businesses and households make the necessary changes to reduce their greenhouse gas emissions and provide a gradual period of adjustment to emissions pricing.

How do businesses participate in the emissions trading scheme?

Businesses participate in the emissions trading scheme in different ways.

Some have a legal obligation to acquire and surrender emission units to cover their direct greenhouse gas emissions or the emissions associated with their products (the emissions they are responsible for under the scheme). These participants are generally ‘upstream’ operators, for example, fossil fuel producers or importers bringing in products to New Zealand with an emissions component. If people carry out an activity listed in Schedule 3 of the Climate Change Response Act 2002 they are required to participate in the scheme.
Some have the choice to apply to opt in to the scheme if they carry out an activity listed in Schedule 4 of the Act.
Some receive free emission units that can be used to meet their own obligations or to sell to other firms, for example, landowners with forestry holdings consisting of forestry planted prior to 1990.
Some do not have unit obligations but trade emission units in the same way that stockbrokers or real estate agents trade in their respective markets (secondary market traders). They may have specialist expertise in linking those who can reduce their emissions (thereby freeing up emission units for trading) with those wishing to buy these units.

What is an ‘emission unit’?

The primary domestic unit of trade is a New Zealand unit (NZU) issued by the Crown. Participants are required to surrender one NZU or a Kyoto unit to cover each metric tonne of eligible greenhouse gas emissions within a compliance period (usually a calendar year).

Each NZU is backed by a New Zealand Assigned Amount Unit (NZ AAU). The price of the NZU is determined in the trading market and will tend to match the international price of emission units.

Subject to some restrictions, participants liable for emissions can use both NZUs and Kyoto units to fulfil their unit obligations. Participants can sell NZUs internationally by exchanging them for Kyoto units, within the limits on international sales set by the Kyoto Protocol. See Factsheet 27 on units of trade in the New Zealand emissions trading scheme.

What are the advantages of allowing international trading in emission units?

Allowing international trading means scheme participants can quickly buy or sell emission units without causing a significant movement in their price.

International trading also gives New Zealand businesses access to least-cost ways to reduce emissions overseas. It supports the effective use of Kyoto Protocol mechanisms such as the Clean Development Mechanism, which is an important tool for reducing greenhouse gas emissions and assisting sustainable development in developing countries.

This means a New Zealand business with limited low-cost ways of reducing its own emissions can fulfil its emissions trading scheme obligation by buying emission reductions from overseas. This has the effect of limiting the cost to that company of reducing its emissions.

International experience suggests that, for many developed economies, the costs of compliance with Kyoto Protocol targets would be much higher than if those countries achieved the targets by domestic emission reductions alone.

Allowing international trading means emission prices in New Zealand align with international prices. This, in turn, helps to ensure the level of price exposure in the New Zealand economy is not too far ahead of, or too far behind, prices determined by international efforts to reduce greenhouse gas emissions.

How many emission units will be issued?

The emissions trading scheme operates within the cap on emissions established by the Kyoto Protocol during its first commitment period (2008–2012). There is no cap on the emissions that occur within New Zealand. However, domestic emissions that exceed New Zealand’s allocation under the Kyoto Protocol must be matched by emission units bought internationally from within the Kyoto cap on emissions.

After the first commitment period of the Kyoto Protocol expires in 2012, the emissions trading scheme is expected to operate within whatever international cap on emissions is set beyond that point. If no international cap has been agreed, the government will most likely need to establish a domestic cap on emissions at that point. The scheme is therefore designed to be adaptable to changes in international agreements.

How will NZUs be allocated?

NZUs will be allocated to the forestry, industrial processes, fishing and agricultural sectors in accordance with allocation plans and determinations.

Allocation plans and determinations

The allocation plans establish the criteria and methodology (ie, the classes of people eligible to apply for an allocation of units, and what type of information they have to supply). The determinations specify who will receive units in accordance with the allocation plan.

The process for the allocation plan begins with the Minister preparing and notifying a draft allocation plan, and then calling for public submissions on the draft plan. Following changes to the plan as a result of submissions, the allocation plan is issued by the Governor-General and then presented to Parliament, which has 15 sitting days to reject the plan (excluding forestry allocation plans which do not go via Parliament). The allocation plan comes into force if not rejected by Parliament, and the Minister then gives public notice of the plan and invites persons to apply for a free allocation. People who consider themselves eligible for an allocation of units must supply data and information as part of their application.

The Minister then makes a draft determination of who will receive units and there is a period and process for finalisation of the determination, which specifies who will receive units. The determination is then gazetted, and NZUs are transferred to each eligible person.

Where post-1989 forest land has been brought into the scheme, eligible participants are entitled to file an emissions return setting out their entitlement to NZUs for the net increase in carbon sequestered in that forest land. NZUs are transferred, following a direction from the Minister of Finance rather than through an allocation plan process.

How is the emissions trading scheme administered?

The Ministry of Economic Development administers the emissions trading scheme. It administers an electronic registry, known as the New Zealand Emissions Unit Register (NZEUR), which records:

the holders of emission units and the amount of emission units they hold
transfers of emission units between holders
the surrender of emission units by participants in order to meet their obligations under the emissions trading scheme.

The Ministry for the Environment is responsible for the administration of the Climate Change Response Act, which establishes the New Zealand emissions trading scheme. It is also responsible for the development of allocation plans and regulations under the Act, except for those relating to the forestry sector, which are managed by the Ministry of Agriculture and Forestry.

How are obligations under the emissions trading scheme enforced?

The chief executive of the administering agency (ie, the Ministry of Economic Development) has audit and inspection powers to verify that participants have correctly complied with their obligations under the scheme. Any failure by a participant to meet its surrender and reporting obligations may lead to the chief executive taking enforcement action against the participant, including the giving of notices requiring compliance and the imposition of penalties.

The scheme operates with a ‘self-assessment’ system like that used in the New Zealand tax system. Participants take the actions they are required to under the scheme, and the administering agency verifies their compliance either itself or through an agent.

Participants face binding consequences for non-compliance with their obligations under the scheme. These include penalties, and participants still need to surrender the units they owe.

How are participants encouraged to find innovative ways to meet their obligations?

The emissions trading scheme creates new incentives for participants to reduce their greenhouse gas emissions or to finance emission reductions by other firms. This promotes innovation in energy efficiency and other emission management practices, as well as developing new technology.

Where to go for more information

For more information on the government’s climate change work, including information about the emissions trading scheme, visit www.climatechange.govt.nz or call 0800 CLIMATE (0800 254628).

Published in September 2008 by the Ministry for the Environment, Manatū Mō Te Taiao, PO Box 10362, Wellington, New Zealand