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1 Introduction: The Government’s Decision on Emissions Trading

1.1 Commitment to an emissions trading scheme

The government has decided in principle that New Zealand will use an emissions trading scheme as its core price-based measure for reducing greenhouse gas emissions and enhancing forest carbon sinks. The New Zealand Emissions Trading Scheme (NZ ETS) will operate alongside other policies and measures to reduce domestic emissions and achieve New Zealand’s broader sustainability objectives.

1.2 Objective of the NZ ETS

The NZ ETS is one of a suite of policy measures that the government is implementing to meet its climate change and sustainability objectives. Several other measures have already been implemented to encourage reductions in greenhouse gas emissions, and it is likely that further measures will be required to work alongside the NZ ETS. However, the government envisages that the NZ ETS will be New Zealand’s primary price-based measure to reduce greenhouse gas emissions.

The overall objective of the NZ ETS has been decided in principle by the government as follows:

That a New Zealand Emissions Trading Scheme support and encourage global efforts to reduce greenhouse gas emissions by:

  • reducing New Zealand’s net emissions below business-as-usual levels; and
  • complying with our international obligations, including our Kyoto Protocol obligations;

while maintaining economic flexibility, equity, and environmental integrity at least cost in the long term.

The objective ensures that the NZ ETS focuses on the following factors.

  • Supporting global efforts by reducing New Zealand’s net greenhouse gas emissions below business-as-usual levels. New Zealand is reliant on effective international action, and the best way of supporting it is a credible programme of action to manage domestic emissions downwards at least cost. The reference to net emissions reflects the inclusion of both sources of emissions and removal by forest carbon sinks in the NZ ETS.

  • Maintaining economic flexibility, equity and environmental integrity. Economic flexibility suggests a trading mechanism that enables participants to reduce their own emissions or to fund emission reductions by other parties. It also suggests that the scheme be adaptable to changes in future international climate change agreements, and that, as a general rule, domestic policy settings be reflective of international policy settings. Equity includes considerations of the ability of consumers to pay, fair burden sharing between and within sectors, and fair burden sharing between taxpayers and the private sector. The concept of environmental integrity suggests the use of an absolute rather than an intensity-based core obligation, the linkage of the scheme to international Kyoto markets, and the use of binding non-compliance measures.

  • Producing desired outcomes at least cost in the long term. A least-cost approach suggests there be no mandated preference for domestic emission reductions over international ones within the NZ ETS. This is desirable on economic efficiency grounds, and supports the emissions trading principles in the Kyoto Protocol. However, the government’s overall climate change package will be designed to produce domestic emission reductions below business as usual. The objective also guides the design of transitional assistance measures that seek to produce desired long-term outcomes.

1.3 Staged implementation and assistance to businesses and households

The government has agreed that a transitional pathway will be used to introduce different sectors into the NZ ETS over time. The scheme will be introduced in stages, beginning with the forestry sector in 2008 and then liquid fossil fuels (primarily transport) in 2009. The stationary energy and industrial processes sectors will enter in 2010, and the agriculture and waste sectors in 2013. By 2013, all sectors and all greenhouse gases will be covered by the scheme, so that all major sectors of the New Zealand economy will, from that date, be exposed to the international price of emissions, at the margin, for all operations.13

In order to avoid imposing rapid change on the economy, the scheme will feature a range of measures aimed at smoothing the transition faced by some business sectors; for example, by free allocation of emission units for an initial period. Starting from 2013, that assistance will decrease on a linear basis until it is completely phased out in 2025.

Parallel to these, there will be a number of measures to support the ability of New Zealanders to respond effectively to the NZ ETS price signal, to address non-price barriers to the uptake of low- or zero-emissions technologies and practices, and to ensure that adjustment support is provided to households through energy efficiency measures and measures to assist low-income households.

1.4 In-principle decisions on core design features of the NZ ETS

The government has made a set of in-principle decisions on the core design features of a NZ ETS, and on several more detailed design features that will apply to the forestry and liquid fossil fuels (primarily transport) sectors, which will be the first entrants into the NZ ETS. “In principle” means that the government would need relatively compelling reasons to adopt a different policy approach. These decisions will be confirmed subject to engagement with stakeholders and Māori before legislation is introduced.

For the remaining areas of the NZ ETS design, particularly those relating to how it will apply to other sectors, the government has identified one or more preferred options. These indicate the government’s initial preference, but we are actively seeking further discussion with stakeholders and Māori, and have an open mind on different options they may put forward.

Legislation to enact the core elements of a NZ ETS will be introduced and passed during the life of the current Parliament. This legislation will also include specific rules for the first sectors to enter the NZ ETS. Provisions to guide the entrance of subsequent sectors may also be included. But engagement with those sectors will continue over the coming years on sector-specific design details.

1.5 This framework document

This framework document explains the design of the NZ ETS and the reasoning behind the government’s in-principle decisions. It sets out the rationale, implications and proposed form that emissions trading will take in New Zealand. The document also forms the basis for the next stage of engagement with the New Zealand public, stakeholders and Māori, which will help the government to finalise the details of the ETS.

After this introduction, the document is divided into the following chapters:

  • The Context for New Zealand’s Emissions Trading Framework

  • The Rationale for Emissions Trading

  • Core Design Features

  • How Emission Units are Allocated

  • Design Features for Individual Sectors

  • The Impacts of the Emissions Trading Scheme

  • Emissions Trading: Issues for Māori

  • Approach to Legislation for the Emissions Trading Scheme.

The background to the government’s decisions on an ETS is presented in more detail in New Zealand’s Climate Change Solutions, which discusses the problem of climate change (both in terms of the scientific evidence and the challenge to global governance), provides an overview of the government’s policy response to climate change, and links this response to the government’s goals in relation to moving New Zealand towards sustainability in environmental, economic and social terms. This document is available at:

13 This objective will be modified if progressive unit obligations are applied in some sectors. Under a progressive obligation, a participant would surrender units for a percentage of the full unit obligation during a transitional period. For example, under a 50 per cent obligation, a participant would surrender one emission unit for every two tonnes of emissions. As a result, progressive unit obligations would reduce the marginal price signal during a transitional period. A progressive obligation would be very likely to increase over time until it became a full obligation to surrender one unit for each tonne of emissions.