This chapter covers the essential design features of the emissions trading scheme, including:
- the sectors and greenhouse gases that are covered
- when each sector will be brought into the scheme
- which parties will have obligations under the ETS
- how the obligation is defined
- the unit of trade
- international linkage
- the quantity of New Zealand emission units to be issued
- the possible inclusion of offsets
- the design of the emissions trading market
- establishing an emissions unit register
- compliance, enforcement and the administering agency
- future evolution.
Emissions trading schemes share three generic features in that they all:
set the quantity of emissions and allow the market to set the price
place an obligation on entities to monitor and report their emissions, and surrender some form of instrument (often called a permit, allowance or emission unit) to cover their emissions
allow trading of the units.
That leaves a large number of design features to be determined, including:
which sectors and greenhouse gases are included in the scheme
the timing of entry for various sectors
which parties will have obligations to participate under the scheme
how the core obligation is defined
the unit of trade
the quantity of emission units to be issued
whether offsets are allowed and under what rules
the design of the emissions trading market
establishing an emission unit registry
compliance and enforcement measures (including the role of an administering agency)
the process for future evolution and modification.
This chapter examines each of these in order, and identifies the in-principle decisions that have been made by the government and the priority areas for engagement. The chapter includes a series of text boxes. These are used to provide background on specific issues that are pertinent to emissions trading, and to explain in some detail the reasoning behind particularly important parts of the policy design and the government’s preferred options.
Another important design feature is the mechanism for the allocation of emission units into the market. This design feature is addressed at a broad level in chapter 5, and at a sectoral level in chapter 6.
4.2 Which sectors and gases the NZ ETS will cover
During the recent consultation on the government’s Discussion Paper on Measures to Reduce Greenhouse Gas Emissions in New Zealand Post-2012, many submitters responded to a question on which sectors could and should be included in a NZ ETS. Virtually all submitters emphasised the need to include as many sectors as possible to encourage liquidity in the market. However, perceptions of what is possible varied widely. Several submissions simply suggested that a NZ ETS should be as broad as possible, but did not specify any further details.
In the government’s view, equity, environmental integrity and economic efficiency suggest that an ETS should have the broadest possible coverage, for the following reasons.
There is little justification on equity grounds for any sector to be excluded, and hence subsidised by other sectors and by the taxpayer.
Environmental integrity suggests that an emissions price should be applied to all emissions above a de minimus level.
An emissions trading scheme operates most efficiently when there are a sufficient number of participants and many units available for trade.
A broader emissions trading scheme creates greater opportunities to realise least-cost options for reducing emissions.
Another question in the discussion document asked whether the same price of emissions should apply across all sectors of the economy in the long term. The majority of submissions responding to this question felt that it should.
The government has made an in-principle decision that the NZ ETS will include all major sectors and all greenhouse gases specified in the Kyoto Protocol over time. Minor exceptions will be allowed for emission sources below a de minimus threshold. This decision aligns with the overall objective of the NZ ETS by ensuring economic efficiency, equity and environmental integrity.
4.3 Timing of entry for various sectors
Although the government recognises that it is desirable to include as many sectors and gases as possible in a NZ ETS, it also recognises that some sectors will be ready to participate earlier than others due to technical and administrative capabilities. There is therefore a need for a phased approach for sectoral entry into the NZ ETS.
Internationally, most emissions trading schemes have adopted a phased approach. The first phase of the European Union Emissions Trading Scheme (EU ETS) began in 2005 and included carbon dioxide (CO2) emissions from large emitters in the stationary energy and industrial processes sectors. This included approximately 12,000 installations with obligations, representing approximately 45 per cent of CO2 emissions in the European Union. The European Commission has indicated that it intends to expand the scheme during its second commitment period (2008 to 2012) to include domestic aviation emissions. The Commission has also indicated that beyond 2012 it intends to include more sectors and other gases in the EU ETS.
New Zealand presents a unique context for phasing the introduction of an ETS. Our stationary energy sector contributes approximately 23 per cent of total greenhouse gas emissions and the industrial processes (non-energy) sector contributes approximately 5.6 per cent. The ETS would directly involve about 80 major firms in these sectors. In contrast to the EU and other developed nations, approximately 49 per cent of New Zealand’s emissions derive from agriculture, while forestry offsets the equivalent of approximately 32 per cent20 of our total emissions. Given the significant contribution of the non-energy sectors to New Zealand’s emissions balance, and to avoid distortions in the economy, it is important that they be included in the scheme as early as possible.
4.3.1 Introduction of all sectors through a staged approach
The government has decided in principle that individual sectors will enter into the NZ ETS through a staged process based on sectors’ preparedness for trading, administrative feasibility and consideration of price effects through the economy. This document proposes dates that the government believes are achievable. Consistent with the interim objective, all sectors will have entered the scheme no later than 1 January 2013. Figure 4.1 and Table 4.1 present the approach for introducing sectors into the NZ ETS.
The forestry sector will be the first to enter the scheme, with landowners assuming unit obligations for eligible deforestation emissions and the opportunity to earn units for eligible afforestation activity as of January 2008. The stationary energy and industrial process sectors will assume unit obligations under the scheme in January 2010, followed by the liquid fossil fuels (mainly transport) sector in January 2011. The final sectors to enter the scheme – agriculture, waste and synthetic gases – will assume unit obligations in January 2013. Later entrants to the scheme (ie, the liquid fossil fuels, agriculture, waste and synthetic gas sectors) will have an “on ramp” into the scheme through voluntary reporting starting two years before their unit obligations commence, and mandatory reporting starting one year before their unit obligations commence.