An emissions trading scheme ETS is a tool that puts a quantity limit and a price on emissions. Its "currency" is emission units issued by the government. Each unit is like a voucher that allows the holder to emit one tonne of greenhouse gases. In a typical ETS, the government caps the number of units in line with its emissions target and the trading market sets the corresponding emission price.
New Zealand Emissions Trading Scheme
In the past, we had no limit on the number of emission units in the system, which is why emission prices stayed low, our domestic emissions continued to rise, and the system accumulated a substantial number of banked units. The government decides which entities typically companies in each sector e. In some cases e. There is a trading market where entities can buy units to cover their emissions liability and sell units they don't need.
The trading price depends on market expectations for supply versus demand. Steeper targets mean lower supply and higher emissions mean higher demand; both mean higher emission prices and more behaviour change.
Emissions Trading Scheme
Each liable entity is required to report emissions and surrender to the government enough units to cover the amount of greenhouse gases they release. The companies that have to surrender units pass on the associated cost to their customers, like any other production cost. In this way, the emission price signal flows across the economy embedded in the cost of goods and services, influencing everyone to make more climate-friendly choices.
There are several ways for entities to get units.
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First, some get free allocation from the government. Currently, these free allocations are granted to trade-exposed industrial producers for products such as steel, aluminium, methanol, cement and fertiliser as a way of preventing the production and associated emissions from shifting to other countries without reducing global emissions.
Auctioning
Producers who emit beyond their free allocation need to buy more units, whereas those who improve their processes and emit less can sell or bank their excess units. Second, entities can earn units by establishing new forests or through industrial activities that remove emissions.
By stripping emissions from the atmosphere, such removal activities make it possible to add units to the cap without increasing net emissions. The government publishes information on ETS emissions and removals every year. Third, entities can buy units from the government through auctioning. The decade-in-the-making strengthening of the ETS is finally upon us, but now questions are being raised over whether the scheme will actually make a difference, Marc Daalder reports. The Emissions Trading Scheme ETS , New Zealand's take on a cap-and-trade carbon market, will finally have the eponymous cap on the number of units in the market.
Unfortunately the rules set by previous governments left the scheme too weak to have any real impact on reducing our emissions," Shaw said. This has meant that emissions permitted under the scheme were, in effect, unlimited. I am delighted to say we are finally changing that.
The changes I have announced today will better translate our emission reduction targets into a predictable emission price, which will incentivise our biggest polluters to invest in the transition to a clean, climate-friendly economy.
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The regulations set out a provisional emissions budget of million tonnes of CO2, or the equivalent amount of another greenhouse gas, to be emitted over the five years from to This budget will be replaced by an official emissions budget for that will be released by the Climate Change Commission in February. The provisional budget will cap the number of carbon credits in the market at million over the next five years, with each unit representing the right to emit one tonne of CO2-equivalent CO2e. Another 90 million will be auctioned into the market and the remaining 27 million will have to come from stockpiles of NZUs built up in preceding years.
The remaining million tonnes Mt of CO2e will be emitted outside of the ETS, largely by agriculture which is not expected to be included until Auctions within the carbon market are expected to be conducted somewhere between new price floors and ceilings announced as part of the regulations today.
Both will increase by 2 percent a year to account for inflation. Significant reforms to the forestry sector's involvement in the ETS have been pushed off by a year as the industry grapples with Covid They will come into effect from The provisional emissions budget that the Government has created has swiftly come under criticism, with Greenpeace NZ chief executive Russel Norman telling Newsroom it allows for far more emissions in the coming five years than the country can afford, from an ecological perspective.
If the Paris target is 60 million tonnes of CO2e in net emissions, over 10 years, this is roughly 70 for the first five years. It's quite a significant increase over what they've agreed to and what New Zealand has committed to under the Paris Agreement," he said. The budget allows for Mt CO2e in net emissions over the next five years, but the Government's commitment under the Paris Agreement is to only emit around Mt CO2e in net emissions by This would imply the Government would have to drastically slash emissions in the second half of the decade, to Mt CO2e over the five years or an average of Such a move is unlikely, Shaw freely admits.
Instead, it is likely that New Zealand will have to purchase credits from the as-yet-unfinished global carbon market called for in the Paris Agreement, to offset the shortfall in emissions reductions. And that's because the NDC, when National came up with it, were planning for up to 85 percent of it to be met with offshore units.
So the assumption that we've got, and we built this into the Zero Carbon Bill, is that some of it will be met by offshore units, but ultimately that's the last resort not the first resort," he said. Nonetheless, Shaw defends the way in which the provisional budget was created, saying it was a practical output. The top-down approach is what has to happen [to meet our net zero by commitment]. The bottom-up approach is the 'what's possible' approach. That relies on a pretty good understanding of the industries that we have in New Zealand, what technology is currently available and able to be rapidly commercialised in any given five-year period," he said.
What can we roll out in the next five years? There can be no magic science. That might be and beyond, but right now you've just got to go with what's around. And that's why the provisional emissions budget is reasonably shallow at this point.
Emissions Trading Scheme | EPA
You combine those two things - what's possible and what has to happen - and basically gives you the answer that you've got. If met, the provisional budget would represent 15 Mt CO2e in reductions over the five-year period from where emissions were previously forecast to be. While this debate concerns all of the country's emissions over the coming years, just 45 percent of these emissions are covered by the ETS.
This inevitably raises the question of whether the ETS is useful at all. Increasingly, environmentalists and climate economists are arguing for a holistic approach to climate change that puts the ETS to use but doesn't rely on it as a crutch to avoid implementing other, radical policies. That's not enough to incentivise cutting high-emitting behaviour if the Government doesn't introduce other policies that make the transition to a low-carbon economy easier.
Carbon pricing is a blunt instrument.