Memorandum by the New Zealand Government
SUMMARY
1. New Zealand has an interest in the EU
ETS because New Zealand currently has draft legislation for a
domestic emissions trading scheme, the Climate Change (Emissions
Trading and Renewable Energy Preference) Bill, before Parliament.
2. The EU ETS is the world's largest existing
mandatory cap-and-trade scheme. As such, the EU ETS can be regarded
as the cornerstone of the international carbon market at present.
Proposed changes to the EU ETS have direct relevance to the international
market, and by extension to the New Zealand Emissions Trading
Scheme (NZ ETS).
3. New Zealand has views on a number of
the issues outlined in the House of Lord's Call for Evidence as
follows:
(i) Both internationally and in our domestic
ETS legislation, New Zealand advocates the use of emissions trading
with as broad coverage of sectors and gases as is practically
possible. The proposed NZ ETS includes all major greenhouse gas
sectors and gases including agriculture and forestry. New Zealand
would support the EU ETS looking to broader coverage of sectors
in phase 3 than is currently proposed. New Zealand looks forward
to continuing to exchange information with the UK Government on
this matter.
(ii) New Zealand encourages the EU ETS to continue
to be outward looking and encourages liberal use of the Kyoto
Protocol's flexible mechanisms, in order to support the international
carbon market and the uptake of least cost abatement options.
(iii) Linking the EU ETS and NZ ETS is an option
New Zealand would like to further explore with the UK Government.
BACKGROUND
4. The European Commission's proposals for
phase 3 of the EU ETS are of considerable interest to New Zealand
due to the fact that the EU ETS is the world's largest mandatory
greenhouse gas trading scheme and in effect is the cornerstone
of the international carbon market at present. Decisions made
in relation to the EU ETS for phase 3, and in particular decisions
as to the type and quantity of international credits that are
permitted into the EU ETS for compliance purpose will have a strong
bearing on the structure of the international carbon market.
5. New Zealand is interested in future developments
within the EU ETS because the New Zealand Government currently
has draft legislation for a domestic emissions trading scheme,
the Climate Change (Emissions Trading and Renewable Energy Preference)
Bill, before Parliament. It is expected that the Bill will pass
into legislation later this year. The NZ ETS is fundamentally
designed to be consistent with the rules established by the Kyoto
Protocol and the draft legislation allows use of the Kyoto Protocol's
flexible mechanisms. As the EU ETS is currently the major source
of demand for CERs and in effect drives the price levels of these
units, decisions made pertaining to the design of the EU ETS would
directly influence participants in the proposed NZ ETS.
6. The proposed NZ ETS is a relatively small
market. Therefore, in order to ensure liquidity and alignment
of domestic prices with international prices, it is important
that the NZ ETS is linked to larger markets. In New Zealand's
view, the Kyoto mechanisms (international trade in Assigned Amount
Units (AAUs), the Clean Development Mechanism (CDM) and Joint
Implementation (JI)) provide the best and most readily available
means to link to a wider market. Consequently, New Zealand has
designed a scheme that fits within the architecture of the Kyoto
Protocol. It permits sales and purchases between the New Zealand
market and the international market with as few restrictions as
possible. This is also necessary to ensure that compliance costs
are kept to a minimum.
7. New Zealand is advocating in the UN climate
negotiations for improvements in the fungibility and transparency
of the market for Kyoto units. However, while there are potentially
changes to international rules that could improve the functioning
of the market, the reality is that decisions taken by countries
in implementing their domestic and regional trading schemes also
have a major influence on the functioning of the international
market.
8. As more domestic/regional trading schemes
begin to emerge, bilateral or multi-party linking arrangements
will play an important role in expanding coverage and improving
the overall efficiency of emissions trading schemes. The NZ ETS
has been designed to keep linking options open. In the face of
uncertainty as to the nature of an international climate agreement
post-2012, the importance of bilateral linking arrangements may
grow in importance.
9. Box 1 outlines some of the major design
features of the NZ ETS and key differences with the EU ETS.
Box 1
MAJOR DESIGN FEATURES OF THE NZ ETS AND KEY DIFFERENCES
WITH THE EU ETS
The NZ ETS will be introduced across the economy
through a staged process that will allow gradual adjustment such
that, by 2013, all major sectors of the New Zealand economy will
be exposed at the margin to the international price of carbon.
The proposed implementation pathway is:
— 1 January 2008; forestry;
— 1 January 2010: stationary energy;
— 1 January 2010: industrial process
emissions;
— 1 January 2011; liquid fossil fuels
(mainly transport); and
— 1 January 2013: agriculture, waste
and synthetic gases.
The liquid fossil fuels sector will also have voluntary
reporting from 1 January 2009 and mandatory reporting from 1 January
2010. Voluntary reporting will also be enabled for agriculture,
waste and synthetic gases from 1 January 2011 and mandatory reporting
will be required for those sectors from 1 January 2012.
Free allocations will be given to industries that
are likely to face higher costs in respect of their emission than
competiting firmst hat do not face comparable emissions obligations
and to participants from the agricultural sector over a tansition
period, and will be phased out by 2030. Free allocation will also
be given to owners of pre- 1990 forests who are affected by deforestation
requirements under the NZ ETS.
The New Zealand Unit (NZU) will be the primary domestic
unit of trade. For the first commitment period, NZUs will be fully
comparable to and backed by Kyoto units.
The NZ ETS will allow both sale and purchase from
international trading markets. This is essential for a small market
like New Zealand, sinc eit will aid liquidity in the market and
act as a safety valve on price.
The NZ ETS differs in a number of key respects from
the EU ETS. Most notably, the NZ ETS places only limited restrictions
on the type and quantity of international units that can be used
for compliance purposes and the NZ ETS will include all major
greenhouse gases and sectors by 2013.
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New Zealand's views are discussed below according
to the specific issues outlined in the House of Lord's Call for
Evidence.
LEVEL OF
EMISSIONS REDUCTIONS
10. New Zealand supports effective global
action on climate change. This will require emission reduction
efforts by the world's major developed and developing country
emitters. New Zealand is actively engaged in the UN climate change
negotiations under the Framework Convention on Climate Change
and its Kyoto Protocol.
11. Within the Kyoto Protocol negotiations,
New Zealand has said that an appropriate aggregate range of emissions
reductions for Annex I Parties is 25 to 40% below 1990 levels
by 2020 (this corresponds to the lowest greenhouse gas stabilisation
band currently assessed by the Intergovernmental Panel on Climate
Change), but to be meaningful this needs to be in the context
of a global agreement involving at least all of the major emitting
economies.
12. It is expected that there will again
be a spread of emission reduction commitments for individual countries.
In setting further commitments for individual countries, it will
be important to know first what rules will apply, to take into
account national circumstances, and to consider comparability
of effort between countries (this is recognised in the Bali Action
Plan).
SCOPE AND
OPERATION
13. New Zealand strongly advocates incorporating
all greenhouse gases covered by the Kyoto Protocol: this enhances
global efforts to reduce greenhouse gas emissions. This is reflected
in the design of the NZ ETS. Reasons for the "all sectors
all gases" approach reflected in the NZ ETS are two fold:
(i) The first being an argument of economic efficiency:
the broader the coverage of an ETS the greater the potential for
least cost abatement opportunities to be utilised; and
(ii) There are strong inter-sectoral equity arguments
for bringing as many sectors as possible within an ETS.
14. We would therefore support the eventual
inclusion of as many gases and sectors as is practically possible
within the EU ETS. While there are different methodological and
administrative issues associated with including agriculture and
forestry sectors, we are confident that the NZ ETS provides a
good example as to how these sectors can be included within an
ETS, while ensuring high levels of environmental integrity. New
Zealand has shared its experience with the UK Government on a
number of occasions and looks forward to continuing this exchange
of information.
15. Arguments against the inclusion of certain
sectors and gases often refer to the "appropriateness"
of some sectors for inclusion in a trading mechanism. These arguments
often refer to levels of uncertainty with the monitoring and verification
of emissions (or removals) and whether or not there are emissions
abatement opportunities within those sectors. Certainly for any
sector or gas to be included, there has to be a relatively high
degree of confidence that emissions and removals can be estimated
and reported accurately (at least at an aggregate level). New
Zealand is undertaking extensive and ongoing work in this area.
16. We note that under the Commission's
current proposal, the Land Use, Land Use Change and Forestry (LULUCF)
sectors still remain excluded from the EU ETS. However, to respond
to climate change, the world needs to make full use of available
mitigation potential. As noted by the IPCC, forestry offers significant
mitigation potential and, in New Zealand's opinion, can be included
in emissions trading schemes whilst maintaining environmental
integrity.
17. The concerns raised by the Commission
regarding permanence and leakage risks, additional monitoring
requirements, and a concern that the simplicity, transparency
and predictability of the EU ETS would be considerably reduced
due to an uncertain and potentially large supply of units entering
the market from the LULUCF sector, can be overcome. The experience
and insights garnered during the development of the NZ ETS provides
important lessons in doing this.
18. We also note the Commission's proposal
to exclude road transport and shipping from the EU ETS in phase
3. In New Zealand's view, these sectors can readily be brought
into an ETS using an upstream point of obligation. Ultimately
the choice of whether or not to exclude transport fuels depends
on what other policy, including taxes, may be in place in different
jurisdictions and how effective they are. We are unable to comment
on this particular issue.
ALLOCATION AND
AUCTIONING
19. New Zealand notes the difficulty of
designing allocation plans to address issues of international
competitiveness and compensation for stranded assets, while ensuring
price signals are fully devolved to those responsible for emissions
over time. The approach taken in the NZ ETS is to give no free
allocation to sectors that are able to pass on the costs. For
these reasons, under the proposed NZ ETS legislation, no free
allocation of units is given to electricity generators or to the
transport fuels sectors. The Commission's current proposals on
allocation appear to be aligned with the allocation design elements
of the NZ ETS therefore New Zealand is generally supportive of
the proposals as they stand.
INTERNATIONAL DIMENSION
20. The European Commission's proposals
for phase 3 of the EU ETS are of considerable interest to New
Zealand due to the fact that the EU ETS is the world's largest
mandatory greenhouse gas trading scheme and in effect is the cornerstone
of the international carbon market at present. Decisions made
in relation to the EU ETS for phase 3 and in particular, decisions
as to the type and quantity of international credits that are
permitted into the EU ETS for compliance purpose will have a strong
bearing on the structure of the international carbon market.
21. New Zealand welcomes the proposal to
continue to allow CDM credits to be used in phase 3 of the EU
ETS for compliance purposes. However New Zealand is concerned
that the proposal to limit the volume of these credits in phase
3 to phase 2 levels has created some uncertainty in the international
carbon market as a result. While all countries need to make decisions
as to the relative balance between domestic emission reduction
efforts and units purchased from the international market, the
EU ETS, as the major source of demand for CDM credits, has a significant
impact on future investment decisions in such projects in developing
countries. A more liberal approach to the use of international
credits within the EU ETS would continue to support the international
carbon market and the transfer of technology to developing countries.
22. New Zealand welcomes the proposal to
enable linking with other emissions trading schemes. New Zealand
notes in this context that the Kyoto Protocol already provides
Parties with a mechanism for linking, that is, trade in AAUs and
project-based mechanisms (CDM and JI). Bilateral linking arrangements
between countries (ie mutual recognition of allowances) are a
further means to expand the scope and efficiency of domestic/regional
trading schemes.
23. Linking to the EU ETS is an option that
New Zealand may wish to consider in future years. The NZ ETS differs
in a number of key respects from the EU ETS. Most notably, the
proposed NZ ETS applies only limited restrictions on the type
and quantity of international units that can be used for compliance
purposes. The proposed NZ ETS will also include all major greenhouse
gases and sectors in the economy by 2013, including transport
fuels, forestry and agriculture (see Box 1). Such design differences
should not necessarily preclude linking opportunities, the key
requirement generally being comparable levels of ambition in respective
schemes. New Zealand officials have met with representatives of
the European Commission and EU member states (including the UK)
on a number of occasions to discuss prospects for bilateral linking
arrangements between the NZ ETS and the EU ETS and wish to continue
this dialogue in the future.
26 June 2008
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