Examination of Witnesses (Question Numbers
343-359)
Mr David Brash, Mr John Scott, Mr Stuart Dymond and
Ms Louise Gault
9 OCTOBER 2008
Q343Chairman: Hello. Can I just take a minute
to explain? We are towards the end of our inquiry into the EU's
Emissions Trading Scheme. We are particularly interested in the
work you have been doing in New Zealand and we are very grateful
for the fact that you have found time so late in the evening to
enlighten us. Because of the lateness of the evening we will try
and keep it short. We have a shorthand writer here taking a note
and, of course, because it is a formal evidence session you will
receive a transcript of the proceedings so you can go through
it and make any corrections of errors that have taken place, but
for the shorthand writer's benefit could you introduce yourselves
please?
Ms Gault: My name is Louisa Gault. I
am the UK Desk Officer with the Ministry of Foreign Affairs and
Trade.
Mr Brash: I am Dave Brash. I lead the
Emissions Trading Group that has been designing the Emissions
Trading Scheme in New Zealand.
Mr Scott: My name is John Scott. I work
with the Treasury here in New Zealand and I have been heavily
involved in a lot of the policy issues around emissions trading.
Mr Dymond: Good evening. I am Stuart
Dymond. I am with the Ministry of Foreign Affairs and Trade as
part of the climate change team that works in the international
negotiations.
Q344 Chairman: Thank you very much indeed.
How we normally handle these sessions is that we have an opportunity
for those giving evidence to make any general statements at the
beginning and then go on to a period of question and answer. Do
you want to make any initial statement? Would that be helpful?
Mr Brash: Yes, I will make an initial
statement. It will be short. I just want to make a few introductory
remarks. You have got our submission and I am very keen to get
on to the opportunity to have the dialogue part of it, but it
is an opportunity for us to update you on the events that have
happened in New Zealand since we made the submission. Of particular
import is that our emissions trading legislation is now fully
through its passage in our Parliament and is now law. While there
were changes in the design relatively late in the legislative
process—you will be aware that we have a mixed member proportional
government system and there were a number of changes made at the
last minute—the fundamentals remain intact. In particular
it is "all sectors all gases" and internationally linked.
It is an absolute as opposed to an intensity-based scheme and
it seeks to replicate the settings that are in the Kyoto Protocol
in our domestic policy. Our underpinning philosophy is to seek
to work within the international frameworks and to enhance these
frameworks. We are seeking to minimise the costs of meeting our
climate change objectives wherever possible. By minimising these
costs we believe we give ourselves the best chance of achieving
our environmental goals. These principles apply to both domestic
and international levels. There is one more generic point I would
like to make prior to briefly summarising our submission. That
is that the circumstances of different countries differ for a
whole range of perfectly valid reasons, and as such the responses
of those different countries which have the challenge of reducing
emissions should not be expected to be exactly the same. Our domestic
response is quite appropriately tailored to the New Zealand situation,
including our unique emissions profile, and we can go into that
later, but in particular agriculture and forestry are unique.
In some areas of climate change in emissions trading policy we
may lead; in many others we draw off lessons from others such
as yourselves in the UK and in the EU. We are confident our initiatives
are appropriate to our given circumstances. The key points from
our submission are that both internationally and in our domestic
ETS legislation New Zealand advocates the use of emissions trading
with as broad a coverage of sectors and gases as is practically
possible; secondly, New Zealand encourages the EU ETS to continue
to be outward-looking and encourages the liberal use of the Kyoto
Protocol flexibility mechanisms in order to support the international
carbon market in the uptake of the least cost abatement options.
Finally, looking to the EU ETS, we are interested in linking two
schemes together. This is an option New Zealand would very much
like to further explore with the UK Government. We are very happy
to take further questions.
Q345 Chairman: Thank you very much indeed.
That is a very helpful initial statement. What is particularly
interesting to us about your approach is the comprehensive nature
of your coverage, covering agriculture, forestry, shipping and
road transport, because the clear weight of evidence that we have
had from European and particularly UK witnesses and our own Government
is that there is a hesitancy to go into some of those areas, particularly
agriculture and forestry, on the basis that these are areas that
are not ripe yet for inclusion in any emissions trading scheme,
I think partly because of the difficulty of verification and monitoring.
Have those issues come up in New Zealand and what have been the
critical arguments that have convinced you of the practicality
of going particularly into those four areas, and do you see the
possible extension of your scheme into the EU to cover those areas
of activity?
Mr Brash: I will get John to answer that
question, but you are right: those issues that you have put on
the table are right at the centre of the debate here as well,
but I will ask John to respond to that.
Mr Scott: They are pertinent questions
and, as Dave mentioned, they are certainly issues that we have
discussed at length here. Just to draw out what Dave said in the
initial comments, our underpinning philosophy is to reflect in
the domestic policy settings what the Kyoto Protocol sends us
and we consider that to be an economic signal on the country.
The reality is that, as both forestry and agriculture are included
in the Kyoto Protocol, for us to exclude those sectors would mean
that we are excluding just about half of our greenhouse gases
in the case of agriculture and just about 20% in the case of forestry,
possibly more, depending on how you measure it. Forestry has a
post-1989 and a pre-1990 element to it, and if you were to take
out those two from our ETS you would be looking at perhaps 70%
of our emissions not being in there. When you think about that
you say, "Okay, why do we have an ETS?", and you start
questioning the way you are going, so the choice that we had when
we were designing our domestic policy response was to say, "How
do we best manage the Kyoto liability and its successors in terms
of the framework?". We could have put in regulatory controls
to try and reduce greenhouse gases or we could have put in a price-based
mechanism. We chose the latter because we thought that, albeit
there are some quite difficult measurement issues, we are still
better to use a price-based mechanism because they are so powerful
and they are so effective and so efficient as opposed to regulatory
measures. It is not that we argue that you can measure these things
perfectly—you cannot, but you can measure them, in our view,
to a good enough extent so that it is better than the next best
policy option. I will talk if you wish on what we are doing in
terms of forestry and agriculture, which are perhaps two of the
hardest areas. In terms of forestry, there are the two angles
of forestry. There is post-1989, which is the growth on land that
was not in forest on 1 January 1990, and I will point out that
our land use is quite dynamic. A hundred and fifty years ago perhaps
just about all of New Zealand was in forest. Now a relatively
small but still significant proportion is in forestry, and that
proportion changes with a whole range of things, particularly
economic circumstance. What we are primarily measuring is the
volume of land that is in forest and new forest, the trees that
are on there, the species, and the age of that forest. We have
pretty good measures for what the growth rates are in different
regions of the country for different species of trees, so ultimately
what we need to measure is the land area that is in that type
of forest. For pre-1990, again, we are measuring changes in area
fundamentally, as we know a reasonable amount about the carbon
stock in different types of forest. Our approach is slightly conservative,
so we are trying not to expose the Government, the Crown, to particular
fiscal risks. My colleagues have reminded me that I am talking
about plantation forestry here, which is major, but there is also
quite a large area of New Zealand in native bush. From the forestry
side it is really the change in land area plus also relatively
average growth rates that you have to measure, and that is giving
a pretty powerful economic signal and is certainly driving behaviour
now. In terms of agriculture, we are working through the issues,
it is fair to say. We have not finalised our design fully and
agriculture is not coming into our scheme until 2013. The most
likely area where we will start is to have the obligation at processor
level, largely if not entirely, and what that means is a dairy
processor, perhaps a meat works, something like that, and, while
we cannot perfectly give an economic signal, we believe we can
give a good enough economic signal so that you are measuring at
least a decent part of what is driving your emissions. That is
where we think we are likely to go. In terms of your final question:
are there some lessons to be learned from what we are doing for
the UK or for Europe, I am sure there are and we would be very
happy to share them.
Q346 Chairman: Could I just clarify one
thing? When you are talking about agriculture, what is your average
farm size?
Mr Scott: It varies. For a dairy farm,
where a lot of our emissions come from, it is probably something
similar to 100 hectares. Do you use hectares or acres?
Q347 Chairman: We do not mind.
Mr Scott: It is 250-300 acres perhaps
for a dairy farm. For a sheep farm it is certainly over 1,000
acres—1,000, 2,000, 3,000 acres. There is a reasonably small
number of very extensive sheep farms that might be 100,000 acres-plus,
but probably the bulk of them are 2,000-3,000 perhaps. On the
dairy farms, we already have a computer programme for just about
every dairy farm in the country, which is a nutrient budgeting
computer programme and that produces a lot of information that
you would want at a farm level about greenhouse gas output, so
we have quite sophisticated systems at a dairy farming level.
At the sheep and beef level there are less sophisticated systems
for understanding what is going on there.
Q348 Lord Cameron of Dillington: I have
two questions, one on forestry and one on agriculture. On forestry,
if you fell your woodland and replant it, is that a carbon emission
because presumably you are still absorbing the carbon in the new
trees? The second question on agriculture is, do you have a de
minimis? If a farm is only ten acres, which is the average
size farm in quite a lot of European countries, for instance,
are they included in the scheme? Where do the smaller farms stand?
Mr Scott: We will take your second one
first if that is all right. We are not sure yet, to be honest,
in that if you ended up with a farm-level point of obligation,
ie, each individual farmer has to determine their carbon output
and account for it, you almost certainly would have a de minimis.
I do not know what the size would be but you would need to have
one so that you were not picking up someone with one cow or one
sheep out the back. In terms of forestry, there are different
rules that the Kyoto Protocol sets up. For the pre-1990 forests
if you fell the timber and then replant there is no cost to the
country, so we replicate that in our domestic policy systems.
For the post-1989, if you fell and replant you must pay for some
loss of carbon under the Kyoto rules when you fell the trees and
then you count the carbon again or you are eligible for credits
when they regrow, so again we replicate those in our domestic
policy systems.
Mr Brash: Can I just add to that in terms
of agriculture, and this is repeating something John said earlier
but I just wanted to emphasise it? Agriculture does not come in
until 2013. We have a lot of work to do to work out the detail
of how that is going to work in terms of monitoring and how the
system will work, so, even where the point of obligation is going
to be, whether it is at the farm level or the processor level,
from an administrative point of view, if it is at the processor
level we are talking about how many companies in New Zealand?
Mr Scott: Just over 100.
Mr Brash: We are talking about just over
100 companies. If we are talking about at a farm level we are
talking about 30,000, and so we have a major issue to work through
there—compliance costs versus whether you put the incentive
at the farm level.
Q349 Lord Plumb: You spoke when answering
the Chairman's question on the size of farm but you did not really
say anything about the size of unit. With the size of your dairy
herds, some of them are 3,000, there must be an emission of a
lot of gas from some of those herds. Are you considering the possibility
of a limit there, and to what extent are you discussing all these
matters with my good friends in Federated Farmers?
Mr Scott: We are not considering a regulatory
limit on farm size, if that is what you mean by the question,
in that we would prefer to use the economic instrument of the
ETS—along with other economic drivers—to make the
decisions about how big farms should be. We certainly are discussing
the issue with your good friends (and ours) at Federated Farmers.
There is some quite active engagement going on at a working level
and I am personally involved in that and there are pretty good
working relationships.
Q350 Lord Cameron of Dillington: You
seem to have a very liberal approach to external credits and I
was just wondering if you could give us an indication of the types
of restrictions that you have done away with that the EU ETS still
retains.
Mr Scott: We do not, for a start, have
any quantitative restrictions. The EU has a limit, I understand,
on how many units from outside of the EU can be used in terms
of their compliance. The most important one that we have removed
is that quantitative restriction. On the types of unit, while
we have some controls saying there are certain types of unit that
are not permitted to be used for compliance purposes, there are
far fewer than in the EU, so we have a slightly broader number
of CERs that are allowed in and we are also allowing in some but
not all AAUs. That is the brief description.
Q351 Lord Cameron of Dillington: There
is an accusation here that your industries will focus on getting
the credits from abroad and you will have very little effect on
your home-grown industry, maybe even very little effect in the
world, because quite a lot of these external credits, eg, Russia,
post-Kyoto are free allowances and have very little meaning. How
are you auditing what you are trading in your external credits?
Mr Scott: I will say a couple of things.
First, our ETS absolutely will have an effect domestically. Our
estimate is that it will reduce our Kyoto deficit by slightly
less than half through domestic action, so that is putting the
price of carbon down there. In terms of the AAU, that has been
a topic that has been discussed at length in New Zealand. The
minister made an announcement today that we would be allowing
in for compliance purposes greened AAUs in terms of those eastern
European ones, but not those that have not gone through an appropriately
greening process. Part of the discussion around an AAU is the
very point you are raising, its environmental integrity. We have
conceptualised an AAU as a right to emit, so even though it has
gone into the Kyoto system, and some people are not terribly comfortable
with the way it has gone into the Kyoto system, it is in that
Kyoto bubble, and, assuming that the Kyoto Protocol stays in its
present form and continues beyond 2012 or a variant that is close
thereto, you can be sure that that AAU will actually be used somewhere
for an emission. Someone will use it somewhere, so we would argue
that an AAU has environmental integrity in there. It is a bit
like a sunk cost for an economist. Once it is in the system it
is there, so we would argue that using an AAU has environmental
integrity and that is why we have ended up where we are.
Q352 Lord Cameron of Dillington: You
seem to be arguing that kick-starting the international market
is perhaps more important than the integrity of it. In other words,
you want to bring a liberal approach to international credits
really just to get the international market going and flourishing,
and we are more enthusiastic about concentrating on the integrity
of it. I was just wondering whether you wanted to comment on that
line of argument.
Mr Scott: Getting the international trading
going is important; there is no doubt about that, but we also
think the integrity of that market is critical and we have a formalised
objective for our ETS which talks about meeting our international
obligations at least cost, and that was the point made by Dave
in the introductory remarks, but it also has a very explicit statement
about environmental integrity, and we do consider, and it has
been debated at some length in New Zealand, that the use of AAUs
has a lot of environmental integrity in that those AAUs will be
used if you believe in the Kyoto Protocol, and they are in the
system. It is an emission that will occur at some point. In many
ways an AAU has more environmental integrity than some of the
CER credits. We also think the CDM is a very valuable tool and,
do not get me wrong, we are accepting many CER types of credit,
but an AAU is in the system and someone will use it, so if we
do not use it someone else will; it is going to happen.
Q353 Baroness Sharp of Guildford: Can
you tell us what sorts of features you have built into the New
Zealand system to facilitate linkage with other emissions trading
systems, and in particular what features will you be looking for
in other regimes in identifying whether there is potential for
linkage?
Mr Brash: In developing the infrastructure
for our Emissions Trading Scheme it has been all-important to
ensure that it is suitable for future linking. We have put a lot
of emphasis on trying to look at flexability going forward. The
generic features such as not having a price cap, having a price
at the margin created through the ETS and building appropriate
compliance regimes, are all-important to ensuring that the New
Zealand Emissions Trading Scheme is able to link effectively with
other schemes in the future. We can link via the Kyoto mechanisms,
and John has talked about the different types of unit that we
are going to provide for, but we are also able, through the regulation
framework provided in the legislation, to specifically provide
for direct bilateral linking with other schemes, so to accept
other units. The key issues are the types of unit used in respect
of schemes and the rules for import and export of units from and
to the respective schemes. We very much believe they need to be
standardised or very near standardised for full linking to occur.
Having said that, there is a range of different types of linking
that could occur, as I have mentioned, from the Kyoto type of
linking through to different types at a bilateral level. One specific
provision, the provision that stops first commitment period AAUs,
that is up to 2012, from being used for compliance purposes post-CP1
will assist with ensuring that our ETS is suitable for linking
to other schemes post CP1 should these circumstances arise. That
is, if certain AAUs are not acceptable post-2012, then effectively
we have isolated those in our Emissions Trading Scheme. The other
features that are maybe less important but are also nice to align
are the monitoring and verification and reporting approaches.
Both of these can affect competitiveness, but if substantially
different, could also affect opportunities to link; I think it
is a matter of degree.
Q354 Baroness Sharp of Guildford: I wonder
whether you could give us some examples of how far, in terms of
these bilateral linkages, you see those working in preference
to the multilateral schemes, how they link into the multilateral
schemes and so forth.
Mr Brash: Our first best preference is
for multilateral; there is no doubt about that. That is what we
are promoting internationally and that is what we would like to
see. Having said that, we are obviously working very closely with
our Australian cousins in terms of the design of their scheme,
but both Australia and New Zealand, at least to date, are of the
view that we need to get our own schemes up and running that suit
our own domestic circumstances, which I must say are quite different
trans-Tasman, but with a long-term view, ie, 2012 or beyond, linking
from that point on if there is not a multilateral arrangement
that comes into force at that point. There have also been some
very preliminary informal discussions with the EU and Brussels
around what may be the barriers to or opportunities for linking
as well, and of course there are other schemes, like the US scheme,
which are some distance away but we keep close contact with other
countries as well, particularly through the ICAP initiative.
Q355 Baroness Sharp of Guildford: There
is quite a lot of scepticism here in the UK about the CDM mechanism.
Is this also true in New Zealand? Do you see the CDMs and the
JIs as playing a part in this?
Mr Scott: We are accepting units from
both JI and CDM, but there is also a bit of scepticism here, to
be honest, and that has also been a topic of some debate: should
we include them or should we not? Our view is to include them
but to work pretty hard to try and improve that mechanism, for
example, it is important that they are brought on board in the
right way in the climate change agreements. CDM is useful. It
is not perfect, we make no bones about that, so we are accepting
them but we do think it needs improving and we are putting in
quite a lot of work into that area.
Q356 Earl of Dundee: Against linkage
between the New Zealand Emissions Trading Scheme and that of the
European Union, what do you consider to be the main obstacles
just now?
Mr Brash: As I said before, we would
welcome linking with the EU or other emissions trading schemes
and we are very keen to explore those possibilities. Having said
that, and we have touched on this already, between the EU and
the New Zealand schemes you will see that there are some quite
different philosophies coming through and there is a range of
differences between the ETS's that act as a barrier to linking
at this stage in our view. In particular we are seeking to meet
our international obligations for as little cost as possible,
at least in the long term, whilst still maintaining environmental
integrity. This theme runs through many of our actions on climate
change and it is important that the world reduces risks associated
with increasing global emissions, but the higher the cost of doing
so the less likely, we believe, we are to achieve those environmental
goals. The European scheme is more directly focused, and I think
one of your Lordships spoke about this before, on domestic emissions
within Europe. This difference in intent would make direct linking
with the New Zealand scheme difficult in the medium term. There
are other differences around, which again you have touched on,
things like agriculture, which we think can be more easily overcome,
but the difference in philosophies we believe is perhaps understandable.
From a New Zealand perspective we will be reluctant to expose
our industries to a higher price of carbon in a marketplace where
few of our competitors face the price of carbon, particularly
in this hemisphere. In the case of agriculture in particular we
are competing against subsidised production systems. We are not
part of any common market. Over 70% of our emissions are associated
with products that are likely to face higher costs in respect
of our emissions in competing with products that do not face comparable
emission obligations, whereas in Europe the vast majority of the
trading is within the European boundaries and that is where the
fundamental different philosophies emerge from in our view.
Q357 Earl of Dundee: On these different
philosophies, in phase 3 how much prospect do you hold out for
coming together with the EU?
Mr Scott: At the moment, as we understand
the phase 3 proposals, the key difference that acts as a barrier
in the short run is the difference in the export and import rules
around units, and our understanding of phase 3 proposals is that
those rules remain in place in Europe. You basically need to get
towards a standardised price; that is where it takes you, and
if we were to link with the European scheme, given that our scheme
is very small in comparison, and presumably we would be asked
to take on the European rules for importing units, what it would
mean is that the price in the New Zealand ETS would increase quite
dramatically, the cost on the New Zealand economy would increase
quite dramatically, and from our viewpoint it would not add a
great deal at all in terms of environmental value. That is in
a nutshell why we have designed our scheme in the way we have
and, as Dave mentioned, for agriculture it is basically half of
our emissions. Not only are we the only country in the world to
place the price of carbon on agriculture; we are also often competing
with subsidised produce. Yes, we are going to meet our Kyoto obligations,
absolutely, but we are going to be reluctant to put a higher price
of carbon into our economy than we need to. That is in a sense
the philosophy that is sitting behind the design of our trading
scheme.
Q358 Lord Plumb: You have already indicated
quite clearly that you intend in your methodology to be as flexible
as you possibly can, and I understand that, and I think we all
share a view that as far as competition is concerned there has
to be some fairness in the marketplace; that is obvious. What
sectors do you anticipate will qualify for the treatment that
you have already indicated you wish to apply, that is, the distribution
of free emission permits to industries which are exposed to that
competition where there might be unfairness in the market, and
in that how do you make the assessment and would this aspect of
the ETS change in the event of an international agreement?
Mr Scott: I will answer the last part
first, and the answer is very clearly yes, that if the international
agreement were to change so as to affect the relative competitiveness
of particular types of industries then we would reflect that in
our domestic policy settings; there is no doubt about that. In
terms of which industries we are providing free allocation for,
in a general sense we are providing it for agriculture for our
trade exposed industry, and I will talk a little bit about that,
a limited amount for our fishing industry for a 3 year period
and also for our pre-1990 forests where we are changing the economics
of changing land use. The last two are far more of an equity-based
argument; that is, a stranded asset type argument. The first two,
industry and agriculture, are more in a trade exposure or competitiveness-at-risk
type argument. In terms of agriculture, we will be looking to
provide free allocation to all sectors there. There might be some
de minimis applying but it will be pretty much to all sectors.
In terms of industry, we have not made the decisions on exactly
which industries will be provided with free allocation, but the
criteria that we will be looking at are to ensure that the industry
is genuinely trade exposed and, secondly, that the exposure to
the carbon costs is significant. It could be a measure of the
ETS-related costs relative to either their overall costs or their
profit or their revenue, or a measure like that. We will (most
likely) be using those as the two criteria largely to determine
which industries receive some free allocation.
Q359 Lord Plumb: It seems a strange question
for me to ask, but what do you include in agriculture? Are you
talking about producer level as well as slaughterhouse, et cetera,
or are you talking of one aspect of it?
Mr Scott: When I was mentioning agriculture,
we are talking about the producer level which is nitrous oxide
and methane. In terms of the slaughterhouses and the dairy processing
factories, they are potentially going to be included in the industrial
side, and that would include some free allocation that might cover,
for instance, their exposure to the electricity price and the
use of gas. We are not giving any free allocation to our electricity
generators; we consider that they will largely pass the price
through, and nothing to our transport fuel operators, which I
should have mentioned.
|
