Part 4: Overview of the Emissions Trading Scheme

The ETS started in 2008 following an amendment to the Climate Change Response Act 2002 (the Act).¹ After the 2008 general election, a select committee reviewed the ETS with the result that it was amended by the Climate Change Response (Moderated Emissions Trading) Amendment Act 2009.

Purpose

The purpose of the ETS, as stated in the Act, is to support and encourage global efforts to reduce greenhouse gas emissions by helping New Zealand to meet its international obligations under the UNFCCC and the Kyoto Protocol, and by reducing New Zealand’s net emissions below “business-as-usual” levels (which are the estimated emissions levels if the ETS had not been implemented).²

Targets

Under the Kyoto Protocol, New Zealand has agreed to reduce its net greenhouse gas emissions during the period 1 January 2008 to 31 December 2012 (the “first commitment period” or “CP1”) to 1990 levels or to pay for any emissions that are in excess of its 1990 levels. There is no binding international agreement about greenhouse gas emissions beyond 2012, although New Zealand has signed up to the 2009 Copenhagen Accord³ and has submitted to the UNFCCC a conditional emissions reduction target range of 10% to 20% below 1990 levels by 2020. In March 2011, the Government announced a long-term target of a 50% reduction in New Zealand’s greenhouse gas emissions from 1990 levels by 2050.

How the Emissions Trading Scheme works

In New Zealand, the largest proportions of greenhouse gas emissions are from agriculture (46%⁴) and the energy sector (44%) (which includes transport). Under the Kyoto Protocol rules,⁵ in the first commitment period, New Zealand can offset, against its emissions, removals of CO₂ achieved by net increases in forest cover (carbon sinks).

The ETS is designed to move the cost of greenhouse gas emissions onto those who cause them. It is intended to provide incentives for managing greenhouse gas emissions, investing in clean technology and renewable power generation, and activities that absorb greenhouse gases (such as planting trees) in order to reduce New Zealand’s net greenhouse gas emissions.

Different sectors enter the ETS at different dates. Figure 1 shows these dates.

Figure 1
Dates for different sectors to enter the Emissions Trading Scheme

* See section 5.2 for a definition.

Under the ETS, the primary unit of trade is a New Zealand Unit (NZU), which represents one tonne of CO₂-equivalent emissions. NZUs are sometimes called “carbon credits”. An NZU can represent one tonne of CO₂ or the equivalent of another greenhouse gas (referred to as “carbon dioxide equivalent” or “CO₂ equivalent”). The ETS covers all six types of greenhouse gas covered by the Kyoto Protocol: carbon dioxide, methane, nitrous oxide, sulphur hexafluoride, perfluorocarbons, and hydrofluorocarbons.

Generally, each participant⁶ is required to “surrender”⁷ one NZU to match each tonne of CO₂-equivalent emissions for which the participant is liable. The ETS also allows participants to surrender certain other internationally recognised carbon credits instead of an NZU. These are:

• NZ Assigned Amount Units (AAUs), which are units originally issued to New Zealand under the Kyoto Protocol;
• Certified Emission Reduction Units, except those arising from nuclear energy projects;
• Emission Reduction Units, except those arising from nuclear energy projects; and
• Removal Units.

In this document, wherever we refer to surrendering an NZU, these other international credits are equally acceptable.

Entities have specified dates by which to register as participants and to report their emissions for each reporting period (generally based on calendar years). At the end of each period, participants must surrender NZUs (or equivalent units) to the Crown to cover that year’s emissions. Reporting of emissions will be based on self-assessments of emissions, with the administering agencies (see section 7.1) establishing a compliance regime. There are offences and significant penalties under the Act for failing to comply with obligations.

There are also transitional provisions to ease the effect of the scheme on some sectors, including the issue of free NZUs to some parties (see Part 6).

The ETS is complex and challenging for those entities affected, as well as for the administering agencies. The detailed ETS rules for each sector are being set out in regulations, which are made under the Act.

Under the Act, the Minister for Climate Change Issues is required to begin a review of the ETS during the first commitment period and at regular periods thereafter. The first review must be completed by the end of 2011.⁸ This, together with the fact that there is no international agreement beyond 2012, means that future developments of the ETS are uncertain. This is particularly so for agriculture, the last sector to join the scheme.

Part 5 sets out the ETS requirements for each sector.

1: Climate Change Response (Emissions Trading) Amendment Act 2008.

2: See section 3(3) of the Climate Change Response Act 2002.

3 For more information on the Copenhagen Accord, see: http://unfccc.int/meetings/cop_15/copenhagen_accord/items/5262.php.

4: Ministry for the Environment (April 2011), New Zealand’s Greenhouse Gas Inventory 1990–2008, Ministry for the Environment, Wellington.

5: See the UNFCCC website, at www.unfccc.int, for more information about the Kyoto Protocol rules.

6: Businesses and individuals that have mandatory obligations or have opted into the ETS are known as “participants” in the ETS. See section 54 of the Climate Change Response Act 2002 for a definition of participant.

7: For more information about surrendering, see section 4 of the Climate Change Response Act 2002.

8: A team led by Hon. David Caygill carried out the first review and reported to the Government on 30 June 2011 as required by the terms of reference. The Minister for Climate Change Issues is due to release the report when the Government has considered the report’s recommendations.