Part 6: Transition assistance and allocations of free NZUs

6.1 Transition phase

For a transition period from 1 July 2010 to 31 December 2012, participants in the stationary energy, industrial processes, and liquid fossil fuels sectors will be required to surrender only one NZU for every two tonnes of emissions. That is, in the transition period, these participants are paying for only half of their emissions.

In addition, participants in these sectors, as well as the forestry sector, have the option of buying NZUs from the Government at a fixed price of $25 per NZU to meet their obligations during this period. For sectors other than forestry, this is in effect a price cap of $12.50 per tonne of CO₂-equivalent emissions during the transition phase when only one NZU is required for every two tonnes of emissions.

The export of NZUs will not be allowed during this transition phase. Therefore, conversion of NZUs to Assigned Amount Units (AAUs) and sale on the international carbon market is prohibited. This ban is intended to limit arbitrage opportunities that may arise because of the $25 fixed price. However, the ban on exports will not apply to forestry-related units.

After the transition period, participants will need to surrender one NZU for each tonne of emissions and the fixed-price option will stop.

6.2 Forestry allocation

The requirement to surrender NZUs when pre-1990 forest land is deforested means reduced flexibility for using the land (for example, by affecting the economics of dairy conversion). This is expected to cause some pre-1990 forest land to lose value.

In partial compensation for this loss in value, the Government is providing a one-off allocation of free NZUs to forest landowners of pre-1990 forests (except those who have applied for an ETS exemption, as explained below).

Generally, owners of pre-1990 forest land that was bought before 1 November 2002 will receive 60 NZUs per hectare and those who bought their land after this date will receive 39 NZUs per hectare (as these landowners could have taken into account the Government’s announced intention to introduce deforestation restrictions when determining the price to be paid for the land). There will be an allocation of 18 NZUs per hectare for pre-1990 forest land that was Crown forest licence land³² on 1 January 2008 and that was or will be transferred to an iwi under a Treaty of Waitangi settlement after that date. The NZUs will be transferred in two parts – the first when the application process is complete and the second in 2013.³³

These allocations are not automatic so need to be applied for. Applications for these allocations close on 30 November 2011. The Government’s original forecast was that it would issue 55 million NZUs with a value of $1.375 billion³⁴ to compensate for pre-1990 forest land.

By 30 June 2011, over 1000 forest landowners had applied for an allocation and 6.9 million NZUs had been allocated (for the first part of the allocation only).³⁵

There are exemptions from the ETS (available by application) for landowners who own less than 50 hectares in total of pre-1990 forest land, and for tree weeds (to ensure clearing of listed tree weed species is supported under the ETS). Applications close on 30 September 2011 for those applying for the less-than-50 hectares exemption. Applications for the second round of tree-weed exemptions closed on 31 March 2011.

Landowners of pre-1990 forests who are eligible for these exemptions have to make a choice between applying for the free NZUs or applying for an exemption from the ETS. If they choose to apply for the free NZUs, they will then have ETS obligations if they deforest. If they apply for one of the exemptions, they will then not be eligible for the free NZUs, but can deforest without ETS liabilities.

Cabinet has decided that no applications will be made for NZUs under the forestry allocation for pre-1990 forests on Crown land. This does not include forests owned by SOEs, Crown entities, or other public bodies.

6.3 Commercial fishing allocation

The commercial fishing sector is not a sector within the ETS and commercial fishers are not participants in the ETS. However, commercial fishers are expected to suffer a significant increase in their input costs through the effect of the ETS on fuel costs. To compensate for these cost increases on the value of fishing quota, the Government provided a one-off allocation of 700,000 NZUs. Owners of fishing quota on 24 September 2009 were eligible for this allocation. Commercial fishers received a share of this allocation based on the weight of their fishing quota as a proportion of the total weight equivalent of all quota for all fish stocks.

Applications for NZUs under the fishing allocation closed on 30 July 2010 and the NZUs were allocated in September 2010. Very few public entities were eligible for an allocation.

6.4 Allocation of NZUs to emissions-intensive and trade-exposed industry

From 1 July 2010, the surrender obligations under the ETS apply to the stationary energy and industrial processes sectors. Therefore, participants in these sectors have obligations and are subject to a price on emissions. This may be passed on to other businesses through the pricing of their products.

The industrial allocation is intended to support a smooth transition to an economy with a price on carbon and to help prevent losing the competitiveness of emissions-intensive, trade-exposed businesses. The Government is allocating free NZUs to partially offset cost increases resulting from the ETS.

To qualify for the industrial allocation, activities must be moderately or highly emissions-intensive (based on thresholds of tonnes of emissions per million dollars of revenue) and satisfy the following trade exposure test:

• there is international trade of the output of the activity across oceans; and
• it is economically viable to import or export the output of the activity.

Businesses that carry out an eligible industrial activity are eligible to receive an allocation of free NZUs. Allocation is on an “intensity” basis. This means that participants will receive an allocation that is linked to, and varies with, their output. Allocation for a specific activity is based on the industry-average emissions per unit of output.

The rate at which a business carrying out an eligible industrial activity will receive units depends on two factors: the activity’s emissions-intensity classification and the “allocative baseline”. The Act prescribes initial levels of assistance of 90% for highly emissions-intensive activities and 60% for moderately emissions-intensive activities.

The regulations³⁶ prescribe the eligible industrial activities, their emissions-intensity classifications, and allocative baselines (for example, emissions per tonne of product) calculated from data submitted by businesses for this purpose.

A business’s actual annual allocation is developed by using the allocative baseline for the activity and multiplying it by the amount produced from the specified activity and by a declining rate of assistance.

The number of NZUs allocated during the transition phase (from 1 July 2010 to December 2012) will be reduced by 50% because of the reduced obligations on participants during that period. The first allocations are for the six months commencing 1 July 2010. The allocation is uncapped, meaning that there is no set limit on the number of units that may be allocated. The level of freely allocated NZUs will phase out at a rate of 1.3% a year beginning in 2013.

The industrial allocation must be considered in an allocation review³⁷ to be completed at least once every five years. Regulations that remove activities from the list of eligible industrial activities require a five-year notice period.

Certain eligible activities were proposed by the Government (after considering the work done for the proposed Australian scheme) and included in the consultation documents for industry. A range of other New Zealand-specific activities were proposed by submitters in response to the consultation. To determine eligibility, intensity classifications, and allocative baselines, significant data has been collected from relevant businesses and analysed. Figure 3 lists the eligible industrial activities for which regulations have been finalised.

Figure 3
Eligible industrial activities for which regulations have been finalised

Businesses may apply for a provisional allocation between January and April of each year, based on the previous year’s output. If a provisional allocation is made, an adjustment is made the following year to determine the final allocation based on the actual output from that year.

Based on the above eligible activities, few public entities are expected to be eligible for the industrial allocation, although the published provisional industrial allocation decisions include an allocation to the New Zealand Railways Corporation for producing carbon steel.

6.5 Agriculture allocation

From 2015, agriculture sector participants will be eligible to receive an allocation of free NZUs to help offset the cost of participating in the ETS. Allocation will be on an “intensity” basis, meaning participants will receive an allocation that is linked to, and will vary with, their output. A participant’s allocation will be determined by multiplying the number of units they produce by the baseline emissions per unit of output and applying a declining assistance level.

The assistance level will start at 90% of an emissions baseline and will phase out at 1.3% per annum from 2016. The baseline is yet to be determined but will likely be the industry average of emissions per unit of output in a chosen year or years. The baseline and allocation process will be considered further in 2012 and will be subject to consultation as part of the process for setting regulations.

The allocation will be uncapped, meaning that there will be no set limit on the number of units that may be allocated.

32: Crown forest licence land is eligible land subject to a Crown forestry licence under section 14 of the Crown Forest Assets Act 1989.

33: Ministry of Agriculture and Forestry (December 2010), A Guide to the Pre-1990 Forestry Allocation and Exemptions, page 6.

34: Value has been calculated based on a carbon price of NZ$25/tonne. See: Regulatory impact statement for Climate Change Response (Emissions Trading Forestry Sector) Amendment Bill, June 2009.

35: Ministry for the Environment (2011), Report on The New Zealand Emissions Trading Scheme: 30 June 2011, pages 11 and 19.

36: Climate Change (Eligible Industrial Activities) Regulations 2010.

37: See section 160(3) of the Climate Change Response Act 2002.