Final round of proposed changes to the Emissions Trading Scheme

The last announcement of proposed changes to the New Zealand Emissions Trading Scheme (ETS) has been made by the Government.  These will be implemented, along with other announced changes, in a Bill by the end of the year; approximately a year later than originally expected.

Some of the proposed changes may disappoint existing participants

The Government’s intention is for the proposed changes to provide certainty, flexibility and incentives to reduce emissions.  The changes will also come at a cost to participants in the ETS and may disappoint (although not surprise) the forestry and industrial sectors.

The forestry sector will be disappointed that existing forests registered before 31 December 2018 won’t be transitioned to averaging accounting.  This would otherwise significantly simply foresters’ participation in the ETS.  The industrial sector will also need to adjust to the proposed phase-out of free allocations, which will increase the cost of their participation in the ETS.

The proposed changes are in five key areas:  averaging accounting for the forestry sector; registration of post-1989 forest land; how Permanent Forest Sink Initiative (PFSI) members can transition to the ETS; phasing out of free allocations to major industrial emitters; and the treatment of old carbon units.

1. Averaging accounting:

  • Enable foresters using averaging accounting to change the location of their forest (i.e. covert existing forest to another land use and replant the forest elsewhere) without financial penalty.
  • Exempt foresters using averaging accounting from paying back emissions units for carbon storage lost after a significant adverse effect e.g. fire, if the area is re-established within four years.
  • Prevent average averaging accounting from being used for forests registered before 31 December 2018 (at least until a review is completed in 2021).

2. Registration of post-1989 forest land:

Prevent (unregistered) post-1989 forest land that has been deforested and re-planted from being registered in the ETS for a period of time (a stand-down period) until the forest has established.

3. Transition for PFSI members:

Give PFSI participants six months from 1 January to 30 June to decide whether to:

  • Leave the PFSI scheme altogether, removing all their forests from carbon accounting; or
  • Join the ETS either as a permanent post-1989 forest using carbon stock change accounting or a post-1989 forest using the new averaging accounting method; or
  • Leave the PFSI scheme altogether, removing all their forests from carbon accounting.

4. Phasing down of industrial allocations:

Phase-out the free allocation of New Zealand Units (NZUs) available to eligible industrial participants.  The allocation will be phased down at 1 per cent per year from 2021-2030, then at 2 per cent from 2030-2041, and at 3 per cent per year from 2041-2050. This will not affect the free allocation to the agricultural sector.  (NZUs are provided allocated by the Government to eligible emission-intensive and trade-exposed participants to protect them from the full cost imposed by the ETS. This reduces the risk of costs forcing business to move offshore, an outcome which could result in an increase in global emissions.)

5. Treatment of old carbon units:

Cancel New Zealand-issued Assigned Amount Units held in private accounts and replace them with an equivalent number of NZUs.  All other privately held Kyoto units from the first commitment period of the Kyoto Protocol will also be cancelled but not replaced.  (These units have not been eligible for surrender since 1 June 2015.)

The next step is a Bill

These changes, along with those announced in December 2018, March 2019 and May 2019, and various other minor and technical changes, will be addressed in a Bill amending the Climate Change Response Act.

The Bill is expected to be introduced to Parliament later this year and will be considered alongside the Climate Change Response (Zero Carbon) Amendment Bill introduced in May.

The Government is also consulting on options to reduce agricultural emissions.  This is in response to recommendations from the Interim Climate Change Committee on how surrender obligations could be arranged if agricultural methane and nitrous oxide emissions enter into the NZ ETS.

Who can help