Primary sector still a focus for emissions trading scheme changes

The process of reforming the New Zealand Emissions Trading Scheme to drive emissions reductions, increase participation in the scheme and raise accountability has been underway since 2018. The Climate Change Response (Emissions Trading Reform) Amendment Bill (Bill) introduced to Parliament has now been reviewed by the Environment Select Committee (Committee).

The Committee recommends fine-tuning changes and proposes more consistency with the Zero Carbon Act. There are timing changes impacting the primary and forestry sector and further transparency required for data collection and publication.

The Bill is likely to proceed swiftly towards further readings now, even though the National Party prefers delaying the Bill until there is more certainty about the economic impacts of COVID-19.

More changes to the way the primary sector will be dealt with under the ETS

From 2025, the Bill will price agricultural livestock emissions and fertiliser emissions. The Bill requires the Minister for Climate Change and Minister of Agriculture to report in 2022 on the development of an alternative farm-level pricing mechanism. The ETS will be used as a fall-back option for emissions pricing if an alternative mechanism cannot be determined.

The Bill will price agricultural livestock emissions and fertiliser emissions by:

  • Requiring farmers to start mandatory reporting on agricultural livestock emissions (at a farm level) from 1 January 2024.
  • Requiring payment for emissions from agricultural livestock emissions (at a farm level) and fertiliser emissions (at processor level i.e. fertiliser manufacturers and importers as opposed to users) from 1 January 2025 (unless deferred by Order in Council).
  • Increasing the free allocation of units available to the agriculture sector from 90% to 95%, which will soften the payment obligation.

Further detail was added to the Bill on these matters by way of a Supplementary Order Paper (SOP) which was referred to the Committee for its consideration. The SOP introduces a new schedule to the Bill which sets out climate change commitments made by the primary sector. The SOP requires the Climate Change Commission to report on progress toward agreed milestones forming part of those commitments by June 2022. It also enables the Minister for Climate Change to make an order enabling the imposition of surrender obligations on agricultural livestock emissions (at a processor level i.e. slaughtering and dairy processors and exporters of live animals) earlier than 2025 if progress towards milestones is considered insufficient.

The Committee has added to this evolving scheme by recommending that:

  • Regulations are developed that allow voluntary farm-level reporting and participation for animal and fertiliser emissions before mandatory reporting and participation is introduced.
  • Farm-level participants will not be subject to any penalties for failing to comply with surrender obligations during the first year of their inclusion in the ETS.
  • The Minister’s order making power enabled by the SOP (referred to above) should include fertiliser emissions (at the processor level), as well as agricultural livestock emissions.

The first two changes will assist the sector to transition into the ETS; the final change will put equal pressure on the fertiliser sector to ensure progress is made towards climate change commitments.

The forestry sector will have more time to transition into new requirements

The Committee has recommended that the implementation of 14 proposed changes to the way forestry is managed under the ETS should be delayed by one year, to 1 January 2022. This includes the introduction of mandatory averaging accounting for newly registered standards post-1989 forests and the introduction of a new permanent forestry category.

The timeframes associated with the disestablishment of the Permanent Forest Sink Initiative and the transition of forestry currently under that scheme into the ETS will be delayed by a year. The first trigger date in the transition is for PFSI participants to inform the EPA of their decision whether to move into the ETS or leave carbon farming. The Committee recommended that this date is changed from the end of 2021 to the end of 2022.

The Committee reports that the delay is to enable more time to develop regulations associated with the new forestry regimes. We expect it may also offer some foresters a welcome reprieve from the costs and time associated with transitional requirements in the COVID-19 economy.

Increased transparency in holding emitters publicly accountable

To increase accountability of emitters, the Bill will make data about individual participants’ emissions and removals public. The Committee has made several recommendations regarding the approach to data collection and publication. It recommends that:

  • Participants receive at least ten days’ notice of the publication of their emissions and removals data. We expect this change will be welcomed by participants; enabling them time to prepare for the external release of the data.
  • Reporting on emissions will be broken down by participant and activity if the return relates to more than one participant or activity (i.e. associated entities). This change will give the EPA the ability to publish clearer information on emissions.
  • The Minister is empowered to collect data on industrial emissions from any year for the purpose of determining the need for industrial allocation.  (Previously this power was limited to collecting data from the years 2006-2009.)

The National Party wants progression of the Bill delayed

The National Party’s minority view is expressed in the Committee’s report.  Its strong view is that the Bill is long, complex, multifaceted and administratively complicated. They are concerned that the law will have widespread and costly implications for every sector of the New Zealand economy. On this basis, its view is that the Bill will add irresponsible cost and uncertainty to the economic recovery from COVID-19.

In addition, the National Party suggests that the Committee has not had an adequate or sufficiently robust opportunity to fully analyse the Bill’s impact in a COVID-19 environment. It proposes postponing the passage of the Bill for one year so that there is more certainty about the economic position New Zealand will be in post-COVID-19. We expect National to hold this position during the second reading of the Bill in Parliament.

We expect the Bill to be read for a second time within the next month

Parliament is now considering the Committee’s report. The next step will be for a second reading of the Bill, where Parliament will consider the report and publicly debate the Bill. We expect the Bill to be read for a second time relatively soon given it is currently sitting 8th on the order paper.

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