Elisabeth Welson Joanna Lim September 12 2011 First annual report on emissions trading scheme paints positive picture Simpson Grierson | Environment & Climate Change - New Zealand Elisabeth Welson, Joanna Lim Environment & Climate Change IntroductionPopularity of NZUsForestryTransport fuelsRenewablesAllocationsReview panelIntroductionThe New Zealand government has hailed the first annual report on the New Zealand emissions trading scheme as indicating that the scheme is "working as intended", implementation has gone smoothly and New Zealand is on target to meet its Kyoto obligations.The government's positive spin on the Ministry for the Environment's report has been greeted with cynicism by some - although it could be argued that this reaction merely reflects entrenched positions around the question of whether New Zealand should have any form of emissions trading scheme. However, the overall message of both the report and the minister's comments at the time of its release suggests that emissions trading is likely to remain an important part of New Zealand's response to climate change. This message is bolstered by comments about the potential for linkage between the future Australian emissions trading scheme and the New Zealand scheme. A separate report by the government-appointed review panel (which is required under the scheme's establishing legislation) has been delayed to allow the panel to consider developments in Australia - it is expected to be released in the coming month.This update considers some of the key points from the ministry's annual report.Popularity of NZUsTrading has clearly been embraced as the preferred approach to managing the costs of compliance with the New Zealand emissions trading scheme, with New Zealand units (NZUs) being the unit of choice. NZUs are units specially created under the scheme for New Zealand purposes, with some limited international transferability.NZUs accounted for nearly 95% of all units surrendered to the government for the most recent compliance period, with a small number of internationally tradable certified emissions reduction units and New Zealand assigned amount units also being surrendered, and less than 1% choosing the NZ$25 fixed-price option offered under the scheme's transitional arrangements. The fixed-price option is available until the end of 2012. It will be interesting to see whether the review panel recommends extending this - or any of the other transitional aspects designed to soften the initial impact of the scheme - beyond 2012. ForestryOne of the features of the emissions trading scheme is the inclusion of forestry, which allows registered post-1989 forests to earn credits for forest growth, but likewise makes them potentially liable for deforestation. Both the report and the minister credit the scheme with reversing the deforestation trend. However, past deforestation decisions were often influenced by the need to deforest before the emissions trading scheme came into force in order to avoid loss of flexibility over land use. Transfers of NZUs to the forestry sector have been lower than expected. However, this could change, as the deadline for registering post-1989 forests under the scheme is December 31 2012, while pre-1990 forestry owners that are entitled to an allocation of NZUs as a one-off compensation for loss of land-use flexibility have until November 30 2011 to apply. Transport fuelsOne of the sectors most affected by the emissions trading scheme is the transport fuels sector. The estimated impact of the emissions trading scheme on fuel prices expressed in the report is NZ$0.035 a litre. It is understood that the transport sector may put pressure on the government to consider allowing more voluntary participation in the emissions trading scheme; the review panel's recommendations in this regard will be watched with particular interest. At present, only large purchasers of jet fuel can voluntarily opt into the scheme; otherwise, responsibility for fuel emissions rests with mandatory participants (ie, fuel importers and refiners). RenewablesPutting a price on carbon in the economy is seen by the government as "the most credible and lowest-cost way to reduce emissions" and to enable New Zealand to meet its Kyoto obligations at the least overall cost to the economy. The theory is that putting a price on carbon makes green technologies more viable. The report states that in the scheme's first year, 11 new resource consents were granted for renewable power stations; in contrast, most new power plants over the past decade have been fossil fuelled. Whether and to what extent the emissions trading scheme has been a major factor in increasing the development of renewable energy is a matter of subjective assessment. Such projects typically take years of planning before resource consents are granted, and a number of the projects will have been in the pipeline before the emissions trading scheme. AllocationsOne of the most frequent criticisms of emissions trading schemes relates to their potential impact on industries that are exposed to overseas competitors which do not face a price for carbon; this, critics argue, can have a negative effect on the overall economy. This has been a particular concern for New Zealand business. The response has been to identify such trade-exposed, emissions-intensive industries, and allocate NZUs to them. The rate of allocation reduces over time to incentivise those industries to improve efficiency and reduce emissions. The report records that rather than merely capturing industrial activities as originally expected, government allocations of units to emissions-intensive, trade-exposed industry have also been made to other sectors that use large amounts of energy - for example, hothouse growers for the export market. This is an example of effective industry lobbying. The government has also made a one-off allocation of units to holders of fishing quotas in recognition of the impact of the emissions trading scheme on fishing businesses, which use large quantities of transport fuel.Review panelThe scheme legislation requires that a formal review of the scheme's operation be undertaken in 2011. This review began at the start of the year. The review panel's report was provided to the government just before the announcements in Australia about proposals for carbon pricing. However, the report has not yet been publicly released, as the government has asked the panel to update its report to take account of the Australian announcements. The outcome of the review and final report are expected to be announced later in September 2011.For further information on this topic please contact Elisabeth Welson or Joanna Lim at Simpson Grierson by telephone (+64 9 358 2222), fax (+64 9 307 0331) or email ([email protected] or joanna.lim@simpsongrierson).