Transition phase - softly, softly

  • Increase of price-cap:  The Panel recommends the price cap increase by $5 per annum from 2013 to 2017, starting at $30 per NZU in 2013 and reaching $50 per NZU in 2017.
  • Phase-in of 1-for-1:  The Panel recommends the 1-for-2 surrender obligation be phased out from 2013 (rather than a 1-for-1 obligation kicking in over-night from 1 January 2013).  The level of phase-out is shown in this table from the Panel's report:  

Click here to view the table.

  • Lift the ban on exports of NZUs from non-forestry activities:  The Panel recommends lifting the ban on exports of non-forestry NZUs when the price cap is removed, or sooner if the price cap is significantly above the international carbon price.  We note that if there is no second Kyoto commitment period it is not clear what the overseas market for NZUs would be, but future linking with Australia and other schemes is being contemplated.  

Free allocation - steady as it goes... for now

  • Thresholds maintained:  The Panel recommends existing allocation thresholds of 90% allocation for highly emissions-intensive activities and 60% allocation for moderately emissions‐intensive activities be maintained.
  • Current phase out rate maintained:  The Panel recommends no change to the allocation phase-out rate of 1.3% per annum (but recommends a tweak to its application to address an unintended outcome).
  • Possible allocation cap:  However, the Panel recommends the next ETS review include consideration of an allocation cap to address issues created by the current intensity based allocation.

Agriculture – still in the crosshairs

  • Agriculture still in from 2015:  The Panel recommends agriculture surrender obligations should still begin in 2015.
  • Shift point of obligation to farmers:  The Panel recommends the point of obligation for agriculture should be at the farmer level rather than the processor level.
  • Gradual phase in of full obligation:  See the table above for the recommended phase-in timetable for the full obligation for agriculture.

Forestry - significant pro-forestry changes possible

It is in the forestry sector where the Panel's recommendations appear to be the most dramatic.  However, the Panel has been careful to temper its recommendations, by making these subject to consideration of fiscal and other considerations. This includes the cost to government (and therefore all tax-payers) that could result from any changes, and any changes in the international rules in this area.  The Panel's recommendations are:

Pre-1990 forests

  • Allow offset planting for pre-1990 forests:  Subject to fiscal constraints, offset planting in relation to pre-1990 forest should be allowed from 2012.  Offset planting allows a landowner to deforest a pre-1990 forest without incurring deforestation liability, as long as the landowner establishes an equivalent forest sink elsewhere.
  • Claw-back of second tranche if participant offsets:  The Government should introduce a claw back provision for the second tranche of the pre‐1990 forestry allocation, if offset planting is introduced into the ETS and taken up by a participant.

Post-1989 forests

  • Harvested wood products – 'emissions to atmosphere' approach:  Subject to fiscal constraints, the ETS rules in relation to post‐1989 harvested wood products should be modified to reflect an 'emissions to atmosphere’ approach if agreement on this has been reached internationally.
  • Allow averaging:  Averaging should be available as an option from 2012 for post-1989 forests.  Under averaging, units are only issued up to the long-term average forest carbon stock level for carbon earned from 1 January 2008, and none would have to be paid back when harvesting occurs, provided the forest is replanted.
  • Insurance for "catastrophic events":  The Government should consider establishing a self-insurance pool of units for post-1989 forests, along the lines of that proposed in Australia (5% retention).

HFC CERs and other unit eligibility issues

The Panel recommends the Government urgently consider whether to ban HFC CERs beyond 2012.  HFC CERs are banned in the EU ETS from May 2013, so if New Zealand does not ban them, large volumes of very cheap HFC CERs may flood our market, undermining the integrity of our scheme.

The Panel says that if these units are banned, a reasonable notice period should be given so that businesses which have already bought these units have an opportunity to surrender them.  But the report does not acknowledge section 30G(3) of the Climate Change Response Act.  That section essentially states that any restrictions imposed on CERs by regulation will not apply to units in the New Zealand registry at the time the regulations come into force.  One interpretation of the Panel's comments is that the Panel considers it legitimate to legislate to override the protection in section 30G(3), provided a reasonable notice period is given.

No other restrictions on unit eligibility, quantitative or qualitative, are signalled.  This is welcome, but NZ ETS participants wanting to buy (non-HFC) CERs at current low prices and stockpile them for post-2012 compliance should beware of the restrictions on carry-over in the Climate Change Response Act.  We understand the Ministry for the Environment is working on regulations to clarify carry-over entitlements.

Pass through and transparency

The Panel expresses concern that some participants may overestimate their carbon costs and pass on excessive costs to consumers by using the price cap as a proxy for the carbon price faced by them when the actual carbon price is below the price cap.  The Panel cautions that such behaviour may result in regulatory intervention.  In our view existing law, in particular the Fair Trading Act, already provides consumers with appropriate protection.

The Panel also encourages ETS participants to disclose their actual ETS costs in order to improve transparency.  If there is an implication here that regulatory intervention could take the form of businesses being compelled to disclose their carbon costs, we think this would be an unwarranted intervention.  However we do support the Panel's recommendation elsewhere in the report that the Government consider more timely disclosure of market information while preserving commercial confidentiality.