The ETS Review

A second review of a New Zealand’s Emissions Trading Scheme (ETS) is currently underway, as required under the Climate Change Response Act 2002. In December 2010, Climate Change Minister Dr Nick Smith announced an independent Review Panel (the Panel) to conduct the review.

Unlike the 2009 review of the ETS that was undertaken by a special select committee, the Panel consists of independent members appointed by the government for their expertise in climate change and related sectors. The Panel is chaired by former Minister of Finance Hon David Caygill, with Julia Hoare, Chris Karamea Insley, Tom Lambie, David Russell, Geoff Thompson and Dr John Wood making up the remainder of the Panel.

Scope of the review

The purpose of the review is to assess the operation and effectiveness of the ETS and how the ETS should evolve beyond 2012. This assessment will be carried out in light of the uncertainty over the outcome of international climate change negotiations and the potential climate change action to be taken by our key trading partners.

There is no scope in the terms of reference for a reconsideration of the need for action on climate change or other responses to climate change outside the ETS, meaning that it is highly unlikely that the Panel will consider the abolition of the ETS. Instead, the terms of reference focus on the high-level design of the ETS, particularly:

  • the implications for the design of the ETS arising from possible international frameworks succeeding the Kyoto Protocol;
  • whether the transitional measures for certain emitters should be extended;
  • whether the entry of the remaining sectors to the ETS (waste, synthetic gases and agriculture) should be rescheduled, taking into account the domestic actions of key trade competitors; and
  • whether synthetic greenhouse gases should be included in the ETS, taking into account alternative approaches to reducing such emissions.

The most significant issues for the majority of businesses in New Zealand will be the consideration of the expiry of the transitional measures, and the lack of assistance to trade-exposed businesses who do not currently meet the requirements for emissions-intensive trade-exposed (EITE) assistance under the ETS.

Transitional measures

The transitional measures, due to expire on 31 December 2012, moderate the impact of the ETS on businesses in the liquid fossil fuels, stationary energy, and industrial processes sectors by imposing:

  • a 50% obligation (i.e., to surrender only one unit for every two tonnes of CO 2 emitted); and
  • a NZ$25 fixed price option (whereby businesses can opt to pay the Government $25 for emission units that would be surrendered immediately as opposed to buying emission units from the market).

The current state of the New Zealand economy, with the strengthening of the New Zealand dollar against our trading partners and the impact of the Christchurch earthquake, is likely to impact on the Panel’s consideration of whether to extend the transitional period beyond the end of 2012. International indecision on global climate change policy and Australia’s consideration of a carbon pricing mechanism is also likely to factor into the review.

Most businesses wish to have a further period of certainty as to maximum carbon costs that will be passed through to them and would welcome a Panel recommendation to extend the transitional measures for an additional period of two or more years.

Conversely, some businesses that can readily pass through the cost of carbon to their customers prefer for the transitional measures to end on 31 December 2012, and that New Zealand move at that time to a one-for-one compliance ETS with no price cap. The rationale being that the transitional measures minimise the number of entities trading, and as such hamper the trading that needs to occur to have a fully functioning ETS that reflects the true price of carbon.

EITE assistance

The intention of the EITE aspects of the ETS is to provide assistance to those persons who are trade-exposed as a result of the impact of the ETS. Whether a person is eligible for EITE assistance is determined by considering the industry-average amount of emissions that arise from the specified activity per $1 million of revenue from the activity; trade exposure is essentially a given provided the person exports their product or products of the same nature are also imported in to New Zealand.

For the initial years, an eligible business will be allocated emission units to cover up to 90% of its emissions (if it is highly emissions-intensive) or 60% of its emissions, with the percentage of allocated assistance reducing slowly over time.

The Panel has sought comment over assistance provided (or not provided) to trade-exposed businesses. We expect that a strong response would have been received from those trade-exposed businesses who have missed out on EITE assistance due to the mechanism that has been employed to determine who is EITE and/or the failure of the government to adopt a “value-add” option.

Such businesses will either be requesting that the Government adopt the value-add option that was provided for in the draft Australian scheme, or otherwise amend the determination matrix to recognise and provide assistance to all businesses that are trade-exposed as a result of the emissions trading scheme. Further those businesses who provide commission-based services to the ultimate end-user, where such service is emissions-intensive, will be arguing that for such activities the revenue rules should reflect and calculate the revenue arising from the activity, not the value of the output.

Whilst the Panel will be cognisant that the Government will not want businesses who already receive assistance to have another mechanism under which it could be calculated that they receive more or less assistance, the lack of assistance to those who are truly trade exposed by the effects of the ETS needs to be addressed. There is some room to propose strict rules that would widen the amount of assistance for those in need but for whom there is no assistance currently available. It will be interesting to see whether the Panel addresses this need and proposes (at a high level) the necessary rules.

Where to from here?

The deadline for written submissions on the Panel’s report closed on 6 April 2011. The Panel continues to hear oral submissions until 20 April 2011, with a final report due to the Minister on 30 June 2011. If the Panel recommends any change to the ETS that requires legislative amendments, the Minister must prepare a report responding to those recommendations.