The Government’s positive spin on the Ministry for the Environment’s first annual report on the New Zealand Emissions Trading Scheme[1] has been greeted by cynicism from some, although this arguably just reflects entrenched positions around whether or not New Zealand should have any form of emissions trading scheme.

The overall message, however, of both the report and the Minister's comments at the time of its release suggests that we can expect emissions trading to continue to be an important part of the New Zealand 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. Release of a separate report by the Government appointed Review Panel (required by the scheme's establishing legislation) has been delayed to allow the Review Panel to consider the Australian developments, and we expect to see it released in the next month.

Some of the key points from the Ministry for the Environment's annual report are discussed below.

Popularity of NZUs

Trading has clearly been embraced as the preferred approach to managing the costs of compliance with the New Zealand emissions trading scheme, with NZUs being the unit of choice. NZUs are units especially created under the scheme for New Zealand purposes (with some limited international transferability).

NZUs comprised nearly 95% of all units surrendered to the Government for the last compliance period, with a small number of internationally tradable CERs and NZ AAUs also surrendered, and less than 1% choosing the $25 fixed price option offered under the transitional arrangements in the scheme. The $25 fixed price option is currently 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 impacts of the scheme, beyond 2012.

Forestry

One of the features of the emissions trading scheme is the inclusion of forestry, allowing some post-1989 forests to earn credits for forest growth (but likewise to be liable for deforestation).

Both the report and the Minister credit the scheme with turning what had been a deforestation trend around to a trend to afforestation. It should be borne in mind however that past deforestation decisions were often influenced by the need to deforest before the emissions trading scheme came into force, to avoid the loss of flexibility over land use.

Transfers of NZUs to the forestry sector have been lower than expected. However this position could change, as post-1989 forests have until 31 December 2012 to register under the scheme and pre-1990 forestry owners who are entitled to an allocation of NZUs as a one-off compensation for loss of land use flexibility have up until 30 November 2011 to apply.

Transport fuels

One 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 3.5 cents per litre.

We understand that in the transport sector, there may be pressure on the Government to consider allowing more voluntary participation in the emissions trading scheme and the Review Panel's recommendations in this regard will be watched with particular interest. At the moment, only large purchasers of jet fuel can voluntarily opt into the scheme. Otherwise responsibility for fuel emissions rests with mandatory participants (fuel importers and refiners).

Renewables

Putting a price on carbon in the economy is seen by the Government as "the most credible and lowest cost way to reduce emissions" and enable New Zealand to meet its Kyoto obligations at the least overall cost to the economy. With a price on carbon, the idea is that "green" technologies become more viable.

The report states that in the scheme's first year there have been 11 new resource consents granted for renewable power stations, whereas in the past decade, most new power plants have been fossil-fuelled.

Whether, and to what extent, the emissions trading scheme has been a major factor in an increase in the development of renewable energy to date is a subjective assessment. These projects typically take years of planning preceding the granting of resource consents and a number of these will have been inthe pipeline prior to the emissions trading scheme.

Allocations

One of the most frequently heard criticisms of emissions trading schemes is the impact such schemes can have on industries exposed to overseas competitors who do not face a price for carbon, and the negative effect this can have on the overall economy. This has been a particular concern for New Zealand business. The response in New Zealand 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 just capturing industrial activities as originally anticipated, Government allocations of units to emissions intensive trade exposed industry have also been made to other sectors that use a lot 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 quota in recognition of the impact of the emissions trading scheme on fishing businesses, as large users of transport fuels.

Emissions Trading Scheme Review Panel

The scheme legislation requires a formal review of the operation of the scheme to be undertaken in 2011. This review got underway at the start of the year. The Review Panel's report was provided to the Government just prior to the announcements in Australia around the Australian proposals for carbon pricing. It has not yet been publicly released as the Government has asked the Review 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 sometime in September 2011.