ETS Review Panel Recommends Delayed Implementation ^Featured

The Government today released the ETS Review Panel's report, entitled "Doing New Zealand's Fair Share".  The primary recommendation of the Panel, chaired by David Caygill (former Cabinet Minister and Chair of the Electricity Commission), is that the implementation of the ETS be slowed down. 

Following consultation with stakeholders, including international ETS participants and other international organisations, the Panel has made 61 recommendations to Government.  In releasing its report, the Panel stated that it: "has sought to strike the right balance between mitigating the short-term costs and competitiveness risks that the ETS may raise, and providing certainty on the clear long-term direction that New Zealand must take."  It notes uncertainty about the future of international climate change agreements is likely to continue in the short to medium term, but that there are a range of strong international drivers for NZ to take responsibility for its emissions.  As a result, the Panel believes it is in NZ's long-term economic interests to continue to change behaviour; and that it is: "important for Government to send a clear signal for the future evolution of the ETS". 

In a press release issued today by the Office of the Hon Dr Nick Smith, Minister for Climate Change Issues, the Government has been quick to align the NZ ETS with the Australian approach.  The Panel is more circumspect.  It notes current international uncertainty over action to reduce emissions, and identifies a number of countries, including Australia, the China, the US and the European Union, which have or are planning to introduce measures.  The Panel recommends that the Government continues to monitor the development of the carbon pricing mechanism in Australia and that, whilst it is desirable to "work broadly in harmony" with Australia, NZ should not be bound by the features of any particular overseas scheme.

The Panel states that it has heard "compelling evidence" that the impacts for the majority of businesses and households are currently low.  Even so, it is aware that the impacts of the ETS will be particularly significant for lower income households, certain businesses and Maori (due to over-representation in lower income households, and unique issues faced by Maori landowners, including governance and eligibility for forestry exemptions from the ETS). 

Based on these conclusions, the Panel's primary recommendation is that the implementation of the ETS be appropriately paced, and that it be supported by a range of other measures to assist the development and take-up of abatement options by the groups most affected. 

The Panels' key recommendations are:

Extensions to Transitional Phase 

• The current obligation for businesses to surrender 1 emissions unit for every 2 tonnes of emissions should be phased out on a sliding scale basis over 3 years so that in 2015, businesses will have to surrender one emissions unit for each tonne of emissions (currently, this is due to end in 2012).

• The 'price cap' (or fixed price option), which is currently set at $25 per NZU and is due to end in 2012, should be increased by $5 per annum in 2013 until it reaches a maximum of $50 in 2017.

• The price cap should be extended to the synthetic greenhouse gases, waste and agriculture sectors.  The synthetic greenhouse gases and waste sectors should join the ETS in 2013 with a 67% obligation, assuming full surrender obligation by 2015.  The agriculture sector should join the ETS in 2015, starting at a '2 for 1' surrender obligation, and assuming full surrender obligation by 2019.

• Those non-forestry sector participants should be entitled to export NZUs in 2017, or sooner if the price cap is "significantly above the international carbon price".  (As an aside, while we agree this approach to be sensible, we question how the international carbon price is to be determined).

• Unlike Australia, a carbon floor price is not recommended.

 Phase-out of Allocation

• Other Australian proposals, including increased allocation thresholds and value-add measures for determining eligibility, are not recommended.

• A linear phase out rate for industrial and agricultural free allocation.

 Agriculture Obligations now with Farmers 

• The point of obligation for the agriculture sector should be moved to the farm gate rather than the processor level. The reason for this significant shift is that the persons best able to reduce their emissions are incentivised to do so.

 Forestry 

• A "hard headed" assessment of domestic ETS forestry rules, including reviewing the forest ownership 'associated person' test to better recognise the situation of related family farming operations. Our experience is that these rules are difficult to apply in practice given some of the historical ownership requirements.

• Pre-1990 forest owners be able to undertake offset planting.  This is currently not provided for, and is a major issue for forest owners wanting to deforest more than 2ha within a 5 year period.  The corollary to this is that the Government should introduce a 'claw-back' provision for the second tranche of free allocation if offset planting is taken up by a participant.

• That the Government considers extending pre-1990 forestry deadlines.

• An 'emissions to atmosphere' approach in relation to post-1989 harvested wood products should be adopted if agreement is reached internationally.

• Owners of forests under 100ha should be entitled to use the field measurement approach.  Currently they are required to use the default look up tables. 

• The 100ha threshold (above which a forest owner must use the field measurement approach) should be increased.  This is of particular interest given that the regulations governing the field measurement approach have only recently been finalised.

• Extending the tree weed exemption for pre-1990 forests.  There seems to be merit in this given that such species can also present biodiversity threats.

• Consider introducing a voluntary ETS equivalent for pre-1990 indigenous forests.  The previous rationale for excluding this was that it was predominantly Crown-owned estate and that in many cases district planning and other legislative requirements restricted deforestation of those areas.

Interestingly the Panel has recommended that the Government "urgently consider" whether HFC-generated CERs (which are considered to be of low environmental merit) should be allowed in the NZ ETS.  This has been a sticking point internationally, as these types of credits are prohibited under the proposed EU and Australian schemes.

It will be interesting to see which of the Panel's 61 recommendations the Government takes up.  This is particularly so in light of the uncertainty clouding the international climate agreements in a post-2012 regime.