New Zealand forest

New Zealand forest (image by: Southern Forests Ltd.)

New Zealand’s Conservative government has released its first annual report on its New Zealand Emissions Trading Scheme (NZ ETS), and the general assessment is that it is working well. In the report, released August 1st, climate minister Nick Smith implied that he was pleased with how smoothly the scheme is progressing in achieving its twin goals of reducing emissions and promoting low carbon investment in forestry and cleantech. “This report shows the ETS is working as intended, that the implementation has gone smoothly, and that New Zealand is now on target to meet its Kyoto obligations,” said Smith.

Going forward, however, the New Zealand government faces significant challenges surrounding its openness to international carbon trading. The NZ ETS also requires an increased political commitment before it has any discernable impact on low carbon investment decisions in New Zealand.

With the review panel due to release its recommendations over the coming weeks; it seems timely to look at how successful the NZ ETS has been since its inception. Before proceeding, it is important to clarify which issues were up for review. These issues include:

  • The tightening of the scheme post-2012;
  • The inclusion of waste-and-refrigerant and agricultural sectors from 2013 and 2015 respectively; and
  • Whether New Zealand is acting too aggressively or too timidly on emission cuts.

So Far So Good

The abovementioned report released on Monday revealed a marked increase in business support of the NZ ETS, with submissions to the review panel showing 63% of businesses were now in favour of it, compared to 78% being opposed to the scheme two years ago. The skepticism towards emissions trading is somewhat understandable in light of some bad press from Europe’s established scheme.

The champions of emissions trading have had to contend with somewhat chequered outcomes: oversupply of allowances, accusations of windfall profits and instances of criminality (in the form of VAT fraud and sophisticated phishing scams) have left many proponents of the European Emissions Trading System (EU ETS) feeling a little bewildered and let down. To date, New Zealand has avoided these problems.

The Challenges of International Trading

The government’s glowing appraisal fails to include all the challenges that their tiny trading system will face. Perhaps the most critical problem concerning the NZ ETS is its willingness to partake in the international trading regime.

The decisions from both the and the European Commission on industrial gas Clean Development Mechanism (CDM) projects involving reductions of hydrofluorocarbon-23 (HFC-23) and nitrous oxide from adipic acid plants are set to radically reconfigure the global market for offsets. The European Commission has proposed a ban to come into force from January 1st 2013.

The Meth Panel (a group of technical experts who give strategic advice to the CDM Executive Board) recently met and made recommendations regarding methodology AM0001 for HFC-23 projects. If these recommendations are ratified it will lead to a 50% reduction in Credit Emission Reductions (CERs) originating from HFC-23 projects post-2012. According to the Meth Panel this will reduce the total issuance of HFC-23 CERs to 634 million for the renewed crediting periods (see chart below). None of this output would be eligible for use in the EU ETS. New Zealand is currently the only established market place for these decreasingly relevant CERs.

CER issuance from HFC-23 projects

Industrial gases currently comprise 68.4% of CER output to date. Disturbingly, regulated entities within the NZ ETS are allowed virtually unlimited use of CERs to meet their compliance. These industrial gas CERs could soon overshadow the New Zealand market, since post-2012 it will be the only established marketplace for industrial gas CERs. If the review panel ignores this issue and does not ban industrial gas CERs in-line with the EU ETS, the effects could be disastrous. Considering the review panel has limited trading experience, one can only hope they listen to NZ ETS market participants.

A Victim of Short-termism

Moreover, of fundamental concern is the short-termism of their governance. The purported success of the NZ ETS needs to be tempered. The NZ ETS in its current form is largely immaterial: the successes are a result of their renewable energy standards and booming logging prices from Chinese demand (which has caused a forestry boom in New Zealand), rather than their price on carbon.

New Zealand has made it clear that it has no intention of leading on emission cuts, but rather it has advocated a “follow the leader” approach. The country’s position is somewhat understandable considering their reliance on agriculture – the country’s mainstay revenue generator – which faces huge technological barriers to reducing methane emissions and is subject to intense international competition. However, there needs to be a paradigm shift in regulatory efforts if New Zealand is to incentivize and ensure the development of cleantech. To achieve this, the NZ ETS needs to be linked to federally regulated carbon budgets.

Although New Zealand does not intend to lead on the international stage, this does not negate the need for long-term low carbon development. Until New Zealand adopts a green growth strategy, like that articulated by the recently formed lobby group Pure Advantage, New Zealand’s economic and environmental performance will continue to slide, and with it a great opportunity to generate wealth worth having.

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