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 1^st, 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 1^st 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.

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.

Who should be bailed out – him, or Bangladeshis? (source: autocar.co.uk)

Low-lying Bangladesh is often cited as one of the countries likely to be worst hit by climate change, particularly due to sea-level rise. Urgent measures in Bangladesh’s 10-year action plan are predicted to cost $5 billion in the first five years.They’ve already raised $45 million from donors, but now there are fears that support will dry up as the financial crisis bites in rich countries, which one of their negotiators for Copenhagen has already expressed. Such fears are echoed by the likes of UNDP and WWF, who fear it is unlikely rich countries will step up to the plate.

Given the UN Adaptation Fund (see previous posts) depends on CERs for its financing, the recent fall in the carbon price is bad news for adaptation. Some estimates suggest nearly 20% of the fund’s worth has been lost. The GEF has indicated that it may start being more vocal about pushing donor countries to finance adaptation.

In any case, it certainly looks bad if the US, Britain and others are pumping billions into their banks and car manufacturers (high carbon emitters and lazy good-for-nothings who have dragged their heels on fuel efficiency) whilst leaving developing countries to face the music. This is the height of climate injustice, and you can expect a lot of noise to be made if things haven’t improved by the time Copenhagen comes along…

*update* 23/2/09 – this Guardian story follows a similar theme

Talks at Poznan about a re-engineering of the Clean Development Mechanism, Kyoto Protocol’s righteous son, have been Bonn-ed. This does not come as a surprise for some observers, but disappointment is understandable. As a flagship of the Kyoto Protocol’s market-based approach to climate change, one could have hoped that delegates fixed at least the most visible holes perforating its surface.

What holes?

UNFCCC recently removed DNV’s CERs verification licence. The unease about project managers hiring the verification team then found, rightly or wrongly, an a posteriori justification. (DNV said it would win back its licence within a month).

Speaking of discomfort, the demonstration of additionality by the project promoters themselves also raised concerns throughout the short history of CDM. With acute information asymmetry between promoters and the Secretariat, the demonstration of additionality can potentially suffer credibility deficit.

Finally, the environmental impact assessment (EIA) of CDM projects is regarded as insufficient. A good EIA would make sure, for instance, that we don’t remove CO2 from the atmosphere ruining an entire ecosystem in the process of doing so.

What can be done? Some suggestions from delegates, bloggers and specialists.

• UNFCCC, not promoters, should hire and pay verification firms directly.
• UNFCCC, not promoters, should assess additionnality.
• Promoters should be required to conduct sound EIAs for CDM projects.

CDM being a rather complicated tool, its short history has given much weight to the procedural status quo. Project promoters, countries and Designated National Authorities (DNAs) have climbed up the learning curve of the actual CDM: they probably don’t want to start over again with new procedures.

In order to gather wide interest, an agenda for CDM should try to mix discussions on potential simplifications of project methodologies with discussions on the procedural modifications listed above.