Government likely to scrap “one-for-two” ETS surrenders

PRESS RELEASE

25 November 2015

Government likely to scrap “one-for-two” ETS surrender obligation

The Government has sent a clear signal that arrangements put in place to ease the impact of the New Zealand Emissions Trading Scheme (ETS) on certain sectors during the Global Financial Crisis could be scrapped as early as next year.

The Ministry for the Environment yesterday released a discussion paper on the New Zealand Emissions Trading Scheme Review 2015/16. It made the current “one-for-two” surrender obligations a priority issue for submissions, along with managing the cost of moving to “full surrender” (one-for-one) obligations. Submissions on these issues will be due by 19 February 2016, while submissions on other issues can be made until 30 April 20160.

The current “one-for-two” obligations for participants in certain sectors, including liquid fossil fuels, industrial processes, stationary energy and waste, were introduced in 2009 and oblige those participants to acquire and surrender one New Zealand Unit (NZU) to account for every two tonnes of greenhouse gas emissions they produce. The discussion paper makes it clear this was a transitional measure linked to the GFC and the rationale for the looser scheme settings no longer exists.

The early timing of submission deadlines for these features would allow legislation to be passed in 2016 that could see the ‘one-for-two’ measure dropped by mid-2016 at the earliest, and it appears likely a change would be in force from the start of 2017 at the latest. Although this is a consultation document, the parallel focus on managing the cost of moving to tighter obligations reinforces the likelihood that the government is serious about dropping “one-for-two” and the issue is about what can be done to mitigate the change.

The overriding message is that the ETS settings will tighten.

Forestry will benefit – others will manage the cost

One sector that will benefit from tighter settings will be forestry. Forest plantings are clearly recognised as a key plank in achieving New Zealand’s emission reduction targets and the outcome of the review should result in settings more favourable to forestry in the long-term.

For adversely affected businesses, there are two main ways to manage the cost of moving to full surrender: seeking a gradual move to one-for-one obligations, or adjusting the emission unit price cap to mitigate the impact of any large upswing in carbon prices. Given the deadlines, businesses will need to mobilise quickly to express any views on the change or how to mitigate any transition.

The Government has ruled out any consideration of agriculture in this review. While there are some requirements in the sector to report on emissions, there is no obligation to surrender units to ‘pay’ for those emissions.

Stockpiling drives tightening

The paper provides insight into some compelling fiscal reasons for the Government to return to tighter ETS settings. The current settings have contributed to “banking” or stockpiling of a large number of units. While these stockpiled units can be surrendered under the ETS after 2020, they won’t count towards New Zealand meeting its 2030 emission reduction target. Unless the stockpile is significantly reduced before 2020 – which returning to one-for-one obligations would help to do - the Government faces a greater financial exposure itself. At today’s carbon prices there is a NZ$400 million exposure for government, and ultimately taxpayers, and that will grow if prices rise.

Prices are likely to be squeezed higher in the next four years, with policy settings pushing ETS compliance costs up. Re-opening of the ETS to international carbon credits, which might offer greater liquidity and potentially lower prices, isn’t an option until after 2020 because New Zealand opted out of the second round of Kyoto Protocol agreements.

It appears the Government is seeking to manage that change to ensure a steady trajectory toward tighter settings that avoids sudden and painful adjustments.

It is unlikely that any of the changes being discussed will be affected by the major United Nations Framework Convention on Climate Change, which will take place in Paris from 30 November to 11 December 2015. The goals set for that conference are about establishing a direction towards lower emissions and putting a framework around that, but will still take several years to firm up and implement.

Having ETS settings that provide a steady path towards emissions reduction goals while maximising the opportunity of a trading scheme to achieve this more cost effectively will give businesses the certainty needed to enable planning and adjustment. If businesses accept there is a move to a more carbon-constrained future, then they should consider submitting their views on what would be a sustainable carbon price path over time.

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