The Emissions Trading Scheme: Performance and Outlook

Kia ora hui hui tatou katoa.

Can I particularly acknowledge the Hon Mark Dreyfus, Australian Parliamentary Secretary for Climate Change & Energy Efficiency, and all our guests from Australia that we are honoured to host at this 7th Climate Change and Business Conference.

I also acknowledge Andrew Ferrier of Fonterra, Gary Taylor of EDS and many other distinguished guests here to engage on this complex issue.  I particularly want to welcome the initiatives announced today by Fonterra.  They reflect an increasingly constructive engagement by the farming sector about these environmental challenges and bode well for New Zealand.

My speech this morning is titled Performance and Outlook.

It is just over 12 months since our emissions trading scheme took effect and with such a difficult reform it is timely to review how it has performed relative to expectations. 

I also want to comment on the Government’s ETS Review and our broader climate change policy agenda.

First, let me give some context.

The problem of climate change and the increased concentration of greenhouse gases in our atmosphere is the most challenging issue of our time.

Few issues spark as much passion or divergence of views.

The science tests the very best minds in our research and scientific institutions.

The economic implications are huge with our industrialised societies being so dependent on fossil fuels for cheap energy.

The international politics of determining who should carry what share of the burden requires the Wisdom of Solomon.

And it is a long-term issue that will span many lifetimes – and the life of many more political careers.

But this difficulty cannot be an excuse for not making progress.

It is said the most difficult step on any journey is that first step, and so it is with climate change.

The debate in New Zealand – and in Australia – on putting a price on carbon has been pretty ferocious, but it is a vital first step to the change we need to make as a society towards a low-carbon economy.

The New Zealand Government is both realistic and pragmatic on this issue.

We need to do our fair share.

We need to act consistent with our clean, green brand.

We also believe the inevitable transition to a low-carbon economy will be less costly the earlier we start to make the necessary changes.

But we are also very mindful of the cost pressures that households and businesses are under.

Nor do we see any sense in undermining New Zealand’s competitiveness only to have industries grow in other countries that are less emission efficient.

Such an approach would cost Kiwi jobs and add to global emissions.     

Our approach is also underpinned by the objective of achieving the greatest emissions reductions at the least cost to the economy.

It is the view that the pricing of carbon pollution is the most efficient way for Government to reduce emissions that has driven our policy of getting an effective emissions trading scheme up and operational.

ETS Annual Report

Today I am releasing the first annual report on the New Zealand ETS and I want to cover some of the key elements in that report.

The report is complicated by the fact the scheme came into effect mid-year.  It therefore covers the reporting of emissions for that half year and the surrender obligations for those in May.

Emissions in the energy and industrialised sectors were less than projected by 30%.

This reflects both the high rainfall in 2010 enabling lower electricity emissions, power companies managing their resources to minimise the use of thermal generation given the ETS costs, and some recessionary impacts on overall activity levels.

Transport, or liquid fuel emissions, was about 25% higher than expected. Deforestation emissions were low and about 18% less than estimated.

The most interesting analysis is in how these obligations were met.

98% of the units surrendered were New Zealand units, the bulk being New Zealand forestry units.

1.6% was international CERs and only 0.45% used the $25 fixed price option.

These figures should allay fears the cost to New Zealanders of their emissions would largely go off shore, or the $25 fixed price option would excessively distort the market.

The report on the allocation of units is also interesting. There were 25% fewer allocations than expected to trade-exposed industry.

Pre-1990 foresters are yet to claim 10 million units provided in compensation for their loss of land use flexibility. Fishing allocations were just as expected. Post-1989 forestry is 11% behind forecasts.

It is worth providing a greater level of detail on allocations to industry, particularly given the controversy around the changes National made to both the thresholds and the intensity approach.

The consequence has been a lot more trade-exposed emissions intensive businesses being eligible for support but the overall level of allocations being substantially less.

The aluminium, steel, pulp and paper, and cement industries make up only 10% of participants but received 90% of the units.

65% of those receiving an industry allocation are smaller horticulturalists. Proportionate to turnnover, these 200 trade-exposed businesses faced quite high costs. However, their allocations make up only 1% of the total.

A difficult question for officials has been estimating the uptake by foresters. 43% of pre-1990 foresters had taken up their allocation at 30 June but I must note that applications have since increased and we expect them to continue to grow as we approach the 30 November deadline.

Post-89 foresters have the option of claiming credits for their forest growth after 2008 anytime up to 2012. Many are considering the merits of participating relative to the future obligation to surrender units on forest harvest. 32% at 30 June had taken up the option to receive their allocation of New Zealand units.

The report concludes the scheme is operationally functioning well.

Only two out of 102 participants failed to meet statutory reporting and surrender obligations on time: one a day late; the other had a nil return.

This is a very good outcome for the first year of a reform as complex as the Emissions Trading Scheme for which I congratulate both officials and industry.

Effects of the ETS    

The most encouraging feature of the ETS for Government is in the way it is successfully changing behaviour and reducing emissions. The starkest have been in the forestry and electricity sectors.

Forestry is particularly significant for New Zealand as relatively small changes in levels of afforestation have a dramatic impact on our current and future emissions profiles.

Post the introduction of the ETS we have seen a marked shift.

Every year since the scheme took effect the sector has seen a growth is afforestation and a reduction in deforestation.

The net increase in forest area has grown from a small positive of 500 hectares in 2009, to 4700 in 2010 and forest survey intentions indicate 5700 hectares this year and 7700 hectares in 2012.

2010 also saw a record high 79% in the proportion of New Zealand renewables. While this was in part due to a wetter year, it is also clear by the behaviour of generators that the ETS had a conscious impact on minimising the use of fossil-fuelled generation made more expensive by the ETS.

The part that is most encouraging has been the surge in consenting activity for new renewable power stations.

The Government’s 2009 Resource Management Act reforms that streamlined the consenting process combined with the pricing incentives of the ETS are driving a boom in the renewables sector.

Eleven new stations, totalling 1340 MW have been consented in the first year of the ETS, made up of 59% wind, 26% geothermal, 13% hydro and 2% tidal.

This is a fivefold increase on the average annual for the previous decade when most new consented generation was fossil fuelled.

The key objective in all this is for New Zealand to meet its Kyoto costs at least cost to our economy.

New Zealand’s net emissions grew by 23% between 2000 and 2008, or an average of 3% per annum.

I was advised on coming to Government in 2008 that without the ETS New Zealand would overshoot its Kyoto target by 19.5 million units with an estimated cost of $485 million.

The ETS has put us in a much stronger position.

I am very confident today in saying we will comfortably meet our Kyoto target.

This is good news for New Zealand taxpayers and good for New Zealand’s reputation as a responsible global citizen that pulls its weight on difficult environmental issues like climate change.

The Future

The big question now is: where to from here?

The Government remains committed to its ETS, its policy of New Zealand doing its fair share, and its approach of carefully balancing our environmental and economic objectives.

Late last year we announced the statutory review of the scheme and I commend the Hon David Caygill and his team on its very constructive and considered work.

It is interesting to look at the analysis of submissions received by Review Panel.

It shows a marked and positive shift in business’ perspective on the scheme.

In contrast to the 78% of business submissions opposed to the scheme two years ago, 63% now support it.

This reflects the value of certainty, the fact that critics overstated the costs of the scheme and the careful approach the Government has taken to the transitional arrangements.

It should also be noted that most business submitters, or 60%, argued that the scheme should be slowed as compared to 15% who wished it to be sped up.

There is also not much surprise in the view of NGOs, who not only strongly support the scheme but 66% wanted it sped up, as compared to 17% who wished it to be slowed.

The Government is currently giving careful consideration to the Panel’s recommendations.

Since the Panel’s report, we have seen the very significant announcements from the Australian Government.

The terms of reference make plain our Government’s objectives for New Zealand to be well attuned to international developments – particularly amongst our key trading partners, of which Australia is our closest and largest.

As a consequence, we have asked the ETS Review Panel to further consider its report and recommendations in light of Australian developments. I expect a response in the next few weeks.        

It is worth noting in this context the level of similarity between the New Zealand and Australian approaches.

We in New Zealand have started two years earlier but with only a half obligation for the first 2 ½ years. The prices are comparable although disparity has grown with the strength of the Australian dollar.

The most complex part of any ETS Scheme is how its industrial allocations work for businesses that are trade exposed and emissions intensive. Our decision to adopt the CPRS approach means we are well synchronised – albeit the Australian model is slightly more generous.

I must note that I am very encouraged by Labour in New Zealand also now agreeing with the approach of an intensity-based threshold, an intensity- based allocation and a 1.3% phase out per year in its most recent policy announcements despite its ardent criticism when we made these policy changes.  This provides an important stability of policy for significant industries like steel, aluminium, wood processing and cement.    

A key Trans-Tasman difference is the clear position of the Australian Government to exclude agricultural emissions. This is the most difficult issue on this side of the Tasman.

I can categorically rule out any cross-party agreement in New Zealand on this.

The recently announced Labour proposition to not only include agriculture two years earlier in 2013, but to adopt the very tough allocation model of 90% of 2005 emissions, no provision for growth and an 8.3% phase out per year is unfair and unworkable.

It is a marginal call to include agriculture given that no other country is doing so and the limited mitigations currently available to farmers.

The part we find inexplicable is to treat agricultural emissions significantly tougher in New Zealand than emissions from industries such as aluminium, steel and methanol.

A farmer next decade under this policy will be paying five times more for their emissions than Rio Tinto or Methanex.

The policy to introduce the obligation at farm level in 2013 is administratively undoable.

This policy would not only have New Zealand as the only country to include agriculture, but globally New Zealand agriculture would be the hardest hit trade exposed industry of any industry anywhere in the world.

To give you a signal on the Government’s perspective on agricultural emissions, I need to go back to first principles.

The ETS is not intended as a cash cow or a new source of revenue. Nor do we want to reduce New Zealand production only to have the goods produced elsewhere less efficiently.

The purpose of the ETS is to drive investment in less emissions intensive production.

A key factor in assessing the Review Panel’s report and in determining the future of agriculture will be the availability of practical technologies that will enable farms to reduce emissions without reducing their contribution to the New Zealand economy.

Complementary measures

This brings me to the complementary measures the New Zealand Government is advancing alongside the ETS to reduce our emissions.

We consider we can make our greatest global contribution to climate change with the Global Research Alliance on these agricultural emissions.

New Zealand has been delighted with the level of support globally for this initiative, with positive support from the likes of UK Prime Minister David Cameron and President Obama.

I also want to acknowledge Australia’s membership and contribution.

Just as it makes sense for Australia to take the lead on technology to advance carbon capture and storage, it makes sense for New Zealand to lead this work on agriculture.

We’ve also made big investments in home insulation, clean heat, solar and heat pump hot water heating.

In transport we’re investing more than $1 billion in electrification of Auckland’s rail network and introduced road user charge exemptions to encourage the adoption of electric cars.   

An issue of which we are doing more work is the complementary measure needed to help small and medium-sized businesses move to a low-carbon economy.

The Advisory Group on Green Growth established earlier this year is applying its considerable expertise to this question as it prepares its report for the Government by December.

Conclusion

I conclude by restating my thanks to all those who have helped New Zealand make the significant step last year in introducing a price on carbon pollution.

After 15 years of flip-flopping back and forward, we have a scheme that is working well and is driving the shift to lower carbon technologies so important for our future.

The questions ahead are not about going backwards but at what rate to advance the scheme further.

I hope to be in a position to announce National’s intentions on the future of the ETS in the next month or so.

I look forward to the work of the Advisory Group on Green Growth to help drive the next complementary steps.

Our Government stated its policy in 2008 of working more closely with Australia on climate policy. That remains our position.

We see real benefits for both countries in ultimately working towards a Trans-Tasman carbon market beyond 2015.

There is a lot ahead to achieve but I sense through the ANZAC spirit, the work of conferences like this, and the strong relationships between our Prime Ministers and Ministers that it is possible.

Best wishes for your conference’s deliberations.