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David Parker

20 September, 2007

A New Zealand Emissions Trading Scheme

10.30am, 20 September 2007, Banquet Hall, Parliament Buildings
Wellington

1.Introduction

Thank you. I’m very pleased to join you here today.

Many people have put a great deal of effort into getting us to here – public submitters and government officials alike. I thank them for their efforts.

I would like to acknowledge the Prime Minister’s work in championing sustainability and climate change. That climate change was big news at Apec this year was in no small part due to her efforts last year to get it on the agenda.

We may be a small country but the world does look to clean-green New Zealand for environmental solutions, and to act as kaitiaki of our land.

We are renowned for our nuclear free stance. We pioneered the fisheries quota system. Both Labour government initiatives. And now we have developed solutions to reduce greenhouse gas emissions.

The Prime Minster set an aspirational goal of carbon neutrality. Today we are taking significant steps towards that. This will be talked about around the world, because we are seen as environmental leaders. The world will take hope from the fact that we can do it. And if we can, so can the world.

2.Why emissions trading?

Firstly, from our consultation it was clear there was broad, albeit not unanimous, support for emissions trading. There was a strong consensus that to be fair to any sector it has to include all sectors and all gases over time.

Secondly, emissions trading is the most flexible and least-cost option. It enables firms to access the cheapest possible emission reductions - anywhere in the economy.

The third reason is that, fundamentally, the science tells us to control the quantity of our emissions. An emissions trading scheme achieves this directly – it sets the quantity and allows prices to adjust.

Lastly, the scheme is consistent with Kyoto Protocol principles.

The emissions trading scheme maintains economic flexibility, equity between sectors, and between industry, consumers and taxpayers. It does all this while achieving environmental integrity at least cost in the long term.

3. Net position report

Our emissions were set to rise if we continued as we did before.

Today we’ve released the latest projection of New Zealand's emissions for the five years from 2008 to 2012.

The updated estimated deficit is 45.5 million tonnes, up from 41.2 million. This increase is due mainly to increased dairy livestock and dairy processing emissions, predicted as a consequence of the increased dairy payout.

If we don’t introduce an emissions trading scheme, emissions will increase still further - to a deficit of around 65 million tonnes.

The good news is that New Zealand can cost effectively reduce our emissions substantially through the policies we are announcing today.

My estimate is that what we have now announced will pull this back to around 25 million tonnes or less, which compares favourably with progress in other countries.

Perhaps more importantly, with an Emissions Trading Scheme we will get our emissions on a sustainable downward trend into the future.

4.Small macro-economic effect

The effect on the economy is not expected to be great, with economic modelling predicting it might knock 0.1 percent off New Zealand’s GDP growth over 5 years.

So, what will New Zealand’s emissions trading scheme look like?

5.All gases, all sectors

The most important feature is that the scheme encompasses all gases and all sectors.

All gases means that the New Zealand scheme will cover all six greenhouse gases specified in the Kyoto Protocol, including methane and nitrous oxide, as well as carbon dioxide.

All sectors means that the scheme will cover all the significant sources of those gases in the economy.

Unlike most developed countries, almost half of New Zealand’s emissions come from agriculture. For an emissions trading scheme to be fair and work in New Zealand, it’s vital that agriculture as well as other big emitting sectors are included.

A scheme which excluded agriculture would be more expensive for the economy as a whole because it would exclude those low cost emission reduction opportunities that exist in agriculture. It would distort the economy. It would also be unfair to other sectors like forestry (which would not get credits), unfair to other industry (which would have to do more than its fair share), and unfair to taxpayers (who would carry the whole cost of agricultural emissions).

6.Key features of an NZ Emissions trading scheme

The key features we are proposing for a New Zealand emissions trading scheme include:

  • Cap and trade: Emissions trading requires participants to surrender units for their greenhouse gas emissions. A capped number of units are distributed – some allocated free, others sold by the government at auction. All can be traded amongst those who want to increase or decrease their emissions. The scheme will operate on an economy-wide basis – so emissions may increase in one area if there are reductions in another. This encourages emissions reductions to occur where they can be achieved at least cost.
  • Participants: The obligation to account for emissions will be imposed on a relatively small number of participants in each sector – typically, operators high in the supply or production chains. For example, in the transport sector, involvement is proposed to be limited to the major oil companies and a few other large companies. Overall we expect about 200 firms to be participants, plus foresters.
  • Units: The primary unit of trade will be the “New Zealand Unit”. One New Zealand Unit must be surrendered for each tonne of emissions. We don’t intend to prescribe how trades of Units should occur. It may be the NZX’s TZ1 carbon trading platform, or it may be a simple bilateral trade. As the scheme develops, we’d expect to see secondary traders enter the market and use their expertise to match buyers and sellers, much like a stockbroker.
  • International: The New Zealand emissions trading scheme will operate within Kyoto and each Unit will be fully comparable to a Kyoto-compliant unit in the international market. Linking internationally is a safety valve that will ensure the cost of emissions in New Zealand does not rise above the world price. Subject to some restrictions, we propose that the New Zealand scheme will link with the international market. This enables access to emission reduction opportunities offshore. Likewise, international players will be able to purchase New Zealand Units or invest in New Zealand emission reductions. Notwithstanding the international linkages, we are confident that a substantial portion of the emissions reductions will occur in New Zealand.
  • Allocation - I’ll talk about that in a moment as I go through the sectors.
  • Administration - Ownership of units will be recorded with a central registry, which will operate a bit like internet banking. Participants will be expected to monitor their own emissions, but an administering agency with audit and inspection powers will verify compliance. Participants will face penalties for non-compliance.

7.Timeline

So the scheme will cover all sectors over time. Let me set out the government’s proposed timeline for implementation.

Forestry will be in first. The government has decided that monitoring of forestry emissions and sinks will begin from 1 January next year, with the first compliance period running for two years ending in December 2009.

The transport sector will be next – joining the scheme from January 2009.

Transport is another large – and growing – source of emissions in New Zealand. In reality, we cannot reduce our overall energy emissions if we do not make progress in transport. Because compliance will apply only to a small number of firms high in the supply chain, the government has decided transport can be included in the scheme earlier rather than later.

Fuel companies will pass on their costs under the scheme to motorists and so will not be given any free allocation of Units.

This principle will be applied whenever the scheme participants would pass on costs anyway. The rationale for this is that otherwise participants get an unjustified gain at the expense of taxpayers, as occurred in Europe.

We propose that the stationary energy sector – which includes electricity generation and all other energy except transport fuel – will join the scheme in January 2010.

Heavy emitting industrial processes – mainly the metal, mineral and chemical industries in New Zealand – will be brought in at the same time, subject to exclusions where the amounts emitted are too small to justify the scheme.

The points of obligation will differ, depending on the gas and industry in question. For several affected industries, including aluminium smelting, the obligation is best placed on the emitter. In other industries, the importer may be the point of obligation.

No free allocation is proposed for electricity generators.

For those big emitters who are facing competition from overseas firms not yet facing emissions pricing, generous levels of free allocation are proposed - up to 90 percent of their 2005 stationary energy and process emissions.

This is a complex area and the January 2010 entry date gives the government sufficient time to engage with key stakeholders on relevant sector details.

For the scheme to work, the number of units allocated by gift or sale must be less than total sector emissions. This is needed to create both the price incentive to decrease emissions and the price disincentive against increases in emissions.

Agriculture is our single biggest source of greenhouse gases, mainly in the form of methane from livestock and nitrous oxide from livestock urine and fertilizer.

But including it effectively and fairly in an emissions trading scheme is not straight forward, and we propose a January 2013 start date for agriculture. It is likely that monitoring will commence before 2013. Opportunities to bring agriculture, or some aspects of it, into the scheme before then will be discussed.

When the agriculture industry joins the scheme in 2013, the government would prefer to impose direct obligations on processing companies rather than individual farmers, although alternative approaches will be explored. In any case, farmers will benefit from free allocation of Units based on 90 percent of 2005 emissions - possibly an allocation direct to farmers themselves.

Jim Anderton will say more.

That’s the scheme in a nutshell.

It’s not possible for me to canvas all sectoral issues here, but we’ve produced a large volume of material which drills into the detail – including a comprehensive Framework Document which is being released here today.

8.Targets

Allow me to talk about the targets the Prime Minister outlined.

By 2025 we want 90 percent of electricity generation to be from renewable sources.

This is affordable and achievable. At around 70 percent, New Zealand already has the third highest level of renewable electricity in the world. We have substantial additional quantities of affordable renewables available. This transition will be cheaper in NZ than most other countries. It will be a point of comparative advantage in the coming years.

In the transport sector, we propose two targets. The first is to cut per capita transport emissions in half by 2040.

This leads to our second transport target: for New Zealand to be one of the first countries – if not the first country - to widely deploy electric vehicles.

Battery powered cars are charging ahead. With our low cost renewable electricity, they will make good economic and environmental sense for New Zealand.

We all know that reducing emissions in the agriculture sector is a challenge – but it’s not impossible.

We are already world leaders in primary production. We produce a kilo of meat or a litre of milk more efficiently than anywhere else in the world– we are agricultural superpowers.

Superpowers have responsibilities that go with powers.

We lead the world in research into reducing greenhouse gas emissions from livestock production. If anyone can make a difference, we can. It is our responsibility to use our strengths to help the world in this area.

The sector and government’s investment in agricultural research has already helped bring forward breakthrough technologies like nitrification inhibitors that both reduce emissions and improve production efficiency.

So our goals in agriculture are, first, for New Zealand to be the world leader in agricultural emissions reduction research, and, second, to lead the world in reducing agricultural emissions.

In forestry, our target is to see a net increase in forest area in NZ of 250,000 hectares by 2020. We will achieve this in part through the emissions trading scheme. Mr Anderton will say more about this.

9.Towards a carbon neutral New Zealand

I am confident that with our emissions trading scheme and other policies, we will reduce our greenhouse gas emissions substantially. The effect is that New Zealand is taking significant steps towards carbon neutrality.

As a result, New Zealand will achieve carbon neutrality first in the electricity sector by 2025. This will require residual emissions of three million tonnes per annum to be offset.

We expect to achieve carbon neutrality in all stationary energy (that is, including electricity generation and industrial heat and process emissions) by 2030. This is projected to require an estimated 11 million tonnes per annum of emissions to be offset.

In the transport sector our date for carbon neutrality is 2040 with an estimated 9 million tonnes of emissions per annum to be offset.

This means we will be carbon neutral in the whole of the energy sector – that’s including both stationary and transport energy – by 2040. This is expected to require 18 million tonnes of emissions to be offset in 2040, declining to 12 million tonnes by 2050.

These targets are challenging but achievable.

We believe they are necessary. Climate change is no longer solely an environmental issue – if we and the world do not reduce emissions major economic, social and even security ramifications are expected to follow.

By being clever and strategic, we can improve our way of life and reduce our impact on the planet.

And the Labour-led government is leading these changes. We are changing the gears of the economy, and it will be stronger, more efficient and profitable, as a consequence.

Today, we are outlining the in-principle decisions taken by the government around one of the important elements of our climate change and sustainability agenda: a New Zealand emissions trading scheme.

10. New Zealand – setting the agenda

The proposed emissions trading scheme has been designed to adapt to developments in international agreements as they emerge.

It will give us a strong voice in negotiating a path forward post-2012 in a way which helps New Zealand’s interests.

Emissions trading is a significant step towards sustainability.

You hear a lot of bad news about climate change.

But here’s the good news: We can overcome.

As a country we can:

  • Reduce emissions
  • Grow our economy
  • Use resources more sustainably

This will help transform our economy in a way in which can give our businesses a competitive advantage.

We will show the world how we, and the rest of the world, can overcome this challenge, while improving the environment and the wealth of our people.

  • David Parker
  • Climate Change Issues