ETS fixes drive climate action

  • Hon Shane Jones
  • Hon James Shaw
Climate Change Forestry

A third set of fixes to the ETS has been made as the Government continues its work with industry to reach our climate change goals, Climate Change Minister James Shaw and Forestry Minister Shane Jones said.

The latest changes to the New Zealand Emissions Trading Scheme will give certainty, flexibility and incentives to participants in the ETS as the Government progresses its plan to tackle the long-term challenge of climate change.

Sensible improvements include allowing foresters using averaging accounting, to move their plantations to more suitable parts of their property and recover from storm or fire damage, without being financially penalised.

They also provide the long-sought-after detail on how to gradually reduce free allocation to major industrial emitters, which was envisaged at the creation of the ETS in 2008. This will not affect the 95 per cent free allocation to the agricultural sector.

“Phasing down free allocation to major industrial emitters that have been part of the scheme for some time helps the ETS do what it’s supposed to do: drive emissions down across all sectors of the economy to help ensure a stable climate for future generations,” said James Shaw.

“The previous Government had indicated plans to do this from 2013 but put them on hold, leaving the industry waiting and unable to make important investment decisions.

“We’ve consulted with stakeholders and are now providing them with the clarity and direction they’ve been asking for – a gradual and steady path of change with time for businesses and communities to adjust,” James Shaw said.

The plan is to begin phasing down industrial allocation at 1 per cent per year from 2021-2030, then at 2 per cent from 2030-2041, and at 3 per cent per year from 2041-2050.

“Officials have shown that the phase-down does not pose a financial risk to ETS businesses as the ETS accounts for only a small part of a firm’s operating costs, and any additional cost to large polluting businesses will be manageable and will encourage businesses to invest in clean energy alternatives that reduce emissions.

“But the Government is aware our industries face international influences, which is why the independent Climate Change Commission will review phase-down rates and advise governments on appropriate allocations if technology, or the economics, or the global situation changes.

“We are all in this together. Whether it’s supporting coastal communities to plan for sea level rise, making fuel efficient cars cheaper for families, or partnering with businesses and farmers to find the best ways to reduce their emissions and create sustainable jobs, our Government is working alongside New Zealanders to tackle the climate crisis,” James Shaw said.

A final set of changes to how forestry is treated in the NZ ETS has also been announced.

Earlier this year the Government announced averaging accounting will be an option available to forests registered from the beginning of 2019, and mandatory for forests registered from 2021 onwards.

Averaging accounting means a forest owner does not need to surrender emissions units upon harvesting. Instead they receive units as their forest grows, up to a determined average level of long term carbon storage, and they will not face any liabilities on harvest provided they replant.

“Cabinet has now decided that forests registered in the ETS before 2019 will not be able to transition to averaging accounting,” Shane Jones said.

Shane Jones said there were a range of reasons for this decision.

“Averaging is primarily intended to encourage new forests because they make the biggest contribution to reducing our carbon footprint. 

“It’s also about managing the volume of carbon units entering the market to maintain a stable price to drive emissions reductions.

“This decision will be reviewed in 2021, once we have a better understanding of how the carbon market will be affected and the resulting costs,” Shane Jones said.

The design details announced today add to landowners’ flexibility and help ensure the ETS is the best scheme it can be, giving prospective participants more confidence.

“Forestry participants  will be able to ‘relocate’ a forest under averaging accounting – perhaps to a less productive land area – without having to surrender units for the deforested area and they won’t have to pay back units in the event of natural disasters, such as a forest fire or major storm, provided they replant in four years.

“These are sensible changes, which make sure it’s easy for people to use their land how they want,” Mr Jones said.

“This Government, like increasing numbers of New Zealanders from all walks of life, understands that commitments like the Paris Agreement now need to be matched with action,” James Shaw said.

“The Climate Leaders Coalition of more than 100 businesses, which represent 60 per cent of New Zealand’s gross emissions, just last week strengthened their efforts to ensure they help limit temperature rise to no more than 1.5o Celsius.

“Farming leaders are on board with the need to measure, manage and reduce agricultural greenhouse gas emissions.

“And the Government is providing the framework for lasting progress on climate change action through the Climate Change Response (Zero Carbon) Amendment Bill, which will establish the independent Climate Change Commission to guide and advise future governments,” Mr Shaw said.

Legislation to enact ETS reforms is expected to be introduced to Parliament later this year.

Further Notes:    

Phasing down of industrial allocation

  • Twenty-six industrial activities, which are collectively responsible for up to 14 per cent of New Zealand’s total greenhouse gas emissions, are eligible to receive industrial allocation. Included are cement production, aluminium smelting, and steel manufacturing.
  • Emissions units are provided by the Government to eligible emission-intensive and trade-exposed firms in the NZ ETS, shielding these firms from the full costs imposed by the scheme. This reduces the risk of costs forcing firms to move their activities offshore, an outcome which could result in an increase in global emissions, referred to as “emissions leakage”.
  • The minimum phase-down rate will be set at a level of 1 per cent per year from 2021-2030.Technically this is a reduction of 0.01 each year in the levels of allocation prescribed in the Climate Change Response Act 2002. These levels are currently 0.9 for highly emission-intensive activities and 0.6 for moderately emission-intensive activities eligible for allocation.
  • The annual phase-down rate will increase to 2 per cent from 2031-2040, and to 3 per cent from 2041-2050.
  • The Government will also set up a legislative mechanism which could apply further phase-downs to activities at low risk of emissions leakage.
  • The independent Climate Change Commission, once established, will be able to recommend that increases to the minimum phase-down rate are paused beyond 2031 if there is still a risk of emissions leakage. The Commission’s advice will also inform the level of any rates of phase-down for activities at low risk of emissions leakage.

Cancellation and replacement of units from the first commitment period of the Kyoto Protocol

A decision was made following targeted consultation held in May 2019, about what to do with privately held units from the first commitment period of the Kyoto Protocol.  The majority of submitters to the consultation were supportive of this approach.

New Zealand-issued Assigned Amount Units held in private accounts will be cancelled and replaced with an equivalent number of New Zealand Units. All other privately held Kyoto units from the now-ended first commitment period of the Kyoto Protocol will be cancelled. These units have not been eligible for surrender since 1 June 2015.

Averaging accounting decisions

Three key features have now been agreed on for forests in the averaging accounting model: 

  • Foresters using averaging accounting have the flexibility to change the location of their forest

If a land owner wants to convert ETS registered forested land to another use they can now do this without paying back emissions units, as long as they plant a forest elsewhere with the same carbon storage. This reflects the long term approach to carbon storage under averaging.

(For forests under carbon stock accounting, any deforestation means surrendering the NZUs they’ve earned, even if new forest is established elsewhere).

  • Foresters using averaging accounting won’t have to pay back NZUs after adverse events

This means no requirement to pay back emissions units for carbon storage lost after a significant adverse event (e.g. forest fires or extreme winds), if the affected area is re-established within four years.

(Under the stock change accounting system, foresters have to repay emissions units if their forest is destroyed by an adverse event.)

  • Existing forests registered before 31 December 2018 won’t be transitioned to averaging accounting at this stage

Following consultation, the Government has decided that forests already registered in the ETS cannot transition to averaging accounting at present. This will be revisited in 2021, when more relevant data will have been collected.  

The decision was made because:

  • Introducing averaging accounting is about seeing more new forests established, to increase the amount of carbon stored in New Zealand.
  • Moving more than 2200 existing forests onto averaging could contribute to an oversupply of units (which, under stock carbon accounting, will be surrendered to the Crown upon harvest) into the carbon market.
  • It would create significant extra financial costs to Government (and taxpayers) as emissions units already credited to forests under stock change accounting would not be surrendered on harvest.

Stand down period introduced

  • There is a situation where post-1989 forests outside the ETS (and some inside the ETS) could be incentivised to deforest at low cost. If these forests are then re-established, they would be able to earn more NZUs.
  • These units would have low integrity as they would not represent an increase in the carbon stored in New Zealand’s forests nor be the result of an increase in forest area.
  • The stand down period will work by requiring the land to be ‘not forest land’ for a period of time before it is established and registered in the ETS. If a forest is established within the stand down period, it will be considered as a second rotation forest. This effectively creates a stand-down period between deforestation and joining the ETS.
  • The rules will apply proactively so should not impact on forests that have already been cleared for other reasons.

For reference previous announcements

May 2019

March 2019

December 2018