The NZ ETS

The Greenhouse Policy Coalition have published a fact sheet on the ETS. Specifically they compare it with the European and the ETS proposed for Australia.

This is very useful as in 2011, our ETS will be up for review. Labour and the Greens both say that our ETS is far too weak, and far greater costs should be imposed on businesses and consumers. So it is very useful to be able to compare it with the European scheme especially. First they not the different profiles:

New Zealand’s emissions (2008 figures) primarily come from agricultural gases (46.6%) and energy (45.3%) while the EU’s emissions are largely from energy (79.1%), with agriculture just 9.6%. There are few internationally recognised mitigation options currently available for agricultural emissions, while renewable energy generation is a proven industry.

That is a key aspect – 47% agriculture compared with 10% for Europe.

New Zealand generates much more electricity from renewable sources – 73% in 2009, with a 90 percent target for 2025, as against a European target of 20% of total energy coming from renewables by 2020 (15% in the UK). Europe therefore has much more scope than New Zealand for increasing renewable generation.

This is also key background. Europe can fairly easily reduce emissions by replacing non-renewable power plants with renewable ones. We already have four times the proportion of renewable energy.

The combination of these two factors means it is much harder (ie expensive) for NZ to reduce emissions.

Emissions coverage

The EU: Covers 43% of emissions, rising to 50% from 2013. There are no plans to cover methane from farm animals or agricultural nitrous oxide from fertilisers or global warming synthetic gases like sulphur hexafluoride.

New Zealand: From 1 January 2015 the NZETS will cover nearly all emissions, including all six gases identified by the United Nations.

So 100% coverage vs 50%. This means that even if one left agricultural gases out such as methane, we would still be covering more than the Europe scheme.

Sector coverage

The EU: Combustion and most industrial sectors are currently covered, with aviation due to enter in 2012. From 2013, petrochemicals, aluminium and ammonia will be included. Agriculture will not be covered.

New Zealand: Virtually the entire economy will be covered by 2015. Currently, the scheme covers forestry, industrial processes (includes iron and steel, aluminium, cement, glass and gold), stationary energy (includes coal, natural gas and refining petroleum) and liquid fossil fuels.

If no other country in the word is including agriculture by 2011, then the logical thing to do in the review is to suspend its inclusion into the scheme.

Allocation of free emission units

The EU: Historically, free units have been allocated to many companies at levels well above 100% of their emissions. Average allocation across EU countries in 2009 varied between 92% and 152%. Allocation also covers more sectors than in New Zealand. The scheme will feature more auctioning of units (ie companies having to pay for them) from 2013, with a sinking cap, but 100% allocation is still on the cards for significantly trade-exposed sectors, including those the NZETS covers.

New Zealand: Trade-exposed companies are to be allocated units at a 60% or 90% level on an intensity basis, ie emissions relative to output.

So again NZ is “more pure” than Europe.

Phasing out of allocation

The EU: The number of units allocated to companies will be cut by 1.74% each year from 2013.

New Zealand: Unit allocation will be cut by 1.3% each year from 2013.

The phase out rate is one of the few areas where Europe is moving faster. But considering the lack of movement from the US and China and India, this is fairly prudent.

Carbon pricing

The EU: Has no price caps, but from 2013 member states will be allowed to influence carbon prices by bringing forward auctioning of units within the overall cap.

New Zealand: Has an optional price cap for carbon until the end of 2012, set at $25 per unit (one unit = one tonne of CO2-e), with companies until then required to surrender one unit for every two tonnes of emissions, an effective halving of the $25 price.

This is the major difference. It halves the cost for businesses (and consumers) by way of effectively a subsidy from the taxpayer.  Unless a change is made this will end in 2013.

Now of course some say there should be no ETS at all, but that is as likely as NZ implementing a flat tax. The real debate next year will be over what changes are made to the ETS – the National Government will review the ETS and decide on some changes. Labour and the Greens will also draw up policy on what changes they want. It will be very interesting to compare the policies after the review is done.

My position is pretty simple. China, India and the US are essential to any meaningful reduction in emissions. Unless those three countries have announced concrete plans to reduce emissions, then there is little point in NZ self-flagellating itself by having the purest ETS in the world. Having no ETS and no emissions reduction target at all is not politically viable as doing nothing would invite trade and reputation repercussions. We need to be doing enough so that we are not seen as the problem, but not so much that we end up exporting jobs to other countries.

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