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Reworking the Emissions Trading Scheme – Expert Reaction

Four options for ETS reform are on the table, intended to avoid scenarios where it is cheaper for polluters to buy carbon credits – encouraging excessive tree planting – than to reduce their emissions.

The options include restricting the amount of emissions units available; increasing the demand for units by allowing the government or foreigners to buy credits; creating two prices, one for reducing emissions and one for greenhouse gas removals like tree planting; or creating a whole new ETS market with separate incentives.

The SMC asked experts to comment. 

Dr Sebastian Gehricke, Senior Lecturer and Director of the Climate and Energy Finance Group, University of Otago, comments:

“Overall, it is quite disappointing to see the options in this proposed review, most of which won’t come in to effect for some time as the issues continue to exacerbate, and hardly solve the core issues we currently see in the ETS. The consultation document itself explains how the first two options will not achieve the goals, so why are they even proposed? The last two options also seem to be quite similar with the last one being very loosely defined.

“To truly let the ETS be the main tool to encourage emission abatement by NZ entities, by increasing the cost of emitting activities, there will have to be some pain and change, it seems these proposals are trying to avoid that harsh reality.

“Four simple and effective changes that could be made to the ETS to address many of the outlined concerns would be to 1) abolish industrial allocation; 2) limit permanent forests to only earn credits for permanent native forests (and successful transition forests) 3) ensure that any credits sold in the Auctions align with our NDCs under the Paris Agreement (accounting for emissions not covered by the ETS); and 4) remove artificial price ceilings and additional units by eliminating the Cost Containment Reserve.

“The revenue generated by the government by selling credits at auction, and the cost saving by avoiding outsourcing our emissions reductions overseas, could then be used to make sure that those households (not polluting companies such as NZ Steel) most affected can be supported, as well as supporting new and higher value industries, rather than to continue implicitly subsidizing polluters and pine forests.

“Throughout the consultation document the control over the price is mentioned. I believe the government should be managing the units supplied, in line with the ERP and NDCs and in a clear consistent way. This then allows market supply and demand to set the price, which is the point of the ETS. Otherwise, a carbon tax would achieve the goal of controlling the carbon price, without all of the complexities and resource costs of running the ETS.”

No conflict of interest declared. 

Dr Adrian Macey, Adjunct Professor, New Zealand Climate Change Research Institute, Victoria University of Wellington, comments:

“Finally, the overriding importance of NZ’s domestic transition has been recognized  after years of denial and brushing off of critics.

“But there’s still an elephant in the room…our international pledge that we don’t have a hope of meeting without doing precisely what the ETS proposals seek to curtail: massive (and in this case unaffordable) use of offsets (from overseas, which is even worse than planting pine trees in New Zealand).

“A fundamental and painful rethink of our NDC target is a necessary step in refocusing our effort towards our own transition to net zero.”

No conflict of interest declared. 

Associate Professor David Evison, New Zealand School of Forestry, University of Canterbury, comments:

“It is encouraging to see the review of the ETS released today proposing an option where there are separate incentives for gross emissions reductions, and removals from new forest planting.

“Removals using new forests are a powerful tool to reduce net greenhouse gas emissions and to avoid the worst effects of climate change. But they should not be used to offset “business as usual” emissions where there are feasible means to remove those emissions by changing behaviour or technology. This is the fundamental problem with having removals included in the ETS.

“Removals from forests should primarily be used to ensure we meet our national targets and international obligations (e.g. net zero by 2050). In principle, removals should be used primarily to offset emissions that we know how to get rid of and have a plan to remove. That is, to get to an agreed target faster than is possible through gross emissions reductions alone. There is also a role for removals to offset some emissions that are very difficult to remove or avoid. In both cases removals need a separate policy instrument to the ETS.

“It has been suggested this change is required because we are planting too many trees. My own calculations suggest we could easily need another 1.7 million hectares of new forest to get to net zero greenhouse gas emissions (including methane) by 2050. There should be general agreement that there is no way (with current technologies) for New Zealand to get to net zero by 2050 without a significant tree planting programme.

“Significant risks with the new proposal need to be recognised and avoided. For example, an offsetting programme using forestry might be implemented as a government incentive to planting, linked to the price of carbon, to ensure that we reach agreed targets. An incentive might be more vulnerable to lobbying by those who oppose changing land use to forestry, which would put achievement of our international undertakings at risk.”

No conflict of interest. 

Troy Baisden, Principal Investigator, Te Pūnaha Matatini Centre of Research Excellence; Affiliate, Motu Research; and Honorary Professor, School of Environment, University of Auckland, comments:

“I had worried that dependence on the ETS to reduce emissions would require near-perfect management of the market it creates. In recent months, it’s been looking far from perfect, with price drops, failed auctions and settings that made it begin to look like a cap-and-trade scheme without a cap.

“The options for consultation announced today have the potential to set a path forward that will work to create sensible emissions pricing and incentives. More importantly, MfE presents clear and innovative options that may reduce the risk of the ETS and associated pathways to emissions reductions becoming a divisive game of political football as we head into the election.

“Some options are particularly appealing because they appear to solve several problems by breaking the complex system that prices and incentivises emissions reductions into more sensible pieces. Reducing fossil fuel emissions from industry, households and transport is recognised as difficult work that deserves a stronger price signal and higher prices. Forestry also deserves stable prices but shouldn’t become an easy way out that disincentivises or destabilises real reductions in fossil fuel emissions, also referred to as gross reduction.

“Looking just beyond the announcement, some innovative options may also create sensible subsystems for emissions pricing that can help to make a pathway for incentivising reductions in on-farm agricultural emissions possible.”

Conflict of interest statement: Professor Baisden creates models that may support emissions reductions via Toha, and is on an advisory group for the Ministry of the Environment not related to the ETS.