The government looks ready to ban use of international carbon credits derived from Third World projects that allow major carbon emitters in New Zealand to lower the cost of carbon they face under the Emissions Trading Scheme.
The change would stop the country’s transport, electricity, and stationary energy sectors, including aluminium, steel and glass manufacturers, from using carbon emissions credits known as Certified Emission Reductions (CER) credits to offset their carbon emissions from the use or production of natural gas, coal, and transport fuels such as petrol and diesel.
CERs were fingered in the government’s review of the Emissions Trading Scheme as one of the reasons global carbon prices have been weak in recent months, and have languished in New Zealand at just above $14 a tonne, falling briefly below that level last week.
The review panel recommended an urgent ban on the use of CERs under the ETS, and Environment Minister Nick Smith said the government will decide the issue soon after submissions on the review close, on Oct. 30.
The ETS is set at a rate of $25 per tonne and requires the three sectors - electricity generation, transport and stationary energy sectors - to pay for one in every two tonnes emitted during a transition ending in 2013, under currently announced policy.
However, global carbon prices have been well below that in recent months, meaning those sectors are able to buy carbon offsets on the 50% of emissions they still have to pay for at prices far lower than $25 a tonne. The price of CERs is even lower than the prices paid for globally certified New Zealand Units, issued under the ETS.
Worse still, CERs are now recognised to encourage developing countries to invest heavily in industries that are paid to destroy powerful greenhouse gases like HFC-23, a waste gas produced in the manufacture of the refrigerant HFC-22, which is harmful to the ozone layer as well as contributing to climate change, and is supposed to be being phased out.
“The high value for destroying these gases creates perverse incentives in developing countries to manufacture more of them bringing into question the environmental gains,” said Smith.
“The European Union is proposing to ban these units from 2013 and Australia is also proposing a prohibition. The proposal in this discussion paper is that New Zealand not allow these particular types of units either from 1 July 2012 or 1 July 2013.”
“While very few were used in the first surrender period this year, we need to be conscious of changes in the international market and risks into the future,” said Smith.
“The Government is also very conscious of New Zealand being a small market and, if we are alone in accepting these units, our market may be flooded or it may limit our capacity to link with other schemes.”
The persistent differential between CERs and NZUs was now close to 50 cents, “when you price the carry of spot NZUs over December CERs,” said OMF Financial in its weekly commentary on the New Zealand carbon market. “Spot NZUs at $14.30 have carry of 65 cents to May 31, for an effective cost of $14.95, versus December CERs at $14.01 with carry of 44 cents for an effective cost of $14.45,” said OMF.