By Catherine Leining*
On 4 May 2020, as Parliament was emerging from lock down, so too did the Environment Committee’s report on the Climate Change Response (Emissions Trading Reform) Amendment Bill. This Bill deserves close attention, as the New Zealand Emissions Trading Scheme (ETS) has a critical role to play in post-pandemic recovery.
The most crucial features of the Bill remain the same: to add a cap to our cap-and-trade system; to guard against extreme emission prices; to improve incentives for new forests; and to prepare the way for pricing agricultural emissions.
In December 2019, the Interim Climate Change Committee (ICCC) identified six desirable outcomes for the Bill which were endorsed in the subsequent submission by the Climate Change Commission. So will the revised Bill help New Zealand reach its climate change and economic goals?
1. Coherence with the Zero Carbon Act
The purpose of the NZ ETS now relates to meeting our targets under the Paris Agreement and Zero Carbon Act, not just reducing emissions below business as usual. Decision-making processes are better integrated across the ETS Reform and Zero Carbon amendments. However, more information would be welcome on how the Government will manage achieving a split-gas 2050 target (treating biogenic methane separately from other GHGs) within all-gas emissions budgets and an all-gas ETS.
2. Predictable and coordinated processes for adjusting ETS settings
Coordinated decisions on unit supply and price management will incorporate advice from the Commission and be made five years in advance, with a rolling year 6 update. There remains scope for adjusting the phase-down of industrial free allocation. Under the Bill’s default pathway, highly emissions-intensive and trade-exposed producers would still receive 30% free allocation in 2050, at which point New Zealand aims to be at net zero emissions. But this will be subject to advice from the Commission, and the Government has signaled a review of other aspects of industrial allocation policy.
3. Sufficient predictability of future unit supply volumes and prices to build confidence and drive low-emissions investment in line with targets
This is enabled but will depend on regulations. While caps and price controls get set for five years in advance, the government can adjust years 2 through 5 (subject to some restrictions) when it makes each year 6 update. The necessary flexibility to accommodate changing circumstances affects predictability. In its submission on proposed ETS settings, the Commission identified ways to provide more transparency about volume adjustments, to strike a better balance between flexibility and predictability.
4. An effective framework and process to enable future pricing of biogenic agricultural emissions
This a major step forward while enabling further innovation. The default outcome – pricing fertiliser emissions at the processor level and livestock emissions at the farm level in the ETS from 2025 – is consistent with the ICCC’s advice (although it also suggested a faster start at the processor level for both sources). The sector has pledged leadership to prepare farmers for pricing and progress will be reviewed by the Commission in 2022, with an insufficient outcome triggering earlier pricing at the processor level. Also in 2022, Ministers will report back on an alternative emissions pricing mechanism for agriculture.
5. Strong safeguards for market integrity
The Bill usefully provides for an independent auction monitor and makes more data publicly available about emissions and removals by individual ETS participants. The non-compliance provisions are better tailored for different types of infringements. Officials are undertaking further work on market oversight.
6. Cross-party support for the core architecture and decision-making processes.
Here the Bill falls short. In its minority view, the National Party has proposed postponing passage of the Bill for 12 months to enable “more certainty around the economic position New Zealand will be in post-COVID-19.” Their argument is that a delay would provide an opportunity for more analysis of the climate change policy tools the Bill seeks to implement.
Despite the unprecedented shock of the pandemic, the following facts remain. This Bill is primarily about architecture; it equips the ETS with essential features for any Government to accomplish its climate change goals. The actual ambition of emissions pricing will be set through regulations that can be adapted to changing circumstances.
Businesses need policy certainty to invest wisely – and prolonged policy uncertainty on emissions pricing will hinder, not help, investment in economic recovery. Governments and businesses understand the importance of managing risk and climate change is a fundamental risk that is not going away. The economic impacts of the NZ ETS can be managed strategically through sectoral measures, free allocation, redistributing ETS revenue, and social and economic development policies.
In a letter to the Minister for Climate Change in April 2020, the Commission identified six principles to help deliver an economic recovery that keeps New Zealand on track to achieve our climate goals. The fifth principle emphasised maintaining the integrity and continuity of market, regulatory and policy measures aligned with long-term climate change goals to guide investment and innovation.
The current prolonged drought in New Zealand reminds us that even with a pandemic, we cannot afford to press “pause” on climate action. As we launch substantial investment in economic recovery, effective emissions pricing will future-proof our investment, helping us avoid stranded assets, meet our climate targets and pass a better legacy to future generations.
*Catherine Leining is a Policy Fellow at Motu Economic and Public Policy Research and a New Zealand Climate Change Commissioner.