The Ministry for the Environment says it will review the Emissions Trading Scheme (ETS) to find ways to incentivize businesses to reduce emissions, rather than just offset them.
ANZ economist Susan Kilsby said the review would be welcomed by those who feel the current system incentivises land to be planted in exotic trees rather than tackling the underlying issue of pollution.
However, it could also create significant disruption in the carbon markets at a time when confidence in the system was already low.
Last week the quarterly auction of carbon units failed to clear a confidential reverse price and secondary market prices have been trending down since December.
The Government has asked the Ministry for the Environment to assess if settings could be changed to give businesses a stronger incentive to transition away from fossil fuels.
A cabinet paper presented by Climate Change Minister James Shaw said the ETS would deliver considerable net emissions reductions, mainly through sequestration from forests, but not significantly reduce total emissions.
“This risks delaying meaningful decarbonisation in New Zealand and a successful and just transition to a low-emissions economy,” he said.
Net emissions targets can be met by reducing emissions at their sources, or by removing them from the atmosphere elsewhere — better known as offsets.
The review, now approved by cabinet, will look for ways to incentivise cutting actual emissions and put less emphasis on offsetting them.
Kilsby said the review was clear that trees will continue to play an important role in emissions reductions but that there also needs to be greater efforts to reduce emissions.
Cheapest may not be best
The economic theory underpinning the ETS is that it allows businesses and consumers to make their own decisions about how and whether to reduce emissions based on costs.
This allows the economy to naturally plot the lowest-cost path to achieving climate change targets — at least in theory.
In New Zealand, one of the cheapest ways to lower emissions is through forestry which receives a capital return from selling emissions units. A lot of money has been invested in buying lower-quality farm land and planting it with pine trees.
Between 410,000 and 670,000 hectares of new forests are forecast to be created by 2035, due to the ETS, which will remove between 121 and 169 metric tonnes of carbon across 15 years.
Other types of emission reductions – as opposed to offsets — incentivised by the scheme, often have higher costs than removals through forestry.
Shaw’s cabinet paper said opportunities to reduce emissions in the transport, industry, industrial processes, and waste sectors are often less responsive to carbon pricing.
These reductions might require large capital investments, be harder to scale than pine forests, and carry more risk for external investors.
What this means is that instead of creating less carbon emissions, businesses are paying investors to buy up rural land and cover it in pine trees.
This successfully reduces net emissions but damages rural communities, increases the risk of wildfires, threatens native biodiversity, and may not permanently remove and store carbon.
“Failing to constrain forestry in the NZ ETS would risk meaningful decarbonisation before 2050,” the cabinet paper said.
Rein in the trees
And so, the Ministry for the Environment has been tasked with finding ways to limit the amount of emissions units coming from exotic forestry and encourage real reductions.
This could potentially drive the carbon price higher and come with costs to the economy, government, households, and communities.
The Climate Change Commission has previously said a higher carbon price would mean slightly slower economic growth and higher electricity and fuel prices. However, these impacts should lessen over time as the economy transitioned to lower-carbon alternatives.
The review has been opposed by those who would prefer the ETS to operate as a free-market solution to climate change.
For example, small-government lobby group The Taxpayers’ Union said the prioritisation of reducing gross carbon emissions over net emissions was “illogical and ill-informed”.
“The Emissions Trading Scheme is the most effective way to reduce net carbon emissions. It ensures that net emissions reduce over time while doing so in the most efficient way possible and at least cost to taxpayers. But it must be allowed to do its job,” it said in a statement.
The government's Emissions Reduction Plan says putting a price on carbon price will not be enough to meet NZ’s climate goals due to market barriers and failures, and other measures are required where pricing was slow to respond.
We welcome your comments below. If you are not already registered, please register to comment
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.