Emissions Trading Scheme review suggests lower price for carbon offsets

The Ministry for the Environment has outlined four options to redesign the Emissions Trading Scheme (ETS) to incentivise gross emissions reductions, rather than offsets from forestry.

Current settings are likely to result in as much as 600,000 hectares of pine forest being planted on lower-quality farmland by the end of the 2030s, without incentivizing much actual reduction of emissions. 

The scheme was designed to discover the cheapest way to bring down New Zealand’s net carbon emissions, and it has found offsetting emissions with permanent pine forests to be the most cost-effective path to net zero. 

However, huge carbon forests have been planted on land previously used for sheep and beef farming which has begun to destabilize rural communities and economies. 

Meanwhile, the Climate Change Commission has become concerned that the carbon captured in these forests could be released by fires or infestations in the future.

And so, the Government has asked the Environment Ministry to draw up some possible ways to adjust the scheme’s settings to incentivise gross emissions, as well as offsets. 

On Monday, the Ministry released a discussion document outlining four high-level policy options that could tackle the issue — ranging from status quo, to a whole new scheme. 

The first option would be to simply reduce the supply of NZ units using existing policy settings such as auction volumes, price controls or industrial allocation.

This would likely boost the price per unit and therefore make emission reductions more economically viable. But it would also incentivise more (and more expensive) offsets which would ultimately limit the effectiveness of the policy. 

Option two would be to allow the Government and overseas buyers to purchase units, either to support the carbon price or to meet voluntary emissions targets. 

Since there is not much evidence of demand from overseas buyers and the Government already controls the number of units released into the market, this would only have a marginal impact on prices and incentives. 

The next two options are more substantial changes. 

Option three would create two, separate prices for direct emissions reductions and indirect offsets. One tonne of carbon offset, such as from pine forests, would be paid a lower price than a tonne of direct reductions. 

This would effectively create an exchange rate between direct and indirect reductions. For example, one tonne of direct reductions might be worth three tonnes of offsets. 

The Ministry for the Environment said this option, depending on specific settings, was likely to result in less carbon removal activities and better incentivise direct reductions. 

Option four goes further and would create two separate markets, one for gross emission reductions and the other for carbon removal activities. 

This would completely unlink the two prices, which would move independently. A decision would have to be made about who could buy and use the offset units. 

Emitters may only be allowed to use direct units sold at auction or received through industrial allocation to meet their surrender obligations, and the Government may buy the offsets to meet its national net targets. 

“In its current state, the price of carbon is not high enough to drive significant change. We know a higher carbon price leads to faster emissions reductions. We want to find out whether changes are needed to provide a stronger incentive for businesses to transition away from fossil fuels,” said 

Climate Change Minister James Shaw said the current carbon price was not high enough to drive significant decarbonisation in the NZ economy. 

“We know a higher carbon price leads to faster emissions reductions. We want to find out whether changes are needed to provide a stronger incentive for businesses to transition away from fossil fuels,” he said. 

Forestry has been estimated to contribute up to 95 million tonnes of carbon dioxide removals between 2021 and 2030, with as much as 1.4 million hectares of additional afforestation needed to meet New Zealand’s climate change targets.

Native forests cost a lot more to plant and grow much more slowly, which ultimately encourages carbon farms to use cheap, fast-growing pine trees. 

The Ministry for the Environment will consult on these options for the next eight weeks and any changes would have to be implemented by a new government after the October election.