February 22, 2019
The Emissions Trading Scheme is New Zealand's key tool for reducing harmful atmospheric gas levels to meet international climate change response goals.
As we make our way through the second decade of the 21st century, realities of what the world holds for current and future generations becomes clearer, yet still opaque with uncertainty.
Realities of a purely extractive capitalistic economic system defined by utility maximisation and infinite growth, are met with diminishing natural resources and the fracturing of those ecosystems so depended upon by the global economic industrial system to carry out its affairs.
Indeed behaviour change is needed to ensure intergenerational justice and fairness to those who succeed the generations of today. There is not only a responsibility, but a necessity to do so, to ensure the prosperity and sustainability of global ecosystems and the values that come with it.
The New Zealand Emissions Trading Scheme (NZ ETS), is the government's answer to climate change, our commitment to a fairer future for generations to come, our primary tool for behaviour change in New Zealand towards a sustainable, low-emissions future.
This article begins by defining what the New Zealand Emissions Trading Scheme is and its role in reducing harmful greenhouse gasses.
From there, some detail will be provided on the history of such scheme, and the regulatory structure for participants, screwing down on the five ways one can acquire carbon credits in New Zealand. Concluding thoughts will rest on the driving factors of the New Zealand Emissions Trading Scheme, and open ended inquest into what the future holds.
For now, we will begin to understand the key piece of legislation in New Zealand that aims to encourage technological and behavioural innovation towards a low-emissions economy - the New Zealand Emissions Trading Scheme.
In 2008, to combat the accelerating rate of greenhouse gas emissions, the New Zealand government introduced the Emissions Trading Scheme (ETS) as a way to manage emission rates and meet international climate goals established at the United Nations Kyoto protocol, an international climate accord that was held in Koyoto, Japan, in 1997 (1).
At such protocol, member countries of the United Nations set goals to limit the amount of harmful greenhouse gas emissions they each produced as a result of human economic activity. Despite the accord taking place in 1997, the goals set did not come into effect until 2005. The Koyoto agreement has since been extended, with further emissions goals and obligations addressed at a similar climate agreement known as the 2015 Paris agreement. (For New Zealand’s emissions goals, see (2).
Leaders of the United Nations established industrial sectors that emit harmful greenhouse gases as part of their operations, and made them subject to a tax based on the amount of harmful emissions each business emits into the atmosphere.
It was up to each individual country's discretion to highlight which harmful gasses and which industries would be included in emissions trading schemes.
Industries include; forestry, waste, domestic aviation, transport, buildings, industry, and power (3), while the greenhouse gasses included were; carbon dioxide (CO2 ), methane (CH4 ), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulphur hexafluoride (SF6 ) (3).
New Zealand was the first to include all industries across all greenhouse gases, whilst additionally requiring the agriculture sector to report on emissions across all of these gasses, as well as biological emissions from animal production and nitrogen-based fertilisers (3).
The agricultural sector currently only has to report on emissions and is not subject to an emissions tax. The reason for which will be unpacked in due course. For now, this means that each business operating in these sectors are subject to reporting of emissions and being taxed per tonne of gas released into the atmosphere.
As it currently stands, New Zealand businesses, whilst having to report on the emissions across several gasses, are only subject to a carbon tax.
This tax comes in the form of the surrendering of a carbon credit or New Zealand Unit (NZU) - a token to indicate that 1 ton of carbon has been removed from the atmosphere.
As we established above, businesses operating within the seven established sectors have to measure and report on their emissions profile. Ie. what their greenhouse gas emissions are across the six identified gasses. For full industry obligations and information see (6).
From there, the central government requires these businesses to surrender ‘1 NZU’ or carbon credit per tonne of carbon emitted as part of business operations. 1 NZU = 1 tonne of carbon sequestered.
For example, let's hypothetically say a domestic waste management company ‘Eco Waste’ measured 10,000 tons of carbon emitted as part of their business operations annually. Then under the New Zealand Emissions Trading Scheme, the company would have to surrender 10,000 carbon credits annually to ‘offset’ the carbon emitted whilst carrying out business affairs.
Companies, such as our hypothetical ‘Eco Waste’, can acquire carbon credits through five mechanisms.
The government releases a set number of credits (4.75 million) with a price floor ($20) and an effective ceiling ($50) that companies can bid on for purchase. The first auction ran on 17 March 2021, and will run quarterly.
Polluters required to purchase carbon credits can do so from any entity that owns New Zealand carbon credits through the secondary market. This is the main mechanism for the New Zealand Emissions Trading Scheme, and is subject to classic supply and demand economics to determine the price of units. We will briefly unpack the price determinants of NZU’s at a later point in this article.
Polluters can apply to be allocated free NZU’s to offset their emissions. This option is offered by the government to emissions intensive businesses who would be adversely affected by the administration of a carbon tax. They release millions of free units annually.
Reforms have begun to phase out these free allocations, however at a very slow rate of 1% per annum (5). Agriculture is likely to be included in these allocations once introduced into the NZ ETS (4).
Polluters can purchase NZU’s directly from the government at a fixed price. This price was long $25, however 2020 reforms saw a jump to $35 per unit which triggered the spike in the secondary market witnessed today.
The final way a polluter can offset their emissions is by proving that they have offset their emissions elsewhere. This could be through the purchase of forestry land or other carbon sequestration activities that produce a carbon credit.
We will now unpack this idea of carbon sequestration activities and what it means in the context of the New Zealand Emissions Trading Scheme.
Trees sequester (absorb) carbon from the atmosphere. We know this and it is a well established scientific agreement. As a part of photosynthetic growth, plants sequester carbon and use it as energy to grow. This is not trivial.
Through decades of research and development, forestry sectors can now measure how much carbon a tree has sequestered in its lifetime by measuring the circumference and average height of the tree, or in other words, the volume of a tree.
Extrapolated out across a whole forest, forest owners can model how much carbon entire forests have and will likely absorb into the future of its lifetime.
This well established research contributes to a per hectare rate of carbon sequestration based on the species of tree planted that aids in the planning and modelling of potential forest programmes.
Historically speaking, forest owners would have to wait until harvesting age before receiving any fiscal reward or money for their trees. It is only since the implementation of Emissions Trading Schemes that forest owners can be rewarded for the removal of carbon or the gas regulation their forests provide as part of their existence.
This reward comes in the form of a carbon credit. For each ton of carbon removed by the forest, the owner of such forest is rewarded one carbon credit.
The owner of the forest can either sell their carbon credits back to the government at a market dollar value, or hold onto them until a later date and sell to offsetters.
Once sold back to the government, they are then on offer for companies within the seven established sectors, such as our hypothetical ‘Eco Waste’, to purchase in order to offset their carbon emissions.
And so, the cycle of carbon trading goes on.
Whilst offering a compliance marketplace for polluters and producers of carbon, there exists a voluntary market for carbon trading in New Zealand. This market is for everyday businesses and retail investors who are looking to move with the times and ‘green up’ their portfolio.
As climate change beliefs have been adopted the world over, gained political traction, and mandated, it is becoming necessary to engage in initiatives and behaviour that align with this socio-political shift. To not engage in these behaviours is to be left behind, and from a business perspective, risk being outcompeted by businesses offering products and services that have been off-set by acquisition of carbon credits.
This provides businesses with marketing leverage, as they are able to evangelise their engagement in carbon off-setting, providing competitive advantage in the eyes of the environmentally conscious consumer whose cohort is rapidly increasing for reasons described above.
From the individual's perspective, so-called ‘green investing’ is becoming desirable as it is providing diversity to an investment portfolio that, given the current socio-political climate, carries less associated risk and therefore greater confidence in investment returns.
Businesses and individuals wanting to purchase carbon credits that are not required to do so under the compliance market can do so through a carbon broker such as My Native Forest, through direct affiliation with a forest owner offering credits, or by engaging in insetting initiatives as discussed earlier.
The price of carbon within the voluntary markets is different from the compliance market, and is in part determined by the price of carbon in the compliance market, but also subjected to classical supply and demand fluctuations.
One key aspect of the New Zealand Emissions Trading Scheme is that only forests planted after 1989 are eligible to be registered in the scheme (3).
This is to highlight the need for new afforestation to reduce the levels of atmospheric carbon, as existing forest levels were not sufficient enough to reduce the carbon levels required.
In theory, it is to incentivise the planting of new forests. Why it is this way is simple.
The government has set targets to reduce emissions. These emissions are the result of industrial and societal growth and development. It would cause the country severe social and economic stress to disincentivise growth and development in order to reduce emissions to reach targets.
Therefore, the quickest way we can reduce our emissions whilst continuing industrial growth and development is to plant more trees to compensate for the increase in emissions that result from this growth and development.
It is here that it becomes evident that we are on the precipice of large-scale land-use conversion in New Zealand not witnessed since the agricultural revolution of the early settlers.
As what drove the land conversion back in the days of the early settlers, and indeed historically across the word over is the same as what drives land conversion today.
The price of commodities. In short, money.
It was more profitable to produce sheep and beef than trees once upon a time. It was more profitable to produce dairy than sheep and beef after such.
Now, as more mechanisms such as the New Zealand Emissions Trading Scheme are being introduced, it is becoming more profitable to have registerable forest as a land-use.
However, as we have witnessed time and time again, price is never stable in this modern, globalised system. The price of such a commodity, as with any, is subject to classical supply and demand economics.
As time flows and the realities of annual emissions come to fruition, there will be future amendments to the policies surrounding and including the Emissions Trading Scheme to encourage such behaviour. It cannot be known what technologies could be discovered tomorrow, nor the extent of industrial, political, and social development and growth as a result.
It is this fact that contributes to the opacity of what the future looks like in a low emissions economy here in New Zealand, and indeed the world over. What becomes important is ensuring that policies and initiatives are understood holistically and comprehensively to provide opportunities for today, and our best understanding of tomorrow.
