New Zealand has begun reviewing its Emissions Trading Scheme (ETS) with public consultations starting on 19 June, according to the country's climate change minister James Shaw.
The review will focus on the benefits, trade-offs and risks of changing the ETS to incentivise gross emissions reductions.
The country's climate change commission has advised the government that the current form of ETS may not be incentivising emissions reductions at source, Shaw said.
There are concerns that more money is being invested in exotic forestry rather than in improvements in efficiency, as emissions units (NZUs) generated from forests are cheaper than transitioning to low-emissions alternatives, according to the consultation document.
Models have shown that NZU supply generated by these forests would exceed the number needed by emitters, leading to a glut of NZUs and reducing prices.
The government is looking at four ways to change the ETS, according to Shaw, should a decision be made to do so.
Four options
The first option is to use existing levers to strengthen incentives for net emissions reductions. This could mean reducing the number of NZUs in the market by selling less. But tree planting will still increase the supply of NZUs over time, causing NZU prices to fall.
The second option is to increase the demand for emissions units by permitting the government and overseas buyers to purchase them. But minimal demand for exotic forestry from overseas is anticipated by the government, so New Zealand must consider whether to spend money on buying NZUs or provide funding for lower-carbon emitting technologies.
The third option is to change the incentives for reducing gross emissions. This could be done by applying restrictions or conditions to NZUs obtained from carbon removals, reducing the attractiveness of NZUs from carbon removals, and increasing demand for other NZUs sold. But this option would only disincentivise carbon removal activities. Demand created by the government for purchasing NZUs is also dependent on the quality and price that the government is willing to buy.
The last option, and the one that seems most favoured, involves creating separate incentives for gross emission reductions and removals. This would create two ETS markets — reductions and removals. Carbon removals would be sold directly to the government or on a separate market, allowing the government to incentivise reductions and removals independently.
All sectors in New Zealand's economy, except for agriculture, pay for their emissions through their NZ ETS surrender obligations. But there are plans to tax farmers for their greenhouse gas emissions from 2025.
