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The Government is proposing changes to the Emissions Trading Scheme (ETS) to make it less attractive for businesses to offset their carbon emissions using forestry.
It’s worried that businesses find it cheaper to pay to offset their emissions, rather than invest in technology to reduce their emissions.
An oversupply of units in the secondary market (as well as uncertainty around the future of ETS settings) is already suppressing the price of carbon, reducing the incentive for businesses to reduce their emissions.
What’s more, modelling suggests the supply of units generated by the planting of forests may exceed the number needed by emitters.
So the Ministry for the Environment, the Ministry of Business, Innovation and Employment and the Ministry for Primary Industries are consulting on four possible ways of changing the ETS.
Another option is to put conditions around the use of removals within the existing system.
For example, the Government could restrict how many forestry-generated units emitters can use to “pay” for their emissions. Or it could reduce the number of units given out for forestry, relative to the amount of carbon removed from the atmosphere.
A less dramatic option put on the table is to increase the demand for removal activities by allowing the Government and overseas buyers to purchase units from removal activities.
This could increase the price of units.
The least major change proposed would also aim to increase the price of units. It would do so by decreasing the supply of units in the system by cutting the amount the Government issues via auction.
The problem with this option is that landowners could respond by planting more trees, which would increase the supply of units in the market and cause the price to drop.
Climate Change Minister James Shaw wants greater focus on reducing, rather than offsetting, emissions. Photo / Marty Melville
The Government won’t make changes before the October election, saying the public’s feedback will help officials advise the incoming government on steps forward.
The departments running the consultation said focussing on reducing emissions, rather than removing them through forestry, could result in higher fuel and electricity costs in the short-term.
Longer-term, they said there was some uncertainty around whether acting sooner would be more expensive. However, they recognised the Climate Change Commission’s view that prioritising emissions reductions would ultimately put Aotearoa in a stronger position environmentally and financially.
The carbon price fell from $60 to $59 per unit on Monday.
Neither Climate Change Minister James Shaw, nor his National Party counterpart Simon Watts commented on which of the four options they preferred.
Shaw said he was open to combining different elements of the options.
He stressed the importance of getting the price of emissions right, and said, “drawing down carbon dioxide from the atmosphere and storing it in forests is also critically important, and we need to do more of it”.
“However, true decarbonisation can only be achieved through measures like improving public transport, incentivising EV uptake, increasing energy efficiency, and supporting clean-tech industries, such as the new electric arc furnace at New Zealand Steel.”
Watts said National wanted to “fully understand” how much the proposed changes would cost, clarifying the party is “committed to New Zealand’s climate change targets and backs our ETS”.
“It’s the best tool we have to reduce emissions and meet our climate targets,” he said.
Act’s environment spokesperson Simon Court said the Government should return to the “original and successful” model for the ETS and tighten the supply of units.
Late-last year, the Government decided to not tweak ETS settings, in line with both Climate Change Commission advice and market expectations, to let the carbon price rise.
Cabinet (which Shaw isn’t part of) feared a higher price would exacerbate inflation.
The decision caused the carbon price to plummet, and remain low, and created further uncertainty in the market. This contributed towards both of the Government’s carbon auctions failing this year.
ANZ agricultural economist Susan Kilsby expected ongoing disruption to the carbon market until ETS settings are finalised.
Failed auctions reduce the cash proceeds the Government receives to spend on climate initiatives.
But on the upside, they also reduce the number of units in the market, which is already grappling with an over-supply.
Jenée Tibshraeny is the Herald’s Wellington Business Editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
