Government review of Emissions Trading Scheme could be far-reaching - ANZ

A review of the Emissions Trading Scheme is under way. Photo / File

The Government is reviewing the Emissions Trading Scheme (ETS) to see if stronger incentives are needed to persuade businesses to transition away from fossil fuels.

The move follows advice from the Climate Change Commission, which recommended that proposals be developed for strengthening ETS incentives for gross emissions reductions.

ANZ agriculture economist Susan Kilsby said the moves were aimed at looking at what changes are required to encourage emitters of carbon dioxide to reduce their emissions rather than simply offsetting pollution by planting trees.

“This review will be welcomed by many who feel the current system simply incentivises land to be planted in exotic trees rather than tackling the underlying issue of pollution,” Kilsby said.

There are also concerns that native plantings are not sufficiently incentivised under the current system.

“The review does make it 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,” she said.

Cabinet papers refer to the need for additional policy tools to support the ETS.

Under present settings investment capital is highly incentivised to move towards net removals, such as investment in forestry, rather than gross reductions.

Emissions reduction opportunities in the transport, industrial processes and waste sectors are often less responsive to carbon pricing and may not be able to be scaled as easily as exotic afforestation investments, the papers said.

Under current ETS settings it is expected that between 410,000-670,000 ha of land would be converted to forestry by 2035.

That is about 2000 farms converted to forestry resulting in a 20-30 per cent increase in the area currently planted in exotic forests, ANZ’s Kilsby estimated.

The review of the ETS will consider unit supply settings, including industrial allocation, the current stockpile of units, rates of afforestation and deforestation, and the number of units being auctioned, to assess what changes may be necessary.

“At this stage no specific solutions have been proposed but ideas previously raised include limiting the proportion of emissions that can be offset by exotic forestry, and considering ways to address the imbalance in incentives between exotic and native forestry,” Kilsby said.

“The review is likely to deliver some significant policy changes.

“While the review is being undertaken we are likely to see significant disruption in the existing carbon markets and markets for real estate that may have been destined for afforestation,” Kilsby said.

Last week’s quarterly auction of New Zealand Units (NZUs) failed to clear, and prices have been falling since December.

The NZUs last traded at $63.10, down from close to $90 at the start of the year.