DOES NEW ZEALAND’S EMISSION TRADE SYSTEM HAVE A FUTURE IN

THE POST KYOTO ERA?

 

 

 

Nwigwe  Chukwuemeka1   ABSTRACT: The end of the first commitment period of the Kyoto protocol 1997 comes with implications for countries such as New Zealand that have declined taking up a second round of binding emission reduction commitments under the Kyoto Protocol. The implications for New Zealand is likely to be more apparent on its flagship market based mechanism for greenhouse gas (GHG) emission reduction called the New Zealand Emission Trading System (NZETS). This paper examines how the NZETS fared in the 1st commitment period as well as its major merit and demerit. The paper further examines whether the NZETS will be a veritable mechanism for GHG reduction in the post Kyoto Protocol 1st commitment era in New Zealand. It argues that the New Zealand’s decision to exit the Kyoto Protocol may adversely affect the NZETS unless steps are taken to overcome its linkage problems and link the NZETS to other countries such as the European Union.

                                                                                                               1  LLB   Hons,   BL,   LLM   Climate   Change   and   Energy   Law   and   Policy(awaiting   graduation)   CEPMLP,  Dundee.  ***  This  paper  was  written  in  August,2013.  

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ABBREVIATIONS

AAUs Assigned Amount Units

CDM Clean Development Mechanisms

CERs Certified Emission Reduction units

COPS Conference of Parties

CO2 Carbon Dioxide

CP2 2nd Commitment Period

EU European Union

EPA Environmental Protection Authority

ERU Emission Reduction Units

ETS Emission Trading System

GHG Greenhouse Gas

IPCC Intergovernmental Panel on Climate Change

KP Kyoto protocol

LULUCF Land Use, Land-Use Change and Forestry

NIWA National Institute of Water and Atmospheric Research Limited

NZ New Zealand

NZ EUR New Zealand Emission Unit Register

NZETS New Zealand Emission Trading System

NZU New Zealand Units

UNFCCC United Nations Framework Convention on Climate Change

US United States of America

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LIST OF FIGURES

List of Figures

Figure 1:New Zealand's total greenhouse gas emissions from 1990 to 2011………..4

Figure 2:New Zealand's total greenhouse gas emissions from 1990 to 2011…….….4

Figure 3: New Zealand Net Emissions 2008-2012………………….………………....5

Figure 4: How the ETS Works…….…………….……………………………………..7

Figure 5:Types of units surrendered in 2011. ……………..……….………………….

Figure 6: Annual net change in planted forest area in 2005 to 2013………………….

Figure 7: Price History of Spot New Zealand Unit price 2009- to 18th July 2013……

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TABLE OF CONTENTS Abbreviations……………………………………………………………………………..……ii

List of Tables and Figures……………………………………………………………......…...iii

Table of Content……………………………………………………………………...…...…...iv

1.0 Introduction…………………………………………………….…………….……….....1

2.0 Climate Change in New Zealand……………………………………..…….…………..2

2.1 Scientific Evidence of Climate Change in New Zealand………………….……………..2

2.2 Greenhouse Gas Emission by Sectors in New Zealand………………………………….4

2.3 New Zealand’s Greenhouse Gas Emission Reduction Targets…………………...……...5

3.0 New Zealand Emission Trading System in the Kyoto 1st Commitment Era………..7

3.1 Historical development and objective of the New Zealand Emission Trading System….7

3.2 How the New Zealand Emission Trading System Works ……………………………….8

3.3 Major Merit and Demerit of the New Zealand Emission Trading System……………..10

3.3.1 Major Merit of the New Zealand Emission Trading System…………….……….…….10

3.3.1.1 Reduction in Deforestation and Increase in Carbon Sinks…….….……………...…….10

3.3.2 Major Demerits of the NZ ETS…………………………………………….……….......11

3.3.2.1 Lack of Environmental Integrity……………………………………………………......11

4.0 Major Challenges of New Zealand Emission Trading System in the Post Kyoto 1st

Commitment Era ………………………………….……………..................................12

4.1 New Zealand’s refusal to commit to a Kyoto Second Commitment ……...……………12

4.2 Economic Downturn and Crashed Prices of Carbon Credits…………………………...13

4.3 Non-Linkage of New Zealand Emission Trading System to other Emission

Trading Systems ………………………………………………………………….…....14

5.0 Conclusion

Conclusion……………….……………………………………………………………15

Bibliography…………………………………………………………………………..16

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CHAPTER ONE

1.0: Introduction

New Zealand is a peculiar country due to its geography; it is mainly an island country. This

situation increases its vulnerability to the impacts of climate change. In 2012, New Zealand

declined her commitment to the second period of the Kyoto Protocol. Thus with effect

from the 31st of December 2012,New Zealand joined some countries including Japan to

exit binding climate Greenhouse Gas (GHG) emission reduction commitments under the

Kyoto Protocol. This decision is likely to have impact on New Zealand’s climate change

mitigation mechanisms; particularly the market based flexible mechanism called the New

Zealand’s Emission Trading System (NZETS). The NZETS has amongst other things

played some vital roles in New Zealand’s ability to meet its targets under the Kyoto

Protocol. With New Zealand’s exit from the Kyoto Protocol, it is imperative to evaluate the

impact this decision will have on the NZETS. This paper is divided into 5 parts. Chapter 1

will contain the introduction. In chapter 2, we will examine whether there is climate

change in New Zealand, and if so, the impacts therein. In chapter 3, we will examine New

Zealand’s NZETS under the Kyoto Protocol, identifying, its success and shortcomings. An

examination of the challenges of the NZETS in the post Kyoto Protocol era will further be

undertaken in chapter 4 and they paper will conclude the paper in chapter 5.

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CHAPTER TWO

2.0 Climate Change in New Zealand

2.1 Scientific Evidence of Climate Change and its impact on New Zealand

New Zealand is a country without land borders and it is made up of two large islands (the

North Island and the South Island) as well as some other smaller islands.2New Zealand has

one of the longest coasts (at 11,500 kilometers) and its marine area covers 14 times the

land area with a vast Exclusive Economic Zone. It is also home to several mountains and

about 360 glaciers. These make it a major tourist destination while also rendering it

vulnerable to volcanoes.3

Two recent reports published by the National Institute of Water & Atmospheric Research

Ltd, namely State of the Climate 20134, and Annual Glacier Volumes in New Zealand

1995-20125 bring to focus the existence of climate change and its vicious impacts in New

Zealand. They underscore earlier assertions that climate change will have far reaching

effects on New Zealand, ranging from increased flooding to droughts and fire

outbreaks.6The State of the Climate 2013 report earlier mentioned, examined weather

variation, namely rainfall, temperature, and drought for the period 1981 to 2010 while the

Annual Glaciers Volume report focused on the impact of climate change on New

Zealand’s glaciers. As regards rainfall, the State of the Climate 2013 report found out that

there were high variations in rainfall with either extreme unprecedented rainfalls or lack of

rainfalls in various parts of the country at various times of the year.7

For instance, in 2010, the annual rainfall was on the average close to normal when

compared to the 1981-2010 mean. Nevertheless, six months of the year were still drier than

normal while the other six months had more rain than normal.8As regards droughts, the

                                                                                                               2 Ministry for the Environment, New Zealand’s Fifth National Communication under the United Nations Framework Convention on Climate Change, (2009, Ministry for the Environment) 3Roselynn Smelt, Yong Jui Lin, New Zealand Cultures of the World (2nd Edition, 2008,Marshall Cavendish) p. 8-9 4 National Climate Centre, State of the Climate 2013, (National Institute of Water & Atmospheric Research Ltd, 2013) 5 Andrew Willsman, Annual Glacier Volumes in New Zealand 1995-2012, (National Institute of Water & Atmospheric Research Ltd, 2011) 6Bengtsson Jonas, et al, Climate Change Impacts In New Zealand: A Cross-Disciplinary Assessment of the Need To Adapt Buildings, With Focus On Housing available at http://www.branz.co.nz/cms_show_ download.php?id=2148f83b962386feae1e2ac67a5bd5fda748d6db, accessed on 10th July, 2013 7 National Climate Centre, State of the Climate 2013, pg 12-17 8 Ibid, 13

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variation in rainfall resulted in droughts in some parts of the country.9 Drought was

officially declared in January, 2010, in Northland after three-months of extreme low

rainfall.10A similar situation was recorded in Northland and Westland region of the country

amongst others in December 2012.11Furthermore, as regards temperatures, in 2010, the

average temperature was 13.1°C, 0.6°C above the 1971-2000 and it was the 5th warmest

year since 1900. Conversely, some parts of the country experienced temperatures that were

lower than all time minimums with the lowest being -12.6°C. Although 2011 was not as

warm as 2010 according to the report, some parts of the country still recorded their highest

ever temperatures.

The above situation gave rise to flooding in some parts of the country. 12 Hence,

unprecedented flooding occurred in Hawkes Bay and Nelson, Otago, Nelson and Ventral

North Island regions destroying properties and resulting in the declaration of a state of

emergency at some times.13Again, according to Annual Glacier Volumes in the New

Zealand 1995-2012 report, the extreme warm temperature decreased and resulted in a huge

melting of this natural heritage.14All these point to the fact that climate change is occurring

in New Zealand and justifies the decision of the New Zealand High Court in New Zealand

Climate Science Education Trust v National Institute of Water and Atmospheric Research

Limited (NIWA). In that case, the plaintiffs sought to challenge a report issued by NIWA to

the effect that human activity had led to an increase in global warming and that New

Zealand’s temperature had increased by almost I Celsius since 1909. The court in

dismissing the case and upholding NIWA’s report held that NIWA acted "in accordance

with internationally recognised and credible scientific methodology"15.

2.2 Greenhouse Gas Emission by Sectors in New Zealand

The New Zealand's Greenhouse Gas Inventory 1990–2011 and Net Position published in

2012 show that New Zealand's total emissions as at 2011 was 72.8 Mt CO2-e.16 This

amounted to an increase of 13.2 Mt CO2-e (22.1 per cent) from the 1990 level of 59.6 Mt

CO2-e. GHG emissions in New Zealand from figure1 below shows this increase in total

emissions. In New Zealand, GHG is majorly generated from four key sectors in the

                                                                                                               9 Ibid, pg 18 10 Ibid, pg 18-19 11 Ibid, Pg 20 12 Ibid, pg 22 13 Ibid, pg 25 14 Andrew Willsman, Annual Glacier Volumes in New Zealand 1995-2012 (Supra) 15New Zealand Climate Science Education Trust v National Institute of Water and Atmospheric Research Limited [2012] NZHC 2297.) 16Ministry for the Environment, New Zealand's greenhouse gas inventory 1990–2009.(Ministry for the Environment, 2011). Iii- V

  4  

economy: agriculture, energy, industrial process and waste.17Figure 2 below further shows

the major sectors and their contributions to the total GHG emissions of New Zealand in the

year 2011.

Figure 1:New Zealand's total greenhouse gas emissions from 1990 to 2011

Source:  Ministry  for  the  Environment18  

Figure 2:New Zealand's total greenhouse gas emissions from 1990 to 2011

Source:  Ministry  for  the  Environment19  

 From figure 1 above, it is obvious that GHG emissions reached its peak in New Zealand in

2005 and decreased thereafter. Even though it also started to increase again in 2009, it has

not reached the prior 2005 levels. It is interesting to note that the decrease between 2005

and 2008 in emissions from the agricultural sector was largely due to the impact of climate

change in the form of droughts.20 This led to a decrease in animal rearing, which is a major

                                                                                                               17 Ibid, v-vi 18 Ibid, v 19 Ministry of Environment, New Zealand's Greenhouse Gas Inventory 1990–2011 and Net Position Snapshot April 2013 available at http://www.mfe.govt.nz/publications/climate/greenhouse-gas-inventory-2013-snapshot/, accessed on 10th July, 2013 20 Ibid

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source of emissions from the agricultural sector. 21 However, following adaptation

strategies, improved weather conditions and increased demand for New Zealand dairy

products and meat, production, as well as emissions, has increased.22

The decrease in GHG emissions from the energy sector was not majorly due to conscious

efforts or New Zealand climate change policy.23 Although a reduction occurred due to the

replacement of a coal plant with a gas plant, as well as some increase in the use of

renewable electricity, the more significant decrease arose from unrelated reasons. 24These

include the global economic downturn and consequential decrease in energy demand, the

Canterbury earthquake as well as the reduction in methane emissions from coal mining

activities due to the explosion on the Pike River mine as well as the stoppage of coal

production at the Spring Creek mine.25

2.3 New Zealand’s Greenhouse Gas Emission Reduction Targets

New Zealand has over the years committed to three sets of emission reduction targets.

These include its commitment under the Kyoto Protocol between 2008-201226, its 2020

emission reduction targets27 and recently its 2050 emission reduction targets28. Under the

Kyoto Protocol first commitment period, New Zealand had a binding obligation to return

to its 1990 emission levels by December 2012.The country was therefore awarded

Assigned Amount Units (AAUs) equal to five times its 1990 emission levels. As can be

seen in figure 3 below, the total emission units available to New Zealand consisted of the

AAUs, Removal from eligible forest and other Emission Trading Scheme surrender. From

the emissions recorded between \2008–2011 and projected data for 2012, New Zealand

predicts that it will have a surplus of about 29.6 million units on its targets under the Kyoto

protocol as shown below. From this figure, the net position of 29.6 million units reflects

the difference between the available emission units and the total emission.

                                                                                                               21 Ibid 22 Ibid 2323Ministry for the Environment, New Zealand's greenhouse gas inventory 1990–2009. (Supra) v 24Ibid , ix-x 25 Ibid 26 UNFCCC, Kyoto Protocol to the United Nations Framework Convention on Climate Change (adopted1997, entered into force February, 2005) 37 ILM 22 (1998) Annex 1 27Ole KristianFauchald et al, Yearbook of International Environmental Law: Volume 20 (2011,Oxford University Press) 696 28 Ibid

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Figure 3: New Zealand Net Emissions 2008-2012

Source:  Ministry  for  the  Environment29

As regards the 2020 targets, the New Zealand government in August 2009 set a voluntary

target of between 10 per cent and 20 per cent below 1990 levels by 2020.30 This

commitment was however conditional on a global agreement which did not materialise.31

The government in March 2011 developed and announced a long-term goal for climate

change mitigation till the year 2050. This target aims at a 50 per cent reduction in its

greenhouse gas emissions from 1990 levels by 2050.32 This 2050 target is also voluntary

and not binding on New Zealand internationally and as such, there is no consequence if it

fails to meet them. Furthermore, in 2012 New Zealand declined to commit itself to a

second commitment period under the Kyoto Protocol.33Rather, it chose an economy wide

reduction under the UNFCCC 1992.34 Nevertheless, New Zealand did not withdraw from

the Kyoto Protocol.35From the foregoing, New Zealand currently has no binding target to

reduce its GHG emissions.

                                                                                                               29 Ministry of Environment, New Zealand's Greenhouse Gas Inventory 1990–2011 and Net Position Snapshot April 2013 available at http://www.mfe.govt.nz/publications/climate/greenhouse-gas-inventory-2013-snapshot/, accessed on 10th July, 2013 30 Ibid 31Jonathan Cowi, Climate Change: Biological and Human Aspects (Cambridge University Press, 2013 ) 507 32 The Department of Internal Affairs, the Climate Change Response (2050 Emissions Target) Notice 2011 (2011, Notice Number 2067) 987 available at http://www.dia.govt.nz/MSOS118/On-Line/NZGazette.nsf/6cee7698a9bbc7cfcc256d510059ed0b/3ccb2ba3743eb957cc25786400557b2d!OpenDocument&Highlight=0,2050, accessed on10th July, 2013 33 UNFCCC, Outcome of the work of the Ad Hoc Working Group on Further Commitments for Annex I Parties under the Kyoto Protocol, (2012, decision -/CMP.8) available at http://unfccc.int/resource/ docs/2012/cmp8/eng/l09.pdf accessed on 10th July, 2013, p 7 34 Ibid, p 8 35 Ibid

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CHAPTER THREE

3.0 New Zealand Emission Trading System in the Kyoto 1st Commitment Era

3.1 Historical and Legal development of the New Zealand Emission Trading System

The New Zealand ETS was created pursuant to the Climate Change Response (Emissions

Trading) Amendment Act 2008,36 which amended the Climate Change Response Act of

200237. The Act recognises that a broad range of approaches must be deployed to

effectively mitigate climate change without causing severe harm to the economy of the

country.38It was aimed at enabling New Zealand meet its international obligations for

Greenhouse Gas emissions reduction under the UNFCCC 1992 and the Kyoto Protocol

1997.39 The Environmental Protection Authority (EPA) administers the NZ ETS through

the New Zealand Emission Unit Register (NZ EUR) which had been earlier established

under the EPA in December 2007. It has the duty to issue, hold, transfer and retire

emission units in terms of the Kyoto Protocol.40In 2009, a further amendment was made

called the Climate Change Response (Moderated Emissions Trading) Amendment Act

2009.41This Act provided for amongst others the allocation of emission credits to trade

exposed companies and emission intensive companies. It also spelt out the mode of

allocation to other companies.42

Furthermore, in 2012, the New Zealand government passed the Climate Change Response

(Emissions Trading and Other Matters) Amendment Act 2012 into law.43 This amendment

was a response to some of the weaknesses that are prevalent in the NZ ETS. It amongst

others authorised the government to sell NZUs by auction while putting a cap on all NZUs

auctioned and allocated.44 The Act in recognition of the role of New Zealand’s forests in

GHG removals further provided for landowners to continue receiving emission units.45

Importantly also, it removed the date that had been set for commencement of surrenders

                                                                                                               36The Climate Change Response (Emissions Trading) Amendment Act 2008 (No 85 of 2008) received the Royal assent on 25 September 2008, Article 5 37 Climate Change Response Act of 2002 (Public Act No. 40) available at http://www.legislation.govt.nz/act/public/2002/0040/latest/DLM158584.html, accessed on 20th July, 2013 38Ibid 39 Ibid 40The Climate Change Response (Emissions Trading) Amendment Act 2008 (No 85 of 2008) (supra) 10 (2) 41 The Climate Change Response (Moderated Emissions Trading) Amendment Act 2009 (No 57 of 2009 received the Royal assent on 7 December 2009 42 Ibid, Article 80 43 Climate Change Response (Emissions Trading and Other Matters) Amendment Act 2012 (2012, Public Act No 89) received Royal assent on 13 November 2012 Article 6A 44 Ibid 45 Ibid, Article 186

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for biological emissions in the agricultural sector and made it contingent upon when

similar actions in other countries as well as improved technology for reducing such

emissions.46 Finally, the Act extended the transitional measures put in place for the

reduction of the cost of ETS beyond 2012 such as the surrender of one emissions unit for

every two tonnes of emissions produced.47 Also, this 2012Amendment further provided

that all sectors of the economy would be covered in the ETS by 2015.

3.2 How the New Zealand Emission Trading System Worked between 2008-2012

The New Zealand ETS covers all the six Greenhouse gases that are regulated by the Kyoto

Protocol, namely perfluorocarbons (PFCs), carbon dioxide (CO2), hydrofluorocarbons

(HFCs), methane (CH4), nitrous oxide (N2O) and sulphur hexafluoride (SF6).48The

operation of the NZ ETS covers the forestry, transport fuels, electricity production,

industrial processes, synthetic gases, agriculture and waste sectors.49 The NZ ETS allocates

responsibility for GHGs as high as possible on the supply chain.

By the Climate Change Response Act 2002 as variously amended in 2008, 2009 and 2012,

there are two categories of participants under the NZ ETS.50 The determining factor is

essentially whether the type of activity being conducted by the individual or establishment

is one put into either of the two categories.51The first category contains businesses and

establishments that are compulsorily made participants by law. 52 This category of

participants must acquire and surrender emission units to cover the Greenhouse gases

emitted by them in the course of production or those ascribable to their imported

goods.53However, because the government grandfathers some of these businesses, some of

them get free allocations, which they can either use or sell.54 Also some businesses like

agriculture although participants are not required to make surrenders of NZUs to match its

emission, rather have mere reporting obligations.55 On the other hand, the second category

                                                                                                               46 Ibid, Article 226 47 Ibid, Article 63A 48 UNFCCC, Kyoto Protocol 1997, (Supra) Annex A 49 Ministry of Environment , Questions and answers about the emissions trading scheme, available at http://www.climatechange.govt.nz/emissions-trading-scheme/about/ questions-and-answers.html, accessed on 11th July, 2013 50The Climate Change Response (Emissions Trading) Amendment Act 2008 (Supra) Article 54 and 57 51 Ibid 52 Ibid, Article 54 53 Ibid 54 Ibid, Article 72,73,75 and 77 55 Ibid, Article 63 and 64

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consists of those who opt-in voluntarily through an application if they are part of any of the

relevant sectors covered under the ETS.56

Thus, while some earn NZUs, others have obligations to surrender NZUs or its

equivalent.57Apart from these two sets of participants, there are also secondary market

traders of NZUs who play a crucial role in the day-to-day operation of the NZ ETS.58

Figure 4: How the ETS Works

Source: Ministry for the Environment59

Figure 4 above, shows the two major participants - emitters and absorbers. The emitters in

order to make surrenders could either use NZUs allocated to them by government (if they

are eligible), purchase from the government at the fixed price of NZ$2560, from overseas

sources approved by government or from other participants and traders in the secondary

market.61 The NZ ETS participants are able to use international credits because the NZ

ETS were at the time linked to the international market through their access to Kyoto

credits. Again, only NZUS from forests were allowed to be traded offshore.62Figure 5

below shows the proportion of various credit units that have been surrendered in New

                                                                                                               56 Ibid, Article 57 57 Ibid, Article 54 and 57 58 59 Ministry for the Environment, The New Zealand Emissions Trading Scheme available at http://www.climatechange.govt.nz/emissions-trading-scheme/building/reports/ets-report/nzets-2011-facts-and-figures-2012.pdf, accessed on 20th July, 2013, page 2 60Climate Change Response Act of 2002 (Supra) Article 178A(2) 61 Ibid, Articles 19, 20 and 23 62 Ibid, 178C

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Zealand. Figure 5 below indicates that NZU from forests are the most used in New Zealand

due to their availability at low cost.

Figure 5:Types of units surrendered in 2011.

0.45

Source: Ministry for the Environment63

3.3 Major Merit and Demerit of the New Zealand Emission Trading System 3.3.1 Major Merit of the New Zealand Emission Trading System

3.3.1.1 Reduction in Deforestation and Increase in Carbon Sinks

A major benefit from the NZ ETS has been a reduction in deforestation levels and an

increase in afforestation.64 This is directly related to the inclusion of forests in the NZ ETS.

It enables foresters to make money from just preserving their forests. This resulted in

increased carbon sinks for removal of GHG in New Zealand as shown in figure 6 below.

The figures for 2010 in figure 6 below are provisional while those for 2011-2013 are

projected. From figure 6 below, it is evident that whereas the deforestation rate was about

20.0 in 2007 before the commencement of the NZ ETS, it decreased to about 2.0 in 2008

with the commencement of the NZ ETS.

                                                                                                               63Ministry for the Environment, The New Zealand Emissions Trading Scheme (Supra) 6464Ministry for the Environment, The New Zealand Emissions Trading Scheme (Supra), page 4

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Figure 6: Annual net change in planted forest area in 2005 to 2013

Afforestation Deforestation Net change in planted forest area

Source: Ministry for the Environment65

3.3.2 Major Demerits of the NZ ETS

3.3.2.1 Lack of Environmental Integrity

The major demerit of the NZ ETS is its lack of lack of environmental integrity.66 This is

due to factors such as the allocation of free credits to energy intensive industries, which

reduced efforts towards energy efficiency.67 This has been described as “a taxpayer

subsidy for plantations and energy companies”.68Again, the absence of a cap on emissions

has gravely affected the NZ ETS as it encourages emissions once credits can be

surrendered for them.69More so, some of the credits imported into the NZ ETS registry are

from questionable sources. It has also been described as a dumping ground for worthless

credits. Furthermore, the fact that a significant part of surrenders received by the NZ ETS

are from credits generated from forests as seen in figure 5 above, puts to question the

environmental integrity of credits being traded in the NZ ETS. These have altogether made

compliance very hassle free in New Zealand but affected GHG reduction adversely.                                                                                                                65Ministry for the Environment, The New Zealand Emissions Trading Scheme (Supra) 66same as 76 67 Ibid, Article 57 2008 68Tamra Gilbertson and Oscar Reyes New Zealand's new carbon market: a taxpayer subsidy for plantations and energy companies (Carbon Trade Watch, 2010) available at http://www.carbontradewatch.org/articles/new-zealands-new-carbon-market-a-taxpayer-subsidy-for-plantations-and-energy-comp.html accessed on20th July, 2013 69Professor Euan Mason Greenhouse gas emissions trading scheme more or less dead 2013 available at http://www.scoop.co.nz/stories/PO1302/S00085/greenhouse-gas-emissions-trading-scheme-more-or-less-dead.htm

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CHAPTER FOUR

4.0 Major Challenges of New Zealand Emission Trading System in the Post Kyoto 1st

Commitment Era

4.1 New Zealand’s refusal to commit to a Kyoto Second Commitment

As stated in paragraph 2.1 above, New Zealand took up binding commitments under the

Kyoto Protocol 1st Commitment period but declined to do so for the 2nd commitment

period.70 Thus, following the Doha Conference of Parties to the UNFCCC in December

2012,71 New Zealand exited emission reduction obligations under the Kyoto Protocol with

effect from 1st January, 2013 but subject to the true up period (likely between 2015 and

2016), New Zealand cannot trade in Kyoto CP2 units.72The true up period refers to the

process of reconciling shortfalls in the AAU; each country is supposed to remit to account

for to the UNFCCC viz a viz its targets and assigned AAU.73 Within this period, some

countries will engage in trading with a view to acquiring emission units required to meet

their shortfalls while countries will sell the excess units the have which the do not want to

bank.74 As New Zealand has surplus of emission units and has exited the Kyoto Protocol, it

is likely that it would be selling its unit within this period.

However, in spite of the above, New Zealand will still be able to take part in current and

new Clean Development Mechanism (CDM) projects during Kyoto CP2.75Thus where

CDM projects are embarked upon by New Zealand or New Zealand companies, the

Certified Emission Reduction units (CERs) that are awarded for such projects will still be

forwarded to the New Zealand Emission Unit Register (NZEUR).76 However, these CERs

once received in New Zealand cannot be traded outside New Zealand except in ETS that

are linked to the NZ ETS bilaterally.77

Furthermore, a careful consideration of Article VI (23 and 24) of Decision 1/CMP.8 shows

that excess credits left after the true up period would have to be either converted to NZUS

for local use or cancelled as there is no Kyoto CP2 for New Zealand to carry it over to and                                                                                                                70 UNFCCC, Outcome of the work of the Ad Hoc Working Group on Further Commitments for Annex I Parties under the Kyoto Protocol, (Decision 1/CMP.8, adopted on 8th December, 2012) available at http://unfccc.int/resource/docs/2012/cmp8/eng/l09.pdf, accessed on 20th July, 2013, Annex 1, Article 1(A) 71 Ibid 72 Ibid, Article IV (12) to(15) 73 Government of New Zealand, NZEUR account holder access to Kyoto units from 1 January 2013 available at http://www.eur.govt.nz/news/Access_to_Units_ 2013.pdf, accessed on 20th July, 2013 74 Ibid 7575 UNFCCC, Outcome of the work of the Ad Hoc Working Group on Further Commitments for Annex I Parties under the Kyoto Protocol Article IV (Article 12 to 15) 76 Ibid 77 Ibid

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it cannot be sold to the registry of other countries.78 However, Kyoto units and of course

NZU, will still be accepted locally to meet surrender obligations. 79 These may likely

impact on the success recorded under the ETS if there is an over supply of NZU due to

reduced demand and lack of export market. It may result in a decrease in price to the extent

that it becomes more economically viable to pollute and buy NZU. Furthermore, the

economic value of deforestation may surpass the economic value derived from of receiving

and selling credits for preserved forests by forest owners. Conversely, if demand is higher,

it may lead to increased prices and encourage both efficiency and afforestation.

4.2 Economic Downturn and Crashed Prices of Carbon Credits

A major problem for the NZ ETS like many other ETS is the decrease in price of NZUs on

the spot market.80 This is largely due to the global recession as well as its exposure of the

high price volatility of carbon credits from other countries.81This is illustrated in the graph

below.

Figure 7: Price History of Spot New Zealand Unit price 2009- to 18th July 2013

Source

Source: Carbon CommTrade82

The effective price cap for NZUs is $N25 when bought from government.83 As shown in

the figure 7 above, as at 2009, NZUs sold for up to $21 or $22 a tonne in the International

market but has been declining since then. As at October 2012, New Zealand carbon prices

had dropped to between about $NZ1 and $NZ2.70. This decrease in price from the 20.45                                                                                                                78 Ibid, Article IV (23 &24) 79 Government of New Zealand, NZEUR account holder access to Kyoto units from 1 January 2013 (Supra) 80 UNEP, Global Trends in Sustainable Energy Investment 2010: Analysis of Trends and Issues in the Financing of Renewable Energy and Energy Efficiency (2011, UNEP/Earthprint) page 42 81Horizon Research Limited,New Zealand’s Carbon Market Has Almost Collapsed (2013) available at http://www.scoop.co.nz/stories/SC1302/S00043/new-zealands-carbon-market-has-almost-collapsed.htmaccesed on 20th July, 2013 82Carbon CommTrade, Price History of Spot New Zealand Unit price 2009- to 18th July 2013 available at https://www.commtrade.co.nz/, accessed on 20th July, 2013 83Climate Change Response Act of 2002 (Supra) Article 178A(2)

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and above prices earlier recorded has adversely affected investments into projects that

generate NZUs and has also reduced the motivation for increased afforestation.84 The

withdrawal of NZ from the Kyoto Protocol could further complicate issues as the price of

NZUs may further decline due to decreased demand for it following the end of its

international linkage.85

4.3 Non-Linkage of New Zealand Emission Trading System to other Emission Trading

Systems

It is imperative for the New Zealand ETS to be linked to other ETS in the post Kyoto era to

guarantee a robust and virile ETS.86The NZ ETS also has plans to link with the Australian

ETS by 2015.The NZ ETS has also expressed willingness to link to the EU ETS; however,

the possibility of it doing so under its present form is bleak.87 This is because of several

factors. Firstly, New Zealand accepts ERUs and CERs from sources that their additionality

to emission reduction are in doubt.88. If the EU links with the ETS, it would indirectly be

receiving these questionable CER and ERUs into its pool. Again, the Cap on the NZ ETS

is low when compared with that of the EU and would thus result in a shift of capital

towards NZUS as their cost will be cheaper thereby lowering the value CERS from the EU

which have higher generation cost.

Furthermore, the scope of the NZ ETS includes forest and agriculture, which account for

over 70% of credits.89Also, the bulk of New Zealand’s CERS come from Land Use, Land-

Use Change and Forestry (LULUCF) which is not allowed by some ETS including the EU

ETS.90However, a recent decision of the EU Parliament and Council in May, 2013 has set

plans in motion for a change of this policy.91Thus, although the possibility of linking the

NZ ETS with the EU under its present form is unlikely, it is possible in the future if several

of the conflicts are resolved and the policies are harmonized.

CHAPTER 5                                                                                                                84Horizon Research Limited,New Zealand’s Carbon Market Has Almost Collapsed (2013) 85 Ibid 86 Ibid 87The UK Stationery Office, 1 Dec 2008, Revision of the Eu's Emission Trading System: House of Lords Paper 197 Session 2007-08, 33rd Report of Session 2007-08: Report With Evidence page 73 88Carbon Trust ,Linking emission trading systems Prospects and issues for business ( 2009) available at http://www.carbontrust.com/media/84900/ctc759-linking-emission-trading-systems.pdf, accessed on 20th July, 2013, page 6-12 89 Ibid 90 EU, Decision No 406/2009/EC of the European Parliament and of the Council of 23 April 2009, available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:140:0136:0148:EN:PDF, accessed on 20th July, 2013 91 EU, Decision No 529/2013/EU of the EuropeanParliarment and of the Council of 21 May 2013 available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2013:165:0080: 0097:EN:PDF, accessed on 20th July, 2013

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Conclusion

This paper has shown that climate change is evident in New Zealand and that New Zealand

is very vulnerable to its impact due to its geography. The paper has further argued that it is

imperative for the New Zealand ETS to be linked to other ETS in the post Kyoto era to

guarantee a robust and virile ETS. Furthermore, this paper examined the ETS in the Kyoto

era and is of the view that New Zealand’s ETS has had significant impact on New

Zealand’s ability to meet its climate change obligations during the Kyoto era. It also has

propelled a reversal in the deforestation trend and increased afforestation significantly as

well as renewable energy use. Again, an examination of the ETS in the post Kyoto era

shows that, its decision to exit the Kyoto Protocol may boomerang. This is because the NZ

ETS will be isolated from other ETS and would only be linked to them unilaterally thus

affecting the local market for its NZU. It is hoped however that the NZ ETS will surmount

the barriers to its linkage with the EU ETS and other ETS in the near future.

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