By Euan Sadden

While frequent claims in Australia would have the average person believe Canberra is the first capital to try out emissions trading, a number of schemes – including next door in New Zealand – are helping cut their home countries’ emissions.

The European Union Emission Trading Scheme (EU ETS) began in January 2005. It covers more than 10,000 installations with a net heat excess of 20 MW across the energy and industrial sectors. Japan and the US are considering schemes.

But none as ambitious as the New Zealand ETS, which once fully implemented will cover all six greenhouse gases identified by the Kyoto Protocol, across all major sectors of the economy: forestry, stationary energy, industrial processes, transport fuels, agriculture, synthetic gases and waste.

The NZ ETS was legislated through the Climate Change Response Act (2002) in September 2008. To date only the forestry sector has been directly affected by the NZ ETS, but the national government passed into law substantive amendments in December 2009.

Unlike the EU ETS, which caps carbon dioxide emissions created by heavy industry, the NZ ETS adopts an upstream approach with sectors being introduced separately over a period of seven years starting in 2008.

Kiwi emissions and targets

New Zealand is a signatory to the Copenhagen Accord; it committed to cutting emissions by 10 to 20 percent below 1990 levels by 2020. Australia has submitted an unconditional target of 5 percent by 2020 with the possibility of committing to a reduction target of between 15 to 20 percent provided that certain conditions are met.

As a signatory to the 1997 Kyoto Protocol New Zealand, like Australia, is legally bound to achieving an average emissions reduction of 5 percent below its 1990 levels during the first commitment period, ending at the beginning of 2010. For New Zealand this amount equates to no more than 365 million tonnes of carbon dioxide equivalent emissions (CO²-e).

New Zealand has a relatively different emissions profile compared to most developed countries, which makes its ETS respectively different.

Some 48 percent of Kiwi emissions are methane and nitrous oxide from agriculture, compared to about 12 percent in other developed countries. Energy generation accounts for up to 44 percent of New Zealand’s emissions comprising of transport (19 percent), electricity generation (11 percent) and manufacturing (7 percent).

New Zealand possesses lower than normal carbon dioxide emissions from electricity generation because of extensive hydro-generated electricity. It relies on hydro, geothermal and wind power to supply more than 60 percent of the nation’s electricity. Emissions from transport are largely comprised from fuel combustion for cars and trucks while electricity generation is provided by power stations fueled mostly by gas and coal.

Industrial processes account for 5 percent with the bulk coming from the production of iron, steel and aluminum. Waste accounts for the remaining 2 percent.

The forestry sector also has a significant impact on New Zealand’s greenhouse gas emissions profile. The Kyoto Protocol awards credit for growth in forests planted after 1990, but debits apply upon harvest. There are also debits when pre-1990 forests are cleared and not replanted.

NZ ETS timeframe

The NZ ETS has been designed to allow the gradual integration of each sector into the scheme over a period of seven years. New Zealand’s forestry sector entered the scheme in January 2008. It will be followed by the transport fuels, electricity production and industrial processes sectors in July 2010; the synthetic gases and waste sectors in January 2013 and finally New Zealand’s powerful agricultural sector in January 2015.

The transport fuels, electricity production, industrial processes and waste sectors will be able to start reporting their greenhouse gas emissions voluntarily two years before their obligations to surrender emissions units begin, and are required to report their emissions one year before. Participants in the agriculture sector can voluntarily report their emissions four years before their obligation to surrender emission units begin and are required to do so three years before.

ABCs of the NZ ETS

The government will provide financial assistance, i.e. free emission units, to businesses heavily affected by the scheme, namely trade-exposed industrial producers, forest owners with a pre-1990 exotic forest land, fishing vessel operators and the agriculture sector.

The NZ ETS is strongly linked to other emission schemes around the world, as it allows for both the import and export of Kyoto compliant units. However, the further alignment of the NZ ETS with the schemes of one or more of its key trading partners may offer a number of additional benefits.

In particular, further alignment of the NZ ETS with an Australian scheme would provide greater protection of the competitiveness of NZ firms relative to their trans-Tasman rivals. It would help to reduce trans-Tasman transaction costs and protect against the possibility of New Zealand facing a period where the international trade in Kyoto compliant units is not possible.

Any alignment with an Australian scheme is now delayed, given the Rudd government’s decision to put its proposed scheme aside until at least 2012.

NZUs are to be traded only within the New Zealand market for now. Until the transition phase ends in December 2012, only the forestry sector will be able to convert the NZUs freely allocated to them to Kyoto units to be traded overseas. After the transition phase, all sectors will be allowed to convert NZUs into Kyoto units to be traded overseas.

In the short term, NZU prices will be dependent on price controls in the early years of the NZ ETS. The transition period through December 2012 will substantially lower the cost for participants. During this time, scheme participants will be able to buy emission units from the government for a fixed price of NZ$25. In addition, participants in the energy, industrial, fishing and liquid fossil fuel sectors will have to surrender only one emission unit for every two tonnes of emissions they produce. This means that they will face a price of carbon that is no higher than NZ$12.50 per tonne.

After the transition phase, the price of an NZU will be market-determined.

The future of carbon trading

Last week the Kiwi government threatened to delay the remainder of the NZ ETS beyond 2013 unless major trading partners were to bring similar schemes into effect. Following on the news that Australian Prime Minister Kevin Rudd has shelved Australia’s proposed ETS until at least 2013, New Zealand Environment Minister Nick Smith said: “New Zealand would be unlikely to proceed with the full obligations … if there was not progress in other countries, particularly trading partners like Australia, Japan and the United States.”

Well, Japan is forging ahead and the rest of the year will tell what comes in the U.S., where a proposed scheme is about to be debated in the Senate.

Given the events in Australia last week, one could be forgiven for concluding that political momentum for emissions trading is beginning to waiver. But despite these political setbacks there is still strong popular and commercial support for these schemes.

More importantly for business, it is good to remember that carbon trading can be an opportunity rather than a risk. Dow Jones analysts predict that the value of the global carbon trading market will hit nearly $2 trillion by 2020 – up from $118 billion in 2008. The tremendous growth in this market and increased fears regarding the effects of climate change means that for industry, emissions trading schemes are an issue of ‘when’ rather than ‘if.’

About the author: Euan Sadden holds a Masters in Environmental Policy from Oxford University and BA First Class Honours in International Relations. He has worked for the New Zealand Ministry of Foreign Affairs and Trade and as a policy advisor for the New Zealand Permanent Mission to the United Nations. Euan has also worked for Sindicatum Carbon Capital in Singapore and has published extensively on national emissions trading schemes and resource geopolitics. Euan is currently working with Greenhouse Cleantech Limited to explore carbon trading opportunities in New Zealand’s forestry sector and assist in the worldwide distribution of proven clean technology for commercial and industrial application.