Emissions Trading Scheme

Tuesday January 28, 2014

Emissions Trading Scheme - Presentation

New Zealand's Emissions Trading Scheme (ETS) is complex and so not understood by many. Although the level of dealing with scheme has been low activity should pick up as people get to grips with how it works.  Some of our clients may be affected. Particularly in forestry, fuel supply, manufacturing and fishing. Others may be interested in trading under the scheme. So at least some of us should try to have a basic understanding of scheme.

It is convenient to look at the ETS from a number of different perspectives being:

  1. The international ETS, in particular the Kyoto Protocol;
  2. New Zealand's domestic ETS;
  3. The voluntary ETS market.

International framework - Kyoto Protocol

Since the 1980s there have been a number of international conferences trying to deal with the global problem of increased carbon (and other greenhouse gas) emissions into the atmosphere which was causing the earth to heat up.  The aim of these conferences was to get countries to limiting their carbon emissions.

In 1992 most countries had entered into the United Nations Framework Convention on Climate Change (UNFCC).

The UNFCC contained an objective to stabilise greenhouse gas concentrations with the timeframe to "allow eco systems to adapt" and "to enable economic develop to proceed in a sustainable manner".

A further sub-group of developed countries (including New Zealand) also agreed to prepare and implement a national climate change mitigation programme with the aim of returning carbon dioxide and other greenhouse gas emission levels to their 1990 levels.

In 1997 the Kyoto Protocol to the UNFCC was agreed by the member nations.  This provided for the ability to engage in international emissions trading permits in order to meet countries' individual limits and allowed developed nations to invest in implementation of emission reduction projects in developing countries and receive emission credits in return.

New Zealand formally ratified the Kyoto protocol in 2002. Under the Kyoto Protocol the commitment agreed by New Zealand was to reduce its emissions to 1990 levels as an average over the first Commitment Period (CP1) being 2008-2012.

Since emissions in 1990 equated to 61.9Gg CO2 equivalent, New Zealand received 309.5m Assigned Amount Units (AAUs) for the five years of CP1.  If New Zealand failed to meet this target for CP1 then they would have to purchase compensating AAUs on the international market.  It was felt that New Zealand could achieve this because of the off-setting effects of extensive forestry planting which would provide carbon sinks or off-sets.  Trees absorb carbon so accordingly reduce the amount of carbon in the atmosphere.

Significantly in the United States and at the time Australia and other developed countries held off ratifying the Protocol because of lack of binding obligations on developing countries.  Developing countries such as China and India held off entering the Protocol because the thought it unfair that the same type of binding limits in developed countries be binding on them. 

The Kyoto Protocol finally came into force in 2005 when Russia ratified it.

New Zealand has met its target for the first commitment period (CP1) to 2012 despite the fact that emissions have risen. This is because of the offsets provided by forestry. However with forestry rates expected to peak and then decline in the next few years it will become increasingly difficult to meet targets. In which case the government will have to pay for offsetting AAUs.

In 2009 the National Government announced that it would take on a target for the second Commitment Period 2013 – 20 (CP2) of reducing emissions from 1990 levels by 10-20% by 2020.  This commitment was made subject to other developed countries making comparable efforts. Subsequently the government announced that as these conditions had not been met the CP2 commitment would not be entered into.

New Zealand's ETS

The Climate Change Response Act 2002 (CCRA) provided a legal framework for the ratification of the Kyoto Protocol and the implementation of New Zealand's obligations under it.

Initially in 2005 the government proposed to satisfy its obligations by putting a tax on carbon emissions.  However by 2007 the government preference had shifted to an emissions trading scheme.  This was put in place by the CCRA amendment in 2008.  Before this scheme came into effect the new National Government made changes and implemented a scaled back form of the ETS in 2009.

New Zealand's ETS is the world's second Kyoto-based emissions trading scheme (after Europe) and the only scheme to attempt a comprehensive coverage of all Kyoto gases in industry sectors. 

The NZETS covers all sectors and gases covered by the Kyoto Protocol.  These being the forestry sector, liquid fossil fuels, transport, stationery energy sector (coal, natural gas, etc.), industrial process sector (manufacturing processes that result in direct emissions such as aluminium smelting), agricultural sector and the waste sector.

Coverage under the ETS of the various sectors however is staged over  time.  The last sector, agricultural, was due to be included in 2015 but this date has now been postponed.  This is significant as this sector produces around half of New Zealand's emissions.

The initial transitional scheme implemented for CPI up until 2012 have been extended given the decision by the government not to commit to new targets for CP2.

Participants

Those involved in these sectors are covered by the ETS if they are listed as participants within the schedules to the CCRA.  A public register is kept of each ETS "participant".  In order to simplify implementation, "participants" are generally defined at point of supply.  For example, suppliers holding more than 50,000 litres of fuel, miners and importers of coal and natural gas, power or heat generators, manufacturers of listed industrial products, importers of HFCs, and land-fill operators. 

The exception to this approach, as with forestry, where the individual holding rights to deforest land is the participant ( as will further explained below). 

Participants are required to notify the administrator of the scheme within 20 working days of becoming a participant. 

At present the scheme is administered by the Environmental Protection Authority (EPA).

For the purposes of determining participation, related parties are treated as being one entity and must all register .

Any participant who ceases to carry out activities covered under the ETS must notify the EPA.  The participant is then removed from the register but remains liable for any obligations that arose during the term of activity (and must continue to keep records of the same).

There was also provision for those not covered under the scheme to become "voluntary participants" if they are listed in Schedule 4.  These are mainly large purchasers of fuel, coal or gas.  If they joined their suppliers would be otherwise covered and will adjust their ETS reporting.

There is provision under the CCR for exemptions to be granted by the Minister.  This essentially provides for small volumes and those who have already signed a negotiated greenhouse agreement with the government to be exempted.

Every participant is required every calendar year to report the emissions generated from their activities.   There is currently no requirement that these reports be verified.

Emission Accounts

Each participant is also required to open a holding account. Through this account  in each calendar year participants are obliged to surrender one emission unit for every tonne of emissions generated from their activities.  For liquid fossil fuels, stationery energy and industrial processes this was  reduced in 2009 to one unit for two tonnes.

Those who are carrying out "removal activities" (eg. forestry), are entitled to receive one emission unit (NZU) for each tonne of removals.  They are entitled to receive this within 20 days of reporting.

By 31 May following a calendar year, each participant is obliged to submit an "emission return" recording their emissions or emission removals.   Those who cease activities during the year can submit an earlier return.

Participants are required to retain their emissions records for seven years (forestry 20 years).

Emission Units

The New Zealand Emissions Unit Register (NZEUR) operates to record the balance of units held by participants.  Every participant and other "proper persons" can open an account.  There are various types of units that can be recorded in the register.

New Zealand Units (NZUs) can be purchased from the government for $25 per unit.  These units are also granted by the government for emissions reductions such as forestry.

Assigned Amount Units (AAUs) are granted by the United Nations to participating countries such as New Zealand.  These can be freely traded between countries. 

There are also Approved Overseas Units (AOUs) which are domestic units (equivalent to NZUs) issued by the countries which are approved by the New Zealand government.

Participants can use any combination of the three types of units to satisfy their emission obligations or to sell to others.  NZUs cannot be traded overseas (but forestry owners can convert their NZUs into internationally trading units).

A search can be carried out of a participant's NZEUR which records the units held in the account.  A certified search by the Registrar is evidence of ownership of these units.   Emission units are treated as investment securities under the PPSA and as such a purchaser of the unit value without knowledge of an unregistered security interest takes possession free of that interest.  Possession is deemed to have taken place when the purchaser is recorded on the NZEUR as the holder of the units.

Transfers of units are made on application to the Registrar who must effect the transfer if it is complying.  A registration number is then assigned to the transaction.

Free Allocations

There is a scheme for the free allocation of NZUs to certain parties.

Owners of pre-1990 forests are entitled to certain free allocations of NZUs.  This is intended to compensate the owners for the reduction in the value of the forest as result of the penalties to be paid on deforestation in the future.

There is also provision for free allocation of NZUs to "emission intensive trade expose" industry.  This is intended to design the competitive of this industry in competing in the international market against other economies not subject to costs on emissions.  This allocation is based upon the firm's anticipated emissions for the upcoming year which is then adjusted at the end of the year by their actual emission levels.  Free allocations are provided for 90% of emissions with this phasing out by 2029. There is a process for firms to apply for free allocation under the CCRA.

There are similar free allocations for the fishing industry to compensate for higher fuel costs.

Forestry Provisions

There is a complex set of regulations relating to forestry.

Pre-1990 forests are only covered under the scheme if they are exotic forests (not including trees grown to produce fruit or nuts) , the participant is a land owner or a third party where they have a legal right to deforest.  The coverage is for the forests above 50ha as at 1 September 2007.  There are exemptions for removal of tree weeds in less than 2ha of deforestation in a five year period.   Deforestation apart from this is subject to land use charges.

Participation as a post-1989 forest owner is voluntary in that it covers only those enrolled in the scheme.  Participants include land owners, lessees or forestry right owners.  It can include exotic and indigenous trees (but not producing fruits or nuts).  Enrolled participants are entitled to receive NZUs on a yearly basis to reflect the growth of the trees.  When these trees are eventually removed the units have to be surrendered.

Voluntary Carbon Market

There is a market for trading in emission units outside of the ETS.  This involves those who wish to voluntarily off-set their carbon emissions.

In deciding what units to purchase, consideration can be given to whether the units are accredited through a number of international accreditation agencies.

The voluntary market should only deal with activities outside of the ETS otherwise there is double coverage of activities which would otherwise be within the mandatory scheme. 

Reference sources

For those lucky enough to do some work in this area there is a very good book in our library Climate Change Law and Policy in New Zealand.

 

Presentation by Michael Sharp, Partner, Holland Beckett (January 2014)