Government to auction carbon credits, raise carbon price cap, reopen ETS to global market

The government is preparing to reopen the New Zealand emissions trading scheme to international carbon credits, but is signalling less willingness than in the past to rely on other countries' efforts to combat climate change because of the open-ended cost of doing so.

Climate Change Minister Paula Bennett announced a range of decisions from the second part of a major review of the ETS, including the intention to control the number of so-called New Zealand Units (NZUs) of carbon by putting up pre-determined quantities for auction, removing the $25 per tonne upper limit on the price of a tonne of New Zealand carbon, and reopening the New Zealand ETS to international carbon credits.

The ETS has been closed to international markets since 2015 and there has been controversy over the acceptance before that time of very low-cost international carbon credits of dubious integrity generated mainly in former Soviet states, such as Ukraine, where the collapse of traditional heavy industries and endemic corruption led to a flood of carbon credits becoming available.

Today's announcements are important markers in the evolution of the scheme, but the design of an auction system, the timing and extent of the price cap changes, and access to international markets have yet to be finalised. Decisions on treatment of forestry planting in the ETS and the phasing out of 'free allocation' of carbon credits to trade-exposed industries will be addressed by mid-2018, Bennett said. No change in the operation of the ETS is expected before 2020.

Agricultural emissions remain excluded from the scheme in the absence of commercially viable technologies to help farmers reduce biological greenhouse gas emissions.

The largest change in today's announcements was "a future limitation on use of international markets," said Adrian Macey, a former New Zealand diplomat who has served at the highest levels of international climate change negotiations and is now at Victoria University's Institute for Governance and Policy Studies. That signal was important as it was "something that has run counter to the doctrine that has prevailed so far that it does not matter where emissions reductions are made".

"Linked to that is the signal that (the) government envisages intervening to ensure the New Zealand carbon price is aligned with our climate change targets," said Macey. "Previously the doctrine was that the 'international price of carbon' would be appropriate in New Zealand."

However, that approach had been leading to "potentially unsustainable consequences - notably the prospect of spending billions of dollars offshore with no benefit to the New Zealand economy or its own transition to low carbon," said Macey.

Details of New Zealand's plans to link with other countries carbon-trading schemes are regarded as sensitive and had been "unnecessarily" blanked out of the Cabinet paper released today, said Macey in comments to the Science Media Centre.

Bennett's other main decision was to commit to decisions about carbon unit supply on a five-year ahead rolling basis to bring greater certainty to the ETS, which has been plagued by uncertainty and policy swings.

(BusinessDesk)