Climate Change Response (Emissions Trading Reform) Amendment Bill

Thursday 13 February, 2020

Submissions have recently closed on another Bill amending the Climate Change Response Act.  The Climate Change Response (Emissions Trading Reform) Amendment Bill seeks to reduce greenhouse gas emissions by making changes to the Emissions Trading Scheme, as well as improving the operation of New Zealand’s emissions trading scheme (ETS). There are three major developments in this Bill: the Bill would bring agricultural emissions within the emissions trading scheme for the first time, introduce a mechanism for a sinking cap on the number of emissions units available, in order to align with the emission reduction targets in the Climate Change Response Act, and introduces ‘averaging accounting’ for post-1989 forest land.

Agricultural emissions

As was widely reported in the media, the agricultural industry has until 2025 to develop an alternative farm-level pricing system for agricultural emissions. The Ministers for Agriculture and Climate Change must report back on the progress made in developing the alternative system in 2022. If an alternative system cannot be developed, agricultural emissions will fall within the ETS.

Farmers will have to start reporting on livestock emissions at farm level from 1 January 2024 and paying for livestock and fertiliser emissions from 1 January 2025 (fertiliser emissions being accounted for at processor level). The Bill increases the existing level of free allocation of units to agriculture from 90% to 95% to ease the transition to paying for emissions.

The Explanatory Note to the Bill states that the Bill is not yet complete. Detailed provisions on decision-making during the period to 2025, the requirement to develop the alternative pricing system and ‘other agricultural policy decisions’ will be incorporated into the Bill through draft text provided to the Select Committee or via a Supplementary Order Paper.

Sinking cap and restrictions on NZUs

The Bill introduces a sinking cap for all industrial allocations from 2021, reducing the level of allocation for every industrial activity by 0.01 each year from 2021 to 2030, with greater reductions after 2030. The Bill will also establish a process which may set more rapid phase-down rates for particular activities that are at low risk of emissions leakage. The Bill will also enable the supply of New Zealand Units to be restricted, capping allowable emissions.

The Bill would also remove the current fixed price of $25 per NZU and replaces it with a ‘cost containment reserve’, which will operate through ETS auctions. This will be a limited reserve supply of NZUs that the Government will release only when NZU prices reach a particular level. Regulations will set the trigger level, or levels, and the number of units released.  All in all, the price for emissions units appears likely to rise.

Compliance

The Bill will make data on the emissions and removals of individual businesses publicly available online. This is likely to increase pressure on businesses which fall within the ETS to reduce emissions. The Bill will also make information about significant non-compliance publicly available.

The Bill also aims to encourage compliance by introducing new infringement offences for low-level offending and separating excess emissions penalties into 2 categories. There will be a penalty for failure to surrender or repay units, set at 3 times the current price of carbon, and penalties for failure to report emissions or make mandatory allocation applications, or reporting, or applying, for allocations inaccurately.

Averaging accounting for post-1989 forests

The Bill introduces averaging accounting for post-1989 forests registered from 1 January 2019 (which will be optional for participants until 1 January 2021). Averaging will mean that forest owners will earn units until their forest has reached an age equivalent to its long-term average level of carbon storage (on the basis the forest is to be replanted after harvest). This will be administratively simpler, and will increase the number of units that forest owners can trade at low risk.  The Bill also introduces three new features:

• removing liabilities for carbon lost from adverse events, as long as the forest is replanted:
• enabling liabilities to be offset by planting a carbon-equivalent forest elsewhere:
• closing a loophole that could allow foresters to deforest and re-register land in order to game the averaging accounting provisions.

We will look at this and some other changes to forestry in the ETS in a separate article.

The Bill makes significant changes to New Zealand’s Emissions Trading Scheme in order to support the implementation of New Zealand’s international climate commitments under the Paris Agreement and domestic targets and emissions budgets, and there is still more detail to come. We will keep you informed on further developments in this area.