New Zealand’s proposed Emissions Trading System... 18 Free Allocation - more •No assistance (industrials) past firm exit - important in avoiding regrets •No assistance on firm

© Covec Ltd www.covec.co.nz

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www.covec.co.nz 1© Covec Ltd © Covec Ltd

Tim Denne

30th November 2007

New Zealand’s proposed

Emissions Trading System



www.covec.co.nz 2© Covec Ltd www.covec.co.nz 2

Introduction

• NZ will introduce an ETS.

• The objectives are:

• Some emission reductions at home (“below business as usual”)

• Kyoto compliance and thereafter

• Least cost in the long term

• Will be introduced over the next 5 years, starting 1st Jan 2008




Key features

• All sectors

• All gases

• As upstream as possible

• All emissions to face the full cost of emitting

• Unit of trade = NZ Unit (NZU)

• As flexible and as open as possible (NZU fully

backed by Kyoto units)

• Industry protection in the transition through free

allocation




Timetable for Introduction




NZ Emissions (no LULUCF)

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

1990 1995 2000 2005 2010 2015 2020

'00

0 t

on

ne

s C

O2

Other (incl Waste)

Agricultural N2O

Agricultural methane

Industrial Process

Other Energy

Transport CO2

Energy CO2




Expected Fellings/Potential Emissions

0

10

20

30

40

50

60

70

0

10

20

30

40

50

60

70

80

901

98

2

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

20

14

20

16

20

18

20

20

20

22

20

24

20

26

20

28

20

30

20

32

mil

lio

n t

on

ne

s C

O2

'00

0 h

a

Size of potential liabilities is a big part of

Reason for early entry of forestry to ETS




Net emissions

* Includes removals from post-1989 afforestation

0.0

25.0

50.0

75.0

100.0

125.0

150.0

1990

2000

2010

2020

2030

2040

2050

Mil

lio

n t

on

nes c

arb

on

dio

xid

e e

qu

ivale

nt

Hypothetical illustration of

post-2012 scenarios

Net projected

emissions*




Forestry – Kyoto treatment

• Pre-1990 forests

• Felling is treated as an immediate emission

• Full liability applies (c800 t CO2/ha) unless land replanted

• Cannot transfer between sites, eg fell one and plant another

• Post-1989 forests

• Net change in carbon stocks measured to estimate absorption/emissions

• NZ government does not receive Removal Units (RMUs) until some time after 2012




• Entry 1st Jan 2008

• Obligated participants = landowners

• Liability for pre-1990 forests

• Can opt out if small

• Voluntary entry for post-1989 forests

Forestry under ETS




Post-1989 forests

• Post-1989 forests can join voluntarily (18 months

to decide). They can claim credits from

absorption but take on a liability for emissions

• Will be awarded NZUs

1990 2000 2010 2020 2030 2040 2050 2060 2070

Wo

od

Vo

lum

e/C

arb

on

se

qu

est

ere

d

Potential absorption credits & liabilities




Forestry (Pre-1990)

• Liability for emissions – most hold NZUs if

deforesting/changing land use

• Can opt out if landholdings <50ha

• 21 million NZUs freely allocated to existing

landowners for 2008-12 (roughly equal to

historical deforestation rates – c.5,000ha pa)

• No way of knowing who will deforest, so free

allocations given in proportion to landholding




Liquid fuels

• Enter 1st Jan 2009

• Obligated parties are oil companies – importers

of product plus removals from refinery

• Some potential for opt-in for

large users (Air New Zealand)

• No free allocation




• Entry 1st Jan 2010

• Obligated parties = introducers

of carbon (fuel importers,

coal mines, gas producers, geothermal users)

• Some potential for opt-in (eg electricity)

• Some free allocation:

• Industrial processes – to obligated parties

• Energy – downstream energy users

Stationary Energy & Industrial Processes




Agriculture

• Entry delayed until 2013

• Point of obligation:

• Sale of nitrogenous fertilisers and EITHER

• Processing of meat & dairy products; OR

• Farming activity

• Some free allocation, as for industry

• Waste also included in 2013




Free Allocation

• Free allocation separate from points of obligation

• No free allocation to firms that could pass the

costs on, so no free allocation to

• Liquid fuels (transport)

• Electricity

• Eligible firms

• Stationary energy and industrial process emissions

• Agriculture

• Forestry - deforestation




Free allocation - reasons

• Long-term intent to move towards zero free

allocation on efficiency grounds

• In transition, reasons for free allocation are:

• Regrets – the rules may change or others take on price such that NZ would regret firm closure

• Adjustment costs, particularly those from concentrated job losses

• Reputational issues around stranded assets

• Equity – stranded assets also

• Less so – emissions leakage




Free allocation - proposal

• Generous free allocation for those most affected

when sectors enter the scheme

• All sectors expected to make a contribution

• Relatively simple approach to establish size of

package – 90% of 2005 for ag and industry

• Industry support for electricity price rises,

stationary energy use & process emissions

• Assistance for deforestation based on historical

deforestation rates

• Assistance phased out by 2025 (reduce linearly

from 2013)




Free Allocation - more

• No assistance (industrials) past firm exit -

important in avoiding regrets

• No assistance on firm entry means new entrants

& incumbents on similar footing re growth in

emissions

• Initial concept (but not firm on this approach) is:

• maximum emissions of 2003-2005

• threshold of 50,000 tonnes

• trade-exposure test.




Overall position for NZ




Process

• Legislation introduced to Parliament this year

(2007)

• Select Committee considers the Bill and invites

submissions

• Legislation in place by mid-2008




Tim Denne

Covec Ltd

[email protected]

www.covec.co.nz

mailto:[email protected]

http://www.covec.co.nz/

Documents

New Zealand’s proposed Emissions Trading System... 18 Free Allocation - more •No assistance (industrials) past firm exit - important in avoiding regrets •No assistance on firm