New Zealand is working towards net-zero emissions by 2050. As the country moves closer to this ambitious goal, the Second Emissions Reduction Plan (ERP2) consultation has highlighted key areas for action.
While the Emissions Trading Scheme (ETS) has been successful in putting a price on greenhouse gases and supporting increased action across multiple sectors, there are still challenges to overcome. Below we’ve highlighted a couple of key parts of CarbonCrop's response to the consultation we think may be of interest to you.
The Strengths of New Zealand’s ETS
One of the biggest strengths of the ETS is how broad its reach is, covering most sectors and gases, and applying a meaningful price to emissions. The scheme's neutrality, for the most part its avoidance of favouring any specific industry or technology (with the significant exception of Agriculture, and some caveats for heavy emitting export industries), helps New Zealand focus on achieving reductions in the most cost-effective way.
Overall, the ETS is a powerful, though sometimes under-appreciated, tool. With a few adjustments, it could be even more effective in supporting New Zealand’s shift to a low-emissions future.
A Net-Based Approach to Emissions Reduction
The government’s net-based approach to emissions reduction supports both reducing emissions and removing them from the atmosphere.
Key benefits of this approach include:
It provides incentives for greenhouse gas removals, which are essential to global climate goals. Atmospheric greenhouse gas concentrations are already too high, and some ongoing emissions are likely unavoidable. Removals need to scale up quickly to cover those gaps.
It offers a cost-effective way to reduce emissions, helping New Zealand make progress while providing flexibility around management of economic impacts.
The net-based approach does come with challenges:
It can lead to over-reliance on a limited number of approaches, like forestry, which can concentrate risk economically and environmentally.
If sequestered carbon is disrupted, such as through forest fires, the carbon is re-released into the atmosphere, undoing any gains.
It might delay action on reducing gross emissions if too much focus is placed on removals, which may have unpredictable long term economic and environmental impacts.
Removal technologies can have long-term environmental and social impacts, especially when deployed at large scale, hence need careful regulation.
Well considered regulatory frameworks are needed to limit the unintended consequences of a net-based emissions reduction incentive framework.
Strengthening the New Zealand ETS
To ensure the long-term integrity and credibility of the ETS, and its effectiveness in driving progress towards national and international goals. It’s appropriate that the government continue to refine the scheme - we cannot expect to predict every consequence or need in advance. Significant value needs to be placed on maintaining a predictable environment for market actors and not penalising early movers - any dramatic and unexpected changes risk damaging market sentiment, which both delays and reduces action.
Maintaining market confidence
Market confidence is one of the factors underpinning the success of the ETS. It’s important that the accounting mechanisms and emissions unit flows are consistent with the overall emissions budget. Avoiding unnecessary segmentation or fragmentation within the ETS will also help prevent inefficiencies and keep pricing stable.
Ensuring fairness
The government should aim to treat existing and future technologies and industries consistently and transparently. Incentives should support market mechanisms, not give unfair advantages to certain sectors or actors. Our view is that some past interventions and grants were unnecessary given the incentives already provided through the ETS.
Managing the ‘unit stockpile’
Managing the stockpile of emissions units (NZU’s), each essentially an ‘entitlement to emit’, remains crucial. There’s still a large volume of units available to the market from past allocations, and we’re concerned that some of the assumptions around the liquidity of this stockpile are conservative. More may come to market over the emissions budget two/three, and we expect this to be determined by the market dynamics (especially unit and forestry prices) over that period.
We applaud the government’s decision to largely align with the climate change commission guidance in reducing the auction volumes over the second emissions budget (EB2) period to help reduce the stockpile. We also encourage ongoing assessment of the liquid fraction of the stockpile to inform future unit supply decisions.
Scaling Private Investment for Climate Mitigation
Private investment is critical to driving innovation and scaling up climate mitigation efforts. We see two main barriers limiting investment at present:
Regulatory uncertainty Frequent discussions about changes to pricing frameworks or market access can create uncertainty around investment risk and returns, discouraging and delaying investment.
Lack of incentives In sectors not covered by the ETS, such as agriculture, there aren’t always clear price signals or incentives to encourage and enable businesses to invest in emissions reductions.
To overcome these barriers, the government needs to maintain consistent market and regulatory policies in both word and action, and continuously assess gaps in the market where incentives are unavailable or ineffective. In particular, we continue to encourage review of how regenerating native bush is recognised under the ETS, to better enable it as a national asset. It would also help to introduce incentives for industries currently outside the ETS, like agriculture, so these sectors also have access to market mechanisms to support reducing emissions.
In the long run, implementing a Carbon Border Adjustment Mechanism (CBAM) and exploring opportunities to export high-integrity carbon removals could position New Zealand as a leader in carbon removal technologies. This would not only help the country meet its own targets but also support global climate mitigation efforts.
Expanding Non-Forestry Removals
Forestry is a major part of New Zealand’s carbon sequestration strategy, but there’s also untapped potential in what the ERP2 consultation terms “non-forestry removals” (some of which are pretty forestry-like!).
We see particular opportunities in relation to the following activities:
Regenerating indigenous scrub and restoring mature forests.These offer significant carbon removal opportunities but aren’t always fully recognised under current policies. Expanding support for these activities could unlock new carbon sinks and also help meet biodiversity goals.
Emerging technologies like ocean alkalinity enhancement and enhanced rock weathering are still in the early stages of development but have the potential to scale up significantly in the future.
The Emissions Trading Scheme offers a solid foundation for climate action. With careful management, it can continue to drive real progress. By tackling challenges in key sectors, encouraging private investment, and looking into additional removal incentivisation opportunities, New Zealand can meet its 2050 net-zero target and contribute to global climate mitigation efforts.
Want to dive deeper?
Check out CarbonCrop’s response to the questions in this post and watch our July CarbonCurious discussion on the ERP2.
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