The effectiveness of the Emissions Trading Scheme has been brought into question recently.
Consultation by the Ministry for the Environment (MfE) on the Emission Trading Scheme (ETS) review is currently open. The review will focus on the risks, benefits, and trade-offs of changing the New Zealand ETS settings. The key point of discussion in the review pertains to how forestry should be treated by the scheme. Even though emissions are removed from the atmosphere through forestry activities, the current settings could encourage an over-abundance of forestry that would reduce the price of carbon. This would, in turn, reduce the incentive for industries to decarbonise, and further disincentivise industries that are not decarbonising fast enough. MfE has proposed four options for discussion:
- Decrease the number of emissions units available so that the carbon price rises to incentivise polluters to reduce emissions faster
- Increase the demand for emissions units by allowing the government and overseas buyers to purchase them
- Restrict or place conditions on removal activities
- Do not allow emitters to purchase New Zealand Units (NZUs) from foresters to pay for their greenhouse gas emissions.
In 2018, the New Zealand Productivity Commission stated that a concerted expansion of the forestry sector is required to ensure that New Zealand’s emissions are consistent with the 2050 net-zero target. However, the main pressure point is pricing. It is cheaper to sequester emissions by planting forests than it is to reduce emissions by changing production methods. In addition, the afforestation approach (planting pine to harvest later), does not sequester as much carbon as it could, as the plantations are cleared and replanted. The Productivity Commission suggested:
- Transition forestry into land use patterns to a greater degree
- Transition plantation forestry into permanent forestry. A higher ETS price would increase the likelihood of this occurring.
The Climate Commission had a different view. They argued that relying on forestry:
- Risks the permanence of carbon capture to pests, fire, and worsening storms
- Locks land use to exotic forestry, rather than indigenous forests
- Defers the work of reducing gross emissions to future generations, and reduces the added benefits of reducing gross emissions
- Makes it more difficult to sustain low net emissions. As emitting industries grow, so will the land needed to sequester emissions.
Whichever options are chosen, or even if another emerges from consultation, the ETS price will rise in some way, whether it is natural or forced. However, pricing emissions will still remain a behavioural game of who pays for their contributions to climate change, and who does not. The Climate Commission emphasised that the transition must be just. A rise in the ETS price will also result in industries that pay for units passing the costs on to consumers.
How is an ETS supposed to work?
The ETS is the key mechanism for encouraging global participation in curbing climate change. The earth’s land, seas, and skies do not recognise human borders. It is the world’s aggregate emissions and pollution that have created this position. Intense and transformational change in our production systems is needed to prevent climate disaster by 2050, which is not far away relative to the earth’s history.
Almost one-third of the global population has an operational ETS. In New Zealand, all sectors, except agriculture, pay for their greenhouse gas emissions through their ETS surrender obligations. These obligations:
- Require businesses to measure and report on their emissions
- Require businesses to surrender one NZU to the government for each tonne of emissions they produce
- Allocate NZUs to activities that remove carbon emissions from the atmosphere
- Require government auctions to limit the volume of units available to buy
- Require that free NZUs are allocated to Emissions Intensive Trade Exposed firms, to address the risk of emissions leakage (when production moves from a more efficient economy to a less efficient economy). For instance, although the Tiwai Point aluminium smelter emits a high amount of carbon, if it closed, this production would move to a location that emits more carbon in a different country.
New Zealand’s emissions commitments are relative to its size and population. Although New Zealand’s share of global emissions is small, its per capita emissions are among the highest in the OECD. For global emissions reduction measures to be successful, every country, and industry within each country, must play their part.
Who is counting?
While industries agree that emissions must reduce, the difficulties emerge on how we measure emissions. What may appear as a sustainable option can quickly change as calculation methods change. This is the challenge facing New Zealand’s agricultural sector, as it will be required to pay for emissions in 2025. Cabinet is expected to make a final decision on pricing agricultural emissions in 2023, although this may be put on hold until after the election. The difficulty is that agricultural emissions are primarily biogenic methane, which is a potent emission (25 times more warming than carbon dioxide) while it is in the atmosphere. Biogenic methane, however, only lasts around 12 years in the atmosphere. Federated Farmers has argued that these emissions should be exempt from fees. While it should be recognised that these emissions do not last as long, the constant flow of methane from a large number of livestock will still contribute towards warming in the short-term, and time is running out.
Another limitation is that emissions often cease to be calculated when a product leaves our borders. As New Zealand is an exporting nation, far from large overseas markets, this is a particular issue. Forestry logs, among other goods, create emissions when shipped overseas to be inputs in the value chains of other economies. In addition, emissions are created when we ship in materials as inputs for our own businesses and consumption. We should trust that other countries are monitoring their emissions, but this does not point towards the most efficient use of our scarce resources. The New Zealand government’s industry transformation plans aim to shift our export portfolio from low-value, high-number commodities to premium products that deliver greater value-add. This will not only raise incomes, but also mean that emissions created from shipping will be more worthwhile.
Transformation is possible, but more work is needed.
It is important that the future of our economy be a cycle that platforms the environment and households: we should emit and pollute as little as possible, while using our resources at their most effective value. The World Bank has estimated that it is completely possible to drastically reduce emissions, while increasing economic performance, in both developing and established economies. The environment and the economy are not mutually exclusive, but the way we measure success in both of them will need to change. Forestry will play an important role in how New Zealand reduces its carbon footprint, but it is uncertain whether the right ETS price will be the instrument that transforms the economy to maximise environmental and economic benefits for New Zealand.