Change ahead for the Emissions Trading Scheme

One of the big New Zealand climate change stories of 2023 has been the uncertainty triggered by the release of two Government consultations on the NZ ETS. Two significant discussion documents were released by the Ministry for the Environment with consultation opening on 19 June.

redesigned NZ ETS permanent Forest Category.

The first of these, the discussion document Te Arotake Mahere Hokohoko Tukunga – Review of the NZ ETS identifies a number of possible material amendments to the NZ ETS. Underpinning the consultation is a view from the New Zealand Government that the current emissions trading scheme settings, in particular those for carbon forestry, are placing too much incentive on net (as opposed to gross) emissions reductions, and unduly incentivise carbon forestry (dominated by exotic forests), which can have an adverse impact on New Zealand’s biodiversity.

Amending the NZ ETS

The discussion document identifies a series of options to reform the NZ ETS, to incentivise gross emissions reductions, and reduce its reliance on pine forestry offsets:

Use existing NZ ETS levers to strengthen incentives for net emissions reductions.

Create increased demand for removal activities to increase net emissions reductions.

Strengthen incentives for gross emissions reductions by changing the incentives for removals.

Create separate incentives for gross emissions reductions and emissions removals.

In June 2023, the Government opened public consultation on four options for changing the design of the NZ ETS, which closes in August 2023.

The discussion document appears to favour Option 4, at least in terms of ranking it highest according to the policy criteria. This is the option that would result in the most change to the NZ ETS. If this option were adopted, it could result in the formation of two separate emissions trading scheme markets; one for gross emissions reductions and another for emissions removals. Under this option, emitters would be faced with material implications as forestry New Zealand Units (NZUs) could no longer be used to meet surrender obligations for their emissions. Emitters would be required to purchase these from the Government. All substantive decisions following this consultation will be a matter for the next government.