See also:
Part 1 - What is an Emissions Trading Scheme (ETS)?
Part 3 - How is the National-Maori Party proposed ETS different, and what is wrong with it?
In 2008 the Labour government, with the support of the Greens, passed the Climate Change Response (Emissions Trading) Amendment Act which put in place the rules for emissions trading in NZ, which would gradually come into force for different sectors over the next five years.
Those who bring fossil fuels (petroleum, coal, gas) into the economy by mining it or importing it must purchase emissions units (from anyone with units to sell, here or overseas) to cover the tonnes of emissions that result from burning it. So, oil companies will buy credits to cover the pollution from burning the petrol and diesel they sell, and pass the cost on to their customers. This will raise the price of transport fuels and encourage people to buy a smaller car or take the bus or bike more often.
Those who mine or import coal and gas must also purchase emissions units, and pass on the cost to power companies, factories and households who purchase these fuels. This will cause electricity and gas prices to rise and make it economic to invest in a more efficient fridge or a solar water heater or a smart boiler in industry. So for households, the ETS operates more like a carbon charge on transport fuel, electricity and gas. The price signal is there, but households don't have to get involved with the complexities of trading on the carbon market.
Industries who produce carbon dioxide from their industrial processes, such as steel, aluminium and cement are also responsible for purchasing units to cover this pollution. Half of New Zealand's emissions are methane and nitrous oxide from farm animals. These emissions must also be covered with units.
This will introduce a carbon price into decision making by NZ businesses and households.
Until all countries have a price on carbon, firms which make things here but sell into markets where they compete with firms who face no price on carbon, would be disadvantaged. If this caused them to leave NZ and set up somewhere else there would be no advantage to the climate and a serious disadvantage to the NZ economy and jobs. So it is generally recognised that those firms need assistance until there is a universal price on carbon across all our trading partners or competitors.
At the same time it is important that those firms have an incentive to reduce emissions anywhere they can. The legislation defines firms that are "trade-exposed" in this way, and gives them free allocations of credits to reduce the costs they face, but only for 90% of their emissions in the 2005 year. This means they must pay the full price of carbon for any emissions above that and so have an incentive to reduce emissions. If they reduce to blow 90% of their 2005 emissions they end up with credits to sell, though only if they stay in business and keep producing.
The scheme takes effect in different years for different sectors. Forestry began in 2008. Foresters who have increased their forest area since 1990 can already apply to get credits for the extra carbon they have captured, and some have. Foresters converting their land to other uses - clear felling their forests and not replanting - have to purchase credits to cover the loss of carbon.
Energy and industrial processes are due to enter on 1 Jan 2010, and transport 2011. Agriculture is exempt until 2013, despite being the source of half our emissions.
The Green Party supported that legislation after negotiating some major improvements - a billion dollar home insulation scheme to help families with their power bills; targets in the legislation for future emissions reduction; exclusion of overseas units that have not resulted from genuine environmental action, such as surplus Russian units that result from the collapse of their economy after the cold war; a National Policy Statement on biodiversity to deal with the issue of pines being planted on areas of important biodiversity just to earn carbon credits; a special pool of credits for new entrants with low carbon intensity to encourage technology improvements; Parliamentary scrutiny of allocation plans; and some other technical changes.
This has all been law for about a year and business has been making plans accordingly. Now, however, the Government has announced that it will be replaced with new legislation that is markedly different.
Part 1 - What is an Emissions Trading Scheme (ETS)?
Part 3 - How is the National-Maori Party proposed ETS different, and what is wrong with it?
