Emissions trading: How the new scheme will affect core industries

By Brigid McDonald, Senior associate, Kensington Swan Lawyers

Most people now accept that the climate is changing. Many countries, including New Zealand, are now taking action to reduce emissions in an attempt to slow or halt climate change.

All New Zealanders will, in some way, bear the costs of the Government’s new initiatives to combat climate change – from industries having to comply with emissions limits and understand and participate in the emissions trading market, to consumers buying food from the local supermarket and encountering ‘downstream’ costs passed on by business from fuel and electricity price rises.

Some industries will be the first to be directly affected as a result of the Emissions Trading Scheme (ETS), which was

announced on September 20. The Government has outlined how the ETS will work, however, many details are yet to be addressed. What is known are the parameters for the ETS, the areas that will be targeted first and the Government’s projected implementation timeframes. The Government is to engage with key sectors to finalise details and will then introduce a bill to parliament to formalise the proposed regulatory scheme.

The ETS will set a cap on emissions and allow generators of high levels of emissions to exceed their emissions allowances by purchasing allowances from the market.

Who will be directly affected?

As the Government has acknowledged, New Zealand has an unusual GHG
emissions profile:

•    Nearly 49 percent of New Zealand’s GHG emissions result from agriculture, contrasting with 12 percent in other developed countries.

•    New Zealand has significant emissions from deforestation of forests planted before 1990.

•    Emissions from future harvesting of forests planted post-1990 are forecast to rise sharply between 2020-2030.

•    New Zealand’s energy sector contributes 43 percent of total emissions, which is low relative to other developed countries (due to considerable reliance on renewable energy sources such as hydro, geothermal and wind).

•    Energy emissions from transport are forecast to increase steadily.

It is not proposed that the ETS will impose direct obligations on small or medium businesses (with the exception of some parts of forestry and agriculture) or households.

The ETS will affect different industries differently over time. Forestry will be affected first, followed by the transport sector and heavy emitting industrial processes, followed later by the agriculture and waste sectors. Operators high in supply or production chains will be directly affected, such as oil companies. It follows that the compliance and related costs will be passed on to consumers of products from the directly affected industries.

The agriculture sector is not being phased into the ETS until January 2013, due to the Government’s 2003 agreement with farmers not to introduce a price-based measure until 2013.

How will the ETS work?

The ETS has been described as a ‘cap and trade’ system. It will require participants to hold emissions units – commonly referred to as carbon credits – that match the emissions levels for which they are responsible, in a compliance period (e.g. one calendar year). The units will be allocated across industries and participants, some units will be allocated free, others sold by the government (possibly at auction). The units can be traded by those wanting to increase or decrease their emissions. The primary tradeable unit will be the ‘New Zealand unit’. One New Zealand unit must be surrendered for each tonne of emissions.

Units will not be issued free to emitters where they would be able to pass on the cost, such as the transport and industrial process sectors in the fuel supply chain and electricity generators. However, emitters who face international competition from firms not currently facing emissions pricing are likely to receive a free allocation of units. Overall, however, it is intended to reduce the free allocation of units to zero, which will be done progressively between 2013 and 2025.

The ETS will be linked with other international markets, allowing both sales to, and purchases from other markets.

Interestingly, participants in the ETS will monitor their own emissions but an

administering agency with audit and inspections powers will verify compliance, with penalties for non-compliance.

The Government will now engage on the detail of the ETS and commence targeted engagement with the forestry and transport sectors and Maori before making its final decisions and introducing a bill into parliament later this year.

Affect by sector

All sectors will be phased into the ETS. The phasing in of the sectors is intended to reflect the differing ability of the sectors to adapt and the costs of the scheme on the economy.

Only certain parties in each sector will be directly affected by the ETS obligations. At this stage, it is proposed that those affected will be as follows:

•    Forestry: Landowners.

•    Transport: Oil companies.

•    Stationary energy: It is likely that obligations will be placed on coal miners and importers, gas producers and importers, and geothermal electricity generators.

•    Industrial processes: Purchasers of steel, aluminium, cement, burnt lime, glass, gold, paper, lime fertilizer; electricity and refrigeration industry entities that import relevant synthetic gases.

•    Agriculture: Importers and producers of nitrogenous fertilizers, possibly farmers.

•    Landfill operators.

Risk and cost management

For industries that cannot easily reduce their emissions and/or who wish to increase emissions, there will be major cost implications, depending on the unit allocations and the costs of units on the market.

For some businesses, operational costs may vary from year to year if emissions levels change. This will need to be factored into budgets/contingent liability assessments.

There will also be other costs, such as insurance against penalties for non-compliance, etc.

Other implications may include consent authorities refusing to process applications for uncertainty as to GHG emissions, or declining applications.

Other risks and costs remain to be seen, depending on the final or changing details of the ETS and any new legislation to implement government policy.

Opportunities

As the scheme develops, it is expected that secondary traders will enter the market, for example, to act as a stockbroker to match buyers and sellers.

For those who can offset GHG emissions, there is money to be made from the ETS and on international markets. 

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