Group Members: Deron Hong (75627117), Yan Chen (47529086)

Country: New Zealand

Policy: Emission Trading Scheme

Brief Introduction:

In New Zealand, the amount of emissions in 2003 has been 22% higher than the level in 1990. The climate change will have large impacts on business opportunities since the productions in agriculture, forestry and horticulture will be affected if there are unexpected weather conditions which caused by climate change occur. In order to prevent global climate change, to assist business sectors and to protect future generation, the government of New Zealand made a commitment in Kyoto Protocol and set its political goal to decrease their green house gas emissions during 2008-2012 to the level in 1990. The policy that they decided to implement is Emission Trading Scheme. We will introduce the details about how it works below.

1) The coverage of the carbon policy. Discuss the sectors/fuels covered. Discuss, what sectors/ carbon equivalent emissions are exempted. How does the policy implement over time? Use the information about the policy’s coverage to inform an evaluation of the cost effectiveness of the policy:

The sectors/fuels are covered or exempted:

• Jan 2008: Forestry entered the Emission Trading Scheme, and it was the first sector that entered the scheme in New Zealand
• Jul 2010: Liquid fossil fuels, stationary energy and industrial processes entered the scheme
• Jan 2013: Waste and synthetic green house gas sectors will enter the scheme
• Jan 2015: Agricultural sector will enter the scheme

In conclusion, until Jan 2015, New Zealand will cover all the sectors which are the direct sources of green house gas emissions, so there are no sectors will be exempted from this scheme up to this point.

How does the policy implement over time?

We will focus on how the price cap implement over time here, and the following is an option that is suggested by the government:

1. Until 2012, the following three sectors, including liquid fossil fuels, stationary energy and industrial processes only have to pay 1 emission unit for 2 tonnes of carbon dioxide equivalent (“One-for-two”), which is $25/unit and $12.5 for 1 ton of CO2-e. However, from 2013, this scale will gradually increase. Until 2015, these three sectors will have to pay 1 emission unit for 1 ton of carbon dioxide equivalent, which is $25/unit and $25 for 1 ton of CO2-e, which means the price gradually increase.
2. Waste and synthetic green house gas sectors will not use the “One-for-two” as the above three sectors, instead, when it starts entering the scheme in 2013, it will use 67% scale, which is $25*67%=$16.75 for 1 ton of CO2-e. It will gradually increase its price until 2015 to pay full cost of CO2-e ($25/ton).
3. When Agricultural sector enters the scheme in 2015, it will use “One-for-two,” and its price will gradually increase until 2019 to pay the full cost of CO2-e.
4. Forestry sector will not use the “One-for-two.” Instead, it will be the only sector that can export its emission units out to the other countries. The non-forestry sectors are still not allowed to export their units out.

Use the information about the policy’s coverage to inform an evaluation of thecost-effectiveness of the policy:

1. New Zealand government actually abandoned carbon tax in 2007 and instead implementing Emission Trading Scheme as their carbon policy to reduce emission in order to delay climate change. The reason why they decided to use ETS instead of Carbon Tax is because Carbon Tax will restrict households and business to a certain tax level so that they are forced to decide how much they need to reduce in order to minimize the total abatement cost and tax payment. Also, we have to know the marginal abatement cost of each firm in order to equalize them and generate a cost-effective level of tax. ETS works more efficient and flexible. Given the price cap of the emission unit, each firm have the option to decide and buy the unit of emissions that they want to produce. We do not have to know the marginal abatement cost of each firm in practice, and if they save emission units by abating more with energy efficiency, they could even sell rest of their units out. This makes ETS more easily to achieve cost-effectiveness level of emission.

2. The government suggests increasing the scale of price cap gradually. However, this policy will increase incentives for firms to impose the costs of emissions to the consumers since firms are afraid to bear the costs by themselves. If the price of good increase, consumers will decrease their quantity demand, which will cause the retail suppliers to decrease in their supply. The decrease in supply will cause their emissions to go down because of less outputs being produced, so their abatement costs will go up. If every firm has the same situation, then every firm’s abatement costs will go up, and this will lead to surplus of emission units in domestic market. Since most of the emission units could not be traded outside of the country except forestry, the cost-effectiveness will be hard to achieve since they could not decrease their surplus emission traded units and make their marginal abatement costs equalized.

3. The emission from agriculture sector, methane and nitrous oxide emissions from livestock and soil, is exempted until Jan 2015. According to our research, the agriculture sector actually represents half of the total emission in New Zealand, however, it is not imposed any policy for it to reduce its emission until 2015 since it requires the agricultural sectors to voluntarily do research and development to find their own ways to reduce emissions. However, this will be very hard to achieve cost-effectiveness since if there is no policy imposed to them, they will always want to emit until their marginal abatement cost equal to zero, which means their total marginal benefits from emission is maximized. We suggest that there should be at least a policy to impose on them, such as ETS, which is a flexible way to help them to achieve the cost-effective level and reduce the amount of risk to society as a whole.

4. Only the emission units in Forestry sector are allowed to export. All the other sectors still have not been allowed to export them outside of the country. If the permits are allowed to trade internationally, New Zealand will be easier to achieve cost-effectiveness. Since it is possible that there are shortage or surplus of permits within a country, if these shortage can be gained from other countries or surplus can be sold to the other countries, it will be easier for the firms within a country to decrease their shortage or surplus to achieve the cost-effective level of emission, which means to equalize their marginal abatement costs.

2) Discuss distributional effects of the policy. One of the primary concerns around a carbon policy is that by raising the price of energy it disproportionately impacts the poor. How do these policies address such distributional concerns?

At present, the price of NZ units is fixed at $25 until the end of 2012, which is fully exchangeable with Kyoto units, so NZUs can be traded between firms in New Zealand, and exchanged for Kyoto units for trading overseas. To reduce the effect of the ETS on the economy, the Government of New Zealand has introduced a transitional phase that the emissions obligation placed on liquid fuel, gas and electricity companies is halved, which means they will only be required to surrender one emission unit for every two tonnes of emissions.

There are also free emission units to be allocated for some certain industries. The government of New Zealand has acknowledged that the NZETS places some energy-intensive, trade-exposed companies at risk because their overseas competitors do not have to pay for their emissions. These companies will receive a free allocation of NZUs covering 60% or 90% of their emissions, depending on their activities and on whether they meet the thresholds for assistance (The thresholds are defined in terms of tonnes of emissions per $1 million of revenue). Not all companies receive NZUs, for example, electricity generators which are able to pass on their increased costs to customers. Also, the food processing sector just receives little or no allocation. For example, the world’s largest dairy exporter, Fonterra, gets only a very small allocation (covering 2-3% of emissions) as most of its operations do not meet the threshold for free NZUs. In all cases, the free allocation of NZUs is temporary, with assistance decreasing by 1.3% per year from 2013.

However, with the ETS and raising the price of energy in New Zealand, emitters are so far from covering the full costs to the taxpayer. And since the government in New Zealand does not implement carbon tax, there will be no revenue-neutral policy that can return tax back to personal, business and redistribute for other projects. Therefore, there is no revenue to recycle into projects to lessen the effects on the poor, or to assist in reducing emissions, such as improving public transport, helping farmers develop greener farming methods, and developing renewable energy. Therefore, the Green Party of New Zealand believes the best assistance is to lower people’s power bills by improving the energy efficiency of their homes, and lower their petrol bills by providing options like better public transport so they can use their cars less. They would also support doing it by taking a hard look at pensions, benefits and the minimum wage.

Resources:

http://www.climatechange.govt.nz/emissions-trading-scheme/ets-review-2011/review-report.pdf

http://www.redpathaghort.com/bulletins/AboutCO2Tax.html

http://www.climatechange.govt.nz/emissions-trading-scheme/about/questions-and-answers.html

http://www.beehive.govt.nz/node/22885

http://climatelab.org/Carbon_tax

http://www.climatechange.govt.nz/emissions-trading-scheme/about/what-it-means-for-me/

http://www.gpcnz.co.nz/Site/The_Kyoto_Protocol_/NZ_Status.aspx

http://www.carbontax.org/progress/where-carbon-is-taxed/