New Zealand unveils planned changes to CO₂ emissions trading scheme

Following recent public consultation, the New Zealand government has outlined a series of reforms to its emissions trading scheme (ETS) that will be introduced to Parliament in 2019 as amendments to the Climate Change Response Act 2002 (the legislation that established the ETS system). The measures are scheduled to enter into force in 2020 at the earliest.



These changes include an absolute cap on ETS emissions, which will include annual announcements looking forward five years. An auctioning mechanism will be introduced into the ETS to align the supply of units with New Zealand’s emission reduction targets. The cost containment reserve, operated through the auctioning mechanism, will replace the NZD25/tCO₂ (US$17/tCO₂) current price ceiling or fixed price option (FPO). Currently, emitters can choose to pay NZD25/tCO₂ instead of buying ETS units from emissions unit holders. The new cap will include setting the number of units to be auctioned and the settings for the new cost containment reserve. This measure is expected to restrict the number of units supplied into the scheme and boost the incentive to reduce emissions. The government will also investigate the potential introduction of a price floor in the scheme.



Another significant change is the introduction of permanent forest to the scheme. The current Permanent Forestry Sink Initiative (PFSI) would be replaced with a new permanent post-1989 forestry activity, giving landowners more incentives to plant more trees. Forest planters can report the CO₂ they take out of the air and claim allowances that they can sell, thus creating a trading market and an incentive to lower CO₂ emissions.