ETS reform options ‘disappointing’


The Government is consulting on four options for a better Emissions Trading Scheme, yet University of Otago Dr Sebastian Gehricke points out two of them will not even achieve New Zealand’s climate goals while the other two are not much better

Four options for ETS reform are on the table, to avoid scenarios where it is cheaper for polluters to buy carbon credits – encouraging excessive tree planting – than to reduce their emissions.

The options include restricting the amount of emissions units available; increasing the demand for units by allowing the government or foreigners to buy credits; creating two prices, one for reducing emissions and one for greenhouse gas removals like tree planting; or creating a whole new ETS market with separate incentives.

Overall, it is quite disappointing to see the options in this proposed review, most of which won’t come in to effect for some time as the issues continue to exacerbate, and hardly solve the core issues we currently see in the ETS.

The consultation document itself explains how the first two options will not achieve the goals, so why are they even proposed? The last two options also seem to be quite similar, with the last one being very loosely defined.

To truly let the ETS be the main tool to encourage emission abatement by NZ entities, by increasing the cost of emitting activities, there will have to be some pain and change, it seems these proposals are trying to avoid that harsh reality.

Four simple and effective changes that could be made to the ETS to address many of the outlined concerns would be to:

  1. abolish industrial allocation
  2. limit permanent forests to only earn credits for permanent native forests (and successful transition forests)
  3. ensure that any credits sold in the Auctions align with our NDCs under the Paris Agreement (accounting for emissions not covered by the ETS)
  4. remove artificial price ceilings and additional units by eliminating the Cost Containment Reserve.

Throughout the consultation document the control over the price is mentioned. I believe the government should be managing the units supplied, in line with the ERP and NDCs and in a clear consistent way. This then allows market supply and demand to set the price, which is the point of the ETS. Otherwise, a carbon tax would achieve the goal of controlling the carbon price, without all of the complexities and resource costs of running the ETS.

The revenue generated by the government by selling credits at auction, and the cost saving by avoiding outsourcing our emissions reductions overseas, could then be used to make sure that those households (not polluting companies such as NZ Steel) most affected can be supported, as well as supporting new and higher value industries, rather than to continue implicitly subsidizing polluters and pine forests.


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