NZ reviewing Emissions Trading Scheme

Friday 31 Mar 2023

New Zealand is reviewing its Emissions Trading Scheme to assess whether changes are needed to encourage businesses to accelerate a transition away from fossil fuels and not rely solely on carbon credits from forestry.

The review follows advice from the Climate Change Commission, which has recommended that proposals be developed to strengthen incentives for gross emissions reductions, the Ministry for the Environment said in a statement on its website.

New Zealand’s ETS has been criticized because current settings encourage companies to seek carbon offsets such as tree planting in order to reduce net emissions. The government last year said it wanted to prioritize gross reductions to achieve meaningful decarbonization by 2035 and beyond.

“Given the New Zealand ETS is not expected to materially reduce gross emissions in its current form, amendments are required to achieve cabinet’s decision,” the Minister of Climate Change James Shaw said in a cabinet paper made public after the review was announced.

The paper says the ETS currently provides a higher return to those who opt to invest in forestry as a way of offsetting their emissions, and as a result there has been a surge in planting. The ETS is forecast to drive as much as 670,000 hectares of new forestry by 2035, it said.

Shaw said while the ETS must continue to support afforestation it should also become more effective at encouraging native tree planting, which would be a more permanent carbon sink. There are also risks from over-reliance on exotic forestry to offset gross emissions such as the increased area of land needed to be converted to forests, which can impact rural communities, he said.

The Climate Change Commission, an agency established to provide independent advice to the government, has recommended that higher price settings in the ETS would curb the amount of forest planting driven by the scheme. However, that could bring additional costs to the economy through potentially higher energy prices, the cabinet paper noted.

The review will seek to recommend how to shift the balance between gross and net reductions in the ETS including the impacts, trade-offs and risks to society and the economy associated with that shift, Shaw said. It will also assess what levels of net emissions should come from exotic and indigenous forests, and how to improve ETS incentives for more native tree planting.

“This review will be welcomed by many who feel the current system simply incentivises land to be planted in exotic trees rather than tackling the underlying issue of pollution,” said Susan Kilsby, an economist at ANZ Bank New Zealand in Wellington. “The review is likely to deliver some significant policy changes. Whilst it is being undertaken, we are likely to see significant disruption in the existing carbon markets and markets for real estate that may have been destined for afforestation.”

Source: financial post, Ministry for the Environment

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