The ETS

You’ve probably heard of the term ETS.  This page gives you some information on ETS, how the NZ ETS works, what’s good about it and what could be done better.

What is an ETS?
ETS stands for Emissions Trading Scheme (or system).  These systems are a way for greenhouse gas (GHG), or carbon, emissions to be priced.  It is an example of the pricing of pollution.

Carbon pricing is a way for the people and businesses which do things which result in carbon emissions, to pay for those emissions.

As its name suggests, an ETS is based on the trading of emissions units.  One unit represents one tonne of carbon emissions.  An ETS requires those that produce emissions to buy (or receive) emission units equivalent to their emissions.

An ETS will sometimes be part of a “cap and trade” system, where the amount of carbon emissions allowed is capped.  With a capped amount of units then, according to the theory, only an agreed amount of emissions will be released.

Why do we need an ETS?

The development of the NZ ETS is part of our government’s response to climate change, and specifically the obligation that we agreed with the international community (through the Kyoto Protocol). 

Under the Kyoto agreement, we have to pay for our emissions, between 2008 and 2012, which are above our emission level in 1990.  (As mentioned on the “NZ Facts and Figures” page, we produce about 23% more emissions than we did in 1990.)

There were various options available to our government to raise the money to pay for these emissions, including an ETS, a carbon tax or from general taxation.

Like most other countries, NZ decided to use an ETS.  (By the way, it is not the case that NZ is a “world leader”; already 29 other countries have an ETS.)

What is the advantage of an ETS?

The main advantage of an ETS is that it places an additional cost on those activities which result in emissions.  (i.e. it prices the pollution.)  In this way there is an incentive for people to reduce doing those things which result in emissions.

What is covered by the NZ ETS?

The NZ ETS is an “all gases, all sectors” scheme, which means that it covers all activities, including transport, electricity, agriculture, waste, the main industrial processes (like steel and cement making), and forestry.  (This approach is different from most other ETS’s, which only cover some activities.)

However, the scheme is being introduced over many years, and there are various mechanisms which affect the liability of the emitters in the different sectors.

In July this year, the transport and electricity sectors entered the scheme.  Now we have to pay for the carbon emissions associated with these activities, and so the price of petrol, diesel and electricity went up in July.  (Although, until 2012, we will only be directly charged for half of these emissions, as there is a 2 tonnes per 1 emissions unit arrangement in our ETS.  This was introduced by the current government to reduce the impact of the ETS.  But, this just means that the taxpayer has to pick up more of the Kyoto bill.)

What about agriculture and industry?

The way the ETS covers the other main sectors, agriculture and industry, is more complicated.  These sectors are competing in international markets (unlike the electricity and transport sectors).  If they were to suddenly have to include a full carbon charge, their goods might become uncompetitive (at least this is the argument that these sectors use).  This is because most of their overseas competitors do not (yet) have to pay a carbon charge. 

So, the NZ ETS has been designed to protect these sectors.  Industry joined the scheme in July, but many trade-exposed businesses will initially only have to pay for 10% of their emissions.  Agriculture will not join the scheme until 2015, and even then will also only be responsible for 10% of their emissions.  (When a new international climate change agreement is reached, involving all large countries including the USA and China, then there will be a level playing field and so the agriculture and industry sectors will then have to pay fully for their emissions.)

Who pays for the emissions from these sectors?

Because we, as NZ, have our international Kyoto obligations, we still have to pay for the emissions from our farming and industry sectors.  But, rather than these sectors paying, it is us, as taxpayers, who will pick up most of this bill for many years.

This is one of the main problems with our ETS.  But it won’t be solved until there is a comprehensive international agreement.

Are there any other problems with the scheme?

The NZ ETS is not actually a “cap and trade” system, so there is no cap placed on our emissions. The theory (again!) is that by pricing emissions, there will be natural reduction in the activities which cause emissions.  But it is widely recognised that the carbon price has to be high for that to happen. 

What about our forests?

One advantage NZ does currently have is its commercial, or plantation, forests, which absorb carbon dioxide. 

Under the NZ ETS, owners of land which has been forested since 1990, are eligible to get paid (receive units) for the trees grown on their land.  These forest owners can then sell these units to those (such as fuel companies and electricity companies) which have obligations under the ETS. 

In this way, there is an added incentive for trees to be grown as a commercial activity.  (The downside is that when the trees are felled the landowners are liable to pay for the carbon held in the felled trees.  But this won’t happen in large amounts until the 2020’s.)

In summary

Our ETS is good because it begins to put a price on activities which cause climate change.  But currently it is quite limited as a tool to reduce our emissions.

But it will only raise some of the funds needed to meet our international obligation, mainly from the carbon charges for fuel and electricity.  The remaining funds will be paid by the general taxpayer, rather than from the farming and industry sectors which produce the emissions.  This will be the case for several years, until there is a new international climate change agreement.

And, very importantly, the carbon price will initially only have a limited effect on reducing the activity which causes emissions.

But, of course, there is a solution to this problem.   By taking action to reduce our emissions (see Measuring & reducing our emissions page) we can reduce the amount we, as a country, and we as individuals, have to pay.  And do the right thing for our planet!

Useful links


Content kindly provided by Phil Jones, Carbon Group. For enquiries on the information provided, please contact Phil at philj@co2group.co.nz
 
 

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