What has POW been up to lately? – We submitted on the ETS. The ETS? What’s that?

Photo: Penzy Dinsdale

We’ve been working behind the scenes to advocate for strong climate policies on behalf of the outdoor community. We see the melting glaciers, the rising snow lines, the trails eroding and our favourite rivers becoming unswimmable. Politicians in Wellington rarely hear perspectives like those from the POW community which is why it’s important we make submissions. The most recent submission POW made on behalf of our community was on the ETS – the Emissions Trading Scheme. We advocated for it to be strengthened so that carbon markets, like financial markets, can’t be manipulated or have insider trading. We also emphasised that the ETS can only be part of the solution to reducing emissions in Aotearoa, we need many more systems in place to reach our goals and do our fair share to mitigate climate change. But what is the ETS? Have a read of our blog post here to learn the basics. 

The Emissions Trading Scheme (ETS) – almost as exciting as sending your summer climbing project or skiing blower powder. 

But for real. The ETS is an important part of Aotearoa’s climate solutions and if we don’t understand it we can’t advocate for it to be better, or for other solutions and climate policies to address the climate crisis. 

Emissions Trading Schemes exist around the world, for example in Europe since 2005 and as of last year in China. The ETS in New Zealand has been around since 2008. The goal of an ETS is to create a market for greenhouse gas (GHG) emissions. Companies are charged for their emissions (and therefore their contribution to climate change). The ETS puts a price on a tonne of CO2e and companies must pay for that. Read more here: What is an Emissions Trading Scheme and How Does It Work? (earth.org)

How does it work? 

The New Zealand ETS is a ‘Cap and Trade’ system. It’s got two parts: 

1 – A limit (cap) on how many tonnes of GHG emissions can be polluted into the environment

2 – Tradable units that allow a company to emit a specific number of tonnes of GHG emissions. 

Over time the cap is slowly lowered. This means there are fewer tradable units available. The cap can be lowered every year, inline with NZ’s emissions budget goals. Eventually the price will be too high and there will be an incentive to simply reduce emissions, as that is much cheaper than paying for them via the units. Ideally the money earned from selling units will be put towards climate solutions and just transitions. 

Who participates? 

In NZ most companies above a certain size must participate. Side note – The BIG exception is the agriculture industry. GHG emissions from agriculture in Aotearoa contribute to 50% of our emissions. If we’re not pricing 50% of our emissions, is the ETS effective??. A few other exceptions are landfills and international aviation. Companies that meet the size criteria must calculate their GHG emissions, and for every tonne they release, they must buy one unit (an NZU). 

How do companies participate? 

There are four ways that participating companies can buy NZU’s to cover their GHG emissions: 

  1. Buy directly from the government – every 3 months there is an auction and the government sells NZU’s to the market
  2. Fee allocation – some companies are considered ‘emissions intensive, trade exposed’. The government gives them up to 90% of the NZU’s they need for free! This is because of an idea called ‘carbon leakage’. If NZ companies need to pay more to produce their products (because they are creating a lot of GHG’s) their products will cost more, and therefore be more expensive and less competitive in the global market. Therefore they might move their production overseas where they don’t need to pay for their GHG emissions or to a country with less stringent environmental protection. (This is becoming a less credible option as more and more countries are accounting for their emissions – see: Fonterra consumer pressure case).
  3. But from the market: Anyone or any company can buy or sell NZUs on the market. If, for example, if one company doesn’t use up all of it’s NZU’s it can sell them to another company. 
  4. Generate NZUs through sequestrations. Any person or company can also make NZUs if their projects will store or reduce GHG from the atmosphere. Eg if you own a forest that absorbs GHG’s you can earn NZUs and then sell them on the market. Forestry participates in the ETS this way. 

Is the ETS working? Are GHG emissions going down? 

In theory, if the ETS works well it can create some certainty for companies. They’ll be able to anticipate their costs and have some incentive to reduce emissions, research cleaner technologies, and generate funding for climate mitigation and adaptation. 

BUT – this will only happen if the price of credits is set at the correct level. Currently only about 5% of global carbon prices are set at levels consistent with emissions reductions targets in line with the Paris agreement. 

Recently there have been some improvements to the ETS. There is finally an increase in the price of NZU’s – this means the ETS is becoming more effective. In December 2022 the NZ carbon price was $88.50. It’s been increasing fairly steadily since 2019. But there are still some problems with the ETS that make it less effective at reducing emissions: 

  1. Free allocations: If a company gets free allocations, they aren’t incentivised to reduce their GHG emissions. Free allocations are supposed to be phased out by 2030 but there’s actually just been a new way of granting them to new organisations approved! 
  2. A large surplus of credits: Previously unlimited NZU’s could flood the market and they were cheap. This means there’s now private stock piles of NZU’s – about 150 million units, which is four years of emissions! It’s easy for companies to get hold of NZUs to then surrender to the government instead of actually reducing emissions. The goal is to reduce the surplus to zero by 2030. 
  3. Too great a reliance on forestry: The ETS encourages tree planting as a form of sequestrations instead of actually reducing emissions. In addition exotic species are planted preferentially because they grow quickly, this has implications for biodiversity. 
  4. Agriculture is not included: Half of NZ’s GHG emissions aren’t counted!?!?
  5. The cap is a fake cap: There are currently ‘release valves’ for if the price gets too high. This means more NZU’s are added to the market. 

Overall the ETS is just one way of reducing emissions. It’s one tool but we need a whole toolkit. The ETS is not a silver bullet. Just like tackling a big mountaineering objective we need a combination of things to achieve success; skills, communication, maps, weather, teammates etc. To solve the climate crisis we need an ETS that works, along with other climate policies such as the Zero Carbon act, investments in public transport and infrastructure, green financing, biodiversity strategies, and strong policies to support low emissions agriculture.