Review of the New Zealand Emissions Trading Scheme

Introduction:

Climate Karanga Marlborough is a citizen’s organisation of about 120 members with the purpose of educating the public and our decision-makers as to the dangers of climate breakdown, and to support local and national decision-makers to take action.
We are alarmed at the current state of the NZ ETS market with respect to forestry credits.  This is clearly the result of the Minister and Cabinet not following the Climate Change Commission’s years old advice.  We are somewhat gratified to see this consultation, but it is long overdue. 

The Climate Change Commission was formed to provide expert advice to government.  We support the Commission's independence and its recommendations.  The government needs to urgently follow the Commission's advice.

2.1      Do you agree with the assessment of reductions and removals that the NZ ETS is expected to drive in the short, medium and long term?
Yes, it is also clear from the Climate Commission’s analysis that forestry is on track to exceed NZU demand in the long term, likely depressing NZU prices and slowing decarbonisation in the rest of the society.

2.2      Do you have any evidence you can share about gross emitter behaviour (sector specific, if possible) in response to NZU prices?
The evidence is clear.  With the falling of the NZU price this year, the portion of petrol costs due to the ETS has fallen.  By the laws of supply and demand, this has created an incentive to use more fuel – contrary to the intention of the ETS.

2.3      Do you have any evidence you can share about land owner and forest investment behaviour in response to NZU prices?
My family has applied for carbon credits for our regenerating pasture land.  These haven’t been awarded yet and may not ever be due to the backlog at MBI.  We have decided, however, to reforest the land anyway.  Regardless of possible earnings from the ETS, this is the right thing to do.

2.4      Do you agree with the summary of the impacts of exotic afforestation? Why/why not?
We find the following exceptions to this summary:

1. Well managed exotic forestry will not necessarily stabilise erosion prone land.  The wide spread practice of clear cutting of production pine generally leads to de-stabilisation of erosion-prone land until the forest is regrown. 
2. Even permanent exotic forests, planted in pine, will undergo senescence and the dead and dying forest will, with time, lose the erosion resistance gained from the living trees. Permanent exotic forests need to be transitioned to indigenous forests, wherever possible, and this will require additional investment and active management.  It isn’t even clear that this can be successfully on a large scale.
   
   

3.1      Do you agree with the case for driving gross emissions reductions through the NZ ETS? Why/why not? In your answer, please provide information on the costs of emissions reductions.
The ETS does have a role to play in driving down gross emissions, especially where fossil fuel cost, rather than the cost of investment in a low emissions alternative, is the major behaviour driver.  It needs to be complemented by other policies and incentives, as stated in the discussion document.

3.2      Do you agree with our assessment of the cost impacts of a higher emissions price? Why/why not?
Yes.  Higher emissions prices will drive inflation, but this is what it is meant to do – to make emitting activities more expensive.  Any tax system on emissions would do this.  Policies to shield people of lower income from price increases need to be implemented to facilitate a ‘just transition’.

3.3      How important do you think it is that we maintain incentives for removals? Why?
It is important to maintain incentives for removals, but these removals should be controlled to meet the long term and short term emissions targets.  As of now, there is no control other than the ETS market. It is also important that the country increase forestry, particularly indigenous forestry, for the benefit of long term carbon sequestration, as well as biodiversity, erosion control and water quality.

4.1      Do you agree with the description of the different interests Māori have in the NZ ETS review? Why/why not?
Yes

4.2      What other interests do you think are important? What has been missed?

4.3      How should these interests be balanced against one another or prioritised, or both?

4.4      What opportunities for Māori do you see in the NZ ETS review? If any, how could these be realised?
Prioritising and possibly subsidising indigenous forests for carbon removal will provide the best outcome for Maori land owners interested in carbon forestry.  The only attraction of exotic permanent forest is the enhanced income.  This incentive should be shifted to prioritise indigenous forest.

5.1      Do you agree with the Government’s primary objective for the NZ ETS review to consider whether to prioritise gross emissions reductions in the NZ ETS, while maintaining support for removals? Why/why not?
Yes.  The current ETS structure does not prioritise reduction in gross emissions.  As the Climate Change Commission has pointed out, this needs to change.  There is still need for forestry removals, however, in making national and NDC targets.

5.2      Do you agree that the NZ ETS should support more gross emissions reductions by incentivising the uptake of low-emissions technology, energy efficiency measures, and other abatement opportunities as quickly as real-world supply constraints allow? Why/why not?
Yes.  Gross emissions reductions are permanent.  Removals by forestry are not permanent.  Forests can burn down or die from disease or drought. In either case, the carbon stored in the forest will be returned to the atmosphere.  Emissions reductions due to a shift away from burning fossil fuel and other GHG emitting practices are permanent.

5.3      Do you agree that the NZ ETS should drive levels of emissions removals that are sufficient to help meet Aotearoa New Zealand’s climate change goals in the short to medium term and provide a sink for hard-to-abate emissions in the longer term? Why/why not?
No, we feel that emissions removals need to be managed and not left up to a market mechanism like the ETS.  They need to be decoupled from the ETS and managed in a way that balances the effects of afforestation with net zero and NDC goals.

5.4      Do you agree with the primary assessment criteria and key considerations used to assess options in this consultation? Are there any you consider more important and why? Please provide any evidence you have.
Yes.

5.5      Are there any additional criteria or considerations that should be taken into account?

6.1      Which option do you believe aligns the best with the primary objectives to prioritise gross emissions reductions while maintaining support for removals outlined in chapter 5?
Option 4: Separate incentives for gross emissions reductions and emissions removals. 
Option 1 could possibly incentivise gross emissions reductions in the short term, but not in the medium term.  No matter how the present system is tweaked, it will result in an oversupply of forestry NZUs in the medium term, as the Climate Change Commission has pointed out.  This option also goes against the established ERP system of emissions budgets that has been established by the Zero Carbon Act.  The Climate Change Commission already carefully considers the balance between emissions reductions, economic impacts and emissions targets in proposing emissions budgets.  Since they are the experts in this topic, the job should be left to them and not tweaked by government ministries, as suggested by this option.  We, therefore, do not support Option 1.
Option 2 would allow purchase of NZUs in the voluntary market here and abroad, which could have perverse consequences.  If the demand for NZUs unexpectedly increases or decreases, it could promote uncontrolled carbon forestry, beyond the stated purpose of “right tree, right place”, or a collapse in NZU price, neither of which is desirable.  Markets are unpredictable, making this option risky.  We, therefore, DO NOT support Option 2.
Option 3 still relies on market mechanisms to control gross emissions and removals.  Markets are unpredictable, however and, as we have seen in the NZ ETS market, prone to unexpected swings in price.  We should not plan “right tree, right place” on an unpredictable process.  We, therefore, DO NOT support Option 3.

6.2      Do you agree with how the options have been assessed with respect to the key considerations outlined in chapter 5? Why/why not? Please provide any evidence you have.
Yes.

6.3      Of the four options proposed, which one do you prefer? Why?
Option 4.  The inclusion of forestry removals in the ETS has been a problem since the beginning because the incentives and timing of emissions reductions and forestry removals are not aligned.  In addition, forestry removals aren’t equivalent to gross emissions reductions.  Forestry removals aren’t permanent because forests can burn down and die of disease or drought, returning their stored carbon to the atmosphere. The two processes – the ETS and forestry removals – need to be managed as separate processes.

6.4      Are there any additional options that you believe the review should consider? Why?

6.5      Based on your preferred option(s), what other policies do you believe are required to manage any impacts of the proposal?
As mentioned, it will be important to prioritise indigenous forests due to their relative fire resistance (compared to exotic forests), biodiversity and water quality benefits, long term carbon sequestration and soil stabilisation.
The problem will be the high cost of initiating and managing indigenous forests in their early years when they are sequestering little carbon and, thus, earning little income.  Some type of start-up grant or loan against future credits or multiyear credit averaging scheme would help incentivise the planting and management of indigenous forests.  The long-term benefits to the nation of indigenous forest are too great to leave their start-up to purely economic forces.

6.6      Do you agree with the assessment of how the different options might impact Māori? Have any impacts have been missed, and which are most important?

7.1      Should the incentives in the NZ ETS be changed to prioritise removals with environmental co-benefits such as indigenous afforestation? Why/Why not?
As stated above, we first believe that forestry should be taken out of the ETS (i.e., Option 4).  If it is to be kept in the ETS, then, yes, indigenous forestry should be prioritised.  The key feature of indigenous forestry will be its ability to sequester carbon long term, beyond 2050.  Once New Zealand reaches “net zero”, it is important that the nation stay there or progress to “negative” emissions.  As the Climate Change Commission has pointed out, this is best facilitated by significant permanent indigenous forestry.
On the general question of environmental co-benefits prioritised by the ETS, we believe that environmental benefits should be managed separately from the ETS, so as not to combine potentially misaligned intentions which can lead to perverse economic incentives.  We are already dealing with the perverse incentives created by including forestry removals in the ETS.

7.2      If the NZ ETS is used to support wider co-benefits, which of the options outlined in chapter 6 do you think would provide the greatest opportunity to achieve this?
We believe that Option 4 allows the greatest flexibility in supporting co-benefits.  Separate categories and premiums could be applied to different forest types and different settings.  For example, where slope stability and erosion control are at a premium (such as in Tairawhiti) a premium could be added for forest types that are better at stabilising soils in that environment.

7.3      Should a wider range of removals be included in the NZ ETS? Why/Why not?
Under our preferred option, Option 4, removals would be separated from the ETS.  We feel that there is then room for additional removal activities (i.e. pest management in pre-1990 forests, restoring wetlands and carbon sequestered in soil).  These need to be supported by robust science and monitoring, although there is good evidence for the efficacy of pest management in existing forests now.  These removals should be priced separately, as in Option 4, so as to prevent perverse economic incentives. 
Our overriding recommendation, however, is to remove carbon sequestration from the ETS and focus the ETS solely on gross emissions reductions.  If, at some future date, technology for permanent carbon sequestration becomes available (i.e., air capture or mineral sequestration), then this might be included in the ETS. 
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7.4      What other mechanisms do you consider could be effective in rewarding co-benefits or recognising other sources of removals? Why?
We believe that some existing programs, such as grants for pest control or the promotion of QEII covenanted forests could be expanded and more generously funded to promote co-benefits. 
Other sources of removals will need to be vetted by the IPCC before they officially count toward the nation’s NDCs and be credible in ‘net zero carbon’ claims.  Research needs to be progressed to support IPCC approval.