Latest ETS changes – more gradual and more pragmatic

​The main thrust of the latest amendments to the Emissions Trading Scheme (ETS), widely telegraphed in advance, is to further soften the scheme’s implementation to avoid imposing increased costs on business in the current economic climate.

But some changes also reflect an increasing willingness by the Government to move away from some of the bedrock principles of the ETS – doubtless based on the benefit of a couple of years of experience with an operative scheme.

Key changes

Most of the bigger changes were signalled in the consultation earlier this year, though some proposals have been altered.  Notably the Government no longer intends to introduce limits on the number of international units that can be surrendered. This will be seen as a controversial decision, as there has been wide-spread criticism that the unlimited importation of cheap international units has suppressed domestic carbon prices to levels unlikely to be effective in changing consumption and investment decisions. Other key developments are:

  • extending the transition measures, particularly the "one for two" surrender obligation and fixed price option, with no end date specified at this stage
  • deferring the start date for surrender obligations for agriculture (pending a 2015 review)
  • allowing pre-1990 forest offsetting, with those who take up the option needing to return their second tranche of allocation, and
  • providing the power to auction NZUs (within an overall cap of NZUs auctioned and allocated).

A new pragmatism

A fundamental design feature of the ETS has been to locate the point of obligation at the importer or producer level, largely for reasons of administrative practicality, then allowing the carbon price signal to flow through the supply chain to end-use consumers.  But the Government is now taking a more flexible or pragmatic approach to this principle.  The latest package of changes includes a new “opt-in” mechanism for large purchasers of fuel to take responsibility themselves for the emissions from the fuel they purchase, rather than having that cost built into the price they pay the fuel supplier.  This option has always been available on jet fuel but is now being extended to all liquid fuels.In addition, the Government has signalled that – when agriculture is brought into the ETS – the point of obligation will be the farm rather than, as initially proposed, the processor.

Next steps

An amendment Bill will be released to implement the changes.  There will be the opportunity to make submissions in the normal select committee process.  The amendment Bill will need to be passed by the end of this year, otherwise the transitional measures (the "one for two" surrender obligation and fixed price option) will cease.  Full information on the changes is available here.

Our thanks to Teresa Weeks for writing this Brief Counsel. For further information, please contact the lawyers featured.

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Related topics: Climate change; Emissions trading

 

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