“This would amount to New Zealand having to purchase international offsets amounting to around 75–102 MtCO2e over time given the NDC’s emissions budget is 571 MtCO2e, which would set an alarming precedent for significant offset purchasing to meet an NDC.”

“New Zealand is set to meet by far the highest proportion of its target (two thirds of the action required) through buying international offsets compared with any other OECD country.”

As well as delivering on its international commitments, New Zealand aspires to be a leader in climate change action. Why should other similar-sized countries bother if New Zealand doesn’t deliver?

New Zealand’s gross emissions contribute about 0.17% of the world’s gross emissions. That’s three times more than our fair share when you look at our proportion of the global population.

Recent announcements of some great government initiatives, including the New Zealand Steel electrification project and the Climate Fund to help the country reach 100% renewable electricity are welcome.

One of the Government’s main tools for delivering its emission reduction commitments is the New Zealand Emissions Trading Scheme (ETS), but the current operation of the ETS makes it cheaper for companies to buy New Zealand Units - in other words to pay to continue to emit - rather than making changes to directly reduce their gross emissions.

Consultations to support emissions reductions

Two important consultations on the New Zealand ETS are closing tomorrow, Friday 11 August.

It’s an opportunity to tell the government how important it is to reduce emissions and to encourage changes to the ETS that better support New Zealand’s international commitments and reputation as well as to encourage the government to place a higher priority on biodiversity, social and cultural values through the way the ETS operates.

High-level view

This is my high-level view on the consultation options and questions. I am not an expert on the ETS, and I strongly recommend that you read the excellent articles by Dr Christina Hood from Compass Climate, who is an expert on the scheme.

Review of the ETS

TE AROTAKE MAHERE HOKOHOKO TUKUNGA – REVIEW OF THE NEW ZEALAND EMISSIONS TRADING SCHEME is being undertaken by the Ministry for the Environment, Ministry of Business, Innovation and Employment and Ministry for Primary Industries (82 page consultation document).

The current statutory process does not have to consider how the ETS settings impact gross emissions reductions or the supply of forestry removals which earn units. This clearly needs to change but there are consequences.

Emissions reduction is critically important and urgent but there are too many forestry removals available to the emitters with regulatory obligations.

Putting up the price of New Zealand Units will increase costs and could force some companies to close.

Removing access to removal units for emitters with regulatory obligations also removes the main market for the forest owners who participate in the ETS.

Key changes

The key things I would like to see achieved by the changes to the Emissions Trading Scheme are:

1) gross emissions reductions by all business sectors with an emphasis on the regulated emitters and;

2) an expansion and improvement of the permanent forest category so that the units issued can be used for voluntary action.

It is concerning that many emitters are delaying investment in reducing gross emissions until the technology is more affordable. More affordable than what?

Basing decisions only on the cheaper option of buying removal units doesn’t take into account the cost to society and the environment of delaying emissions reductions.

It doesn’t take into account the disproportionate impacts and costs to more vulnerable communities. Nor does it take into account the expectations of overseas markets and customers and related impacts on New Zealand’s reputation.

With increasing climate change impacts there are also likely to be supply issues and competition for resources and capability. Where some high emitting activities need to be phased out, there needs to be planned and supported transition.

The second option in the consultation document considers whether the Government should buy the removals to contribute to the Nationally Determined Contribution (NDC) and so reduce the amount of overseas mitigation that needs to be purchased.

This would work only if it incentivised expansion of permanent forest as the existing forests in the Emissions Trading Scheme already count towards the goal. Another option is for the forest removals to be made available to the Carbon Neutral Government Programme and the voluntary carbon market.

Need to meet international standards

Removing regulated emitters’ access to forest removal units and converting them into a source of domestic units that can be used by the voluntary carbon market creates other challenges.

It’s unlikely that the use of the units could be restricted to domestic use, as they would inevitably be used by exporters. Therefore, units made available for voluntary action must meet international expectations on credibility and integrity. Meeting international requirements could then enable these units to be sold into the overseas voluntary carbon market which in turn would provide a larger market.

These expectations need to be factored into the design of the permanent forest category of the ETS.

Gaining international recognition for such units is possible and has already been achieved by the Australian and Canadian governments for their domestic carbon units.

Solving the problem of whether or not overseas buyers would use units that do not have a corresponding adjustment is something all countries are facing and will get sorted out through the Paris Agreement Article 6.4 developments or by the voluntary market itself.

This should not be seen as an insurmountable barrier. It is a marketing and transparency issue that simply affects what claim can be made. Investing in the further development of emissions reductions and permanent removals as a way of taking voluntary climate action is to be encouraged.

Pragmatic solutions

There will be concerns that the changes needed to enable the removal units to be traded in the voluntary market are too onerous with too much red tape. Other governments have overcome these concerns and the New Zealand government can adopt pragmatic solutions that still meet international expectations. The key is to ensure that the scheme meets those requirements so that once individual forest owners have been registered, they automatically also meet the requirements subject to ongoing assessment.

The Permanent Forest Sinks Initiative was a domestic scheme used by the voluntary carbon market. The initiative was acknowledged internationally for its conservation values, but it did not meet international carbon market requirements. We already know what those barriers are and what measures need to be put in place to overcome them. These include, but are not limited to, registration processes, assessment rules and the availability of monitoring and assessment documents on the New Zealand Emissions Unit Register.

Changes should enable other sources of removals

Should such changes be implemented for the permanent forest category of the ETS, the infrastructure would then be in place to enable other sources of removals to be included. Examples are soil carbon and restoration of wetlands and coastal saltmarshes. 

A large proportion of New Zealand’s peat wetlands have been lost through conversion of the land to agriculture, especially livestock farming. The potential income from carbon units for restoring these habitats would need to provide sufficient financial compensation where it involves conversion of productive land.

Govt could buy land for restoration

Another option is for the Government or councils to buy the land as it comes up for sale, a strategy that was used by the German government in the restoration of the riparian areas of the river Rhine after the Sandoz accident in 1986. The sale of carbon units could then be used to pay off any loan required for the initial purchase.

As with permanent forest, the risks of reversal of the removals must be considered and the units should only be made available to the voluntary carbon market. Once reliable measurement methods have been developed, and if they meet the standards for national inventory reporting, these removals are likely to be included in New Zealand’s Nationally Determined Contribution.

Currently, the government earns revenue through the ETS, and by law this must go towards the Climate Emergency Response Fund. Fluctuations in the current market price of units already affect this income and some of the proposed changes could further reduce this income.

Once units are made available to the voluntary carbon market, there will be some buyers who immediately retire the units as a part of the process of offsetting their emissions. Other buyers in the secondary market will treat the purchase of units as an investment and wait to realise a return on their investment.

Some initiatives, concerned about “loss and damage” to vulnerable communities, are calling for a small tax on the sale of carbon units and for that income to support adaptation and a just transition of the communities affected by the phasing out of the very high emitting sectors. Such a tax could replace the anticipated loss of Government income and be earmarked for schemes in vulnerable communities, for example providing insulation and heat pumps.

ETS permanent forestry redesign

A REDESIGNED NZ ETS PERMANENT FOREST CATEGORY consultation is being undertaken by the Ministry for Primary Industries. The discussion document is 38 pages.

A bit like the Review of the New Zealand Emissions Trading Scheme, there are four design choices and 24 questions. Some of the consultation questions related to the Ministerial Inquiry into Land use change in Tāirawhiti and Wairoa which is another 45 pages to read. The consultation asks whether the inquiry’s 49 recommendations should be reflected in the redesign of the permanent forest category.

The key to this is not only helping the affected communities to recover but also planning and implementing for resilience. Future cyclones could be more intense and could take a different track and impact other communities.

The recommendations on having the right trees in the right places and in particular, ensuring permanent canopy cover in areas with extreme erosion susceptibility, would seem to fit well with the permanent forest category in the Emissions Trading Scheme. The rapid assessment undertaken by Manaaki Whenua – Landcare Research, found far fewer land slips on erosion-prone land where it was covered with indigenous forest.

Indigenous forest credits should be integrated into permanent forest category

One of the recommendations asks Ministers to enable the establishment of a world-leading biodiversity credit scheme to incentivise permanent indigenous forests.

In my view it would be better to integrate this suggestion into the permanent forest category rules so that enhanced biodiversity values are assessed as part of participating in the ETS.

It will take time to develop a brand-new crediting scheme and the associated infrastructure such as a registry. It would be duplicating what is needed for the Permanent Forest category to be made available to the voluntary carbon market. It would be a shame if it ended up being a choice between two schemes. Permanent forest units with verified biodiversity and cultural values is likely to attract a higher price in the voluntary carbon market. In turn, this will incentivise permanent forest managers to seek to develop these additional values for their forests.

The consultation document on the redesign of the permanent forest category of the ETS has some really good questions on management of permanent forests and the choice of exotic species in transition forests. In particular, how to assess progress of transition forests and what goals or milestones need to be met and what should happen if transition is not achieved within 50 years.

Barriers in international markets

Other questions explore issues that could address some of the barriers that were faced in international markets by some organisations using Permanent Forest Sinks Initiative units to offset emissions. These are the questions around having approved forest plans, validation of the plans and verification of progress against the plans, and what a compliance regime should look like. I’ve used the correct terms here, not the ones in the actual questions.

This is an opportunity to align the Permanent Forest category with international voluntary carbon market requirements.

An interesting potential anomaly is that the Ministry of Primary Industries consultation document seems to assume that any development of a voluntary carbon market would be outside the ETS and by inference not based on the Permanent Forest category inside the ETS. Establishing an entirely new voluntary market scheme outside the ETS would be costly and time consuming.

There is already well-established infrastructure, such as the New Zealand Emission Unit Register, that can be adapted to meet the needs of the voluntary carbon market. Indeed, the

ETS and its register should already meet some of these requirements as they were originally designed in collaboration with Australia with the intention of establishing fungibility if Australia had gone ahead with its emissions trading scheme.

Opportunity to incentivise gross emissions reductions

These two consultations are really important and a significant opportunity to incentivise gross emissions reductions and establish a domestic carbon market based on permanent forest with added biodiversity, social and cultural values. It is an opportunity to create domestic carbon units that can be used for voluntary action and generate an income stream to support a just transition for vulnerable communities.

Dr Ann Smith, aka Professor Zero, is former chief executive of climate action certification organisation Toitū, and writes regularly at Letters from the Atmosphere.