What is the Emissions Trading Scheme?
The New Zealand Emissions Trading Scheme (ETS)(external link) is complicated, and it’s not something we think about often as consumers, but it’s one of New Zealand’s key tools for meeting our 2050 emissions reduction targets.
The scheme uses market forces to encourage businesses and consumers to adopt more climate-friendly practices, by making it increasingly more expensive not to.
How the NZ ETS works
The NZ ETS started in 2008 – and since this time has been key to New Zealand’s response to climate change. The Government sets the number of ‘New Zealand emissions units’ (NZUs) supplied to the NZ ETS and reduces that number over time. (Emissions units are sometimes referred to as ‘carbon credits’).
Businesses who participate in the NZ ETS can buy and sell units from each other, and must surrender one NZU for each tonne of carbon dioxide equivalent (CO2-e) emissions they produce. Over time, as availability of NZUs decreases, big emitters will need to transition to cleaner technologies to keep the pricing of the products and services they provide competitive with cleaner companies.
The NZ ETS targets activities as far up the supply chain as possible – for example the NZ ETS obligations sit with the company importing fossil fuels rather than the drivers of fossil-fuelled vehicles. This means that most businesses in New Zealand do not have obligations to participate in the ETS. But the price of NZUs can be passed down through the supply chain – so drivers (for example) are paying this cost when they purchase petrol at the pump.
What’s included in the NZ ETS?
- Industrial processes – such as manufacturing of iron and steel.
- Liquid fossil fuels – such as petrol and diesel.
- Stationary energy – includes all fossil fuels (gas and coal) used in electricity generation and in the direct production of industrial heat.
- Waste – landfills (for emissions of methane through the biodegradation of organic waste).
- Synthetic gases – such as importing and manufacturing of synthetic greenhouse gases for use in refrigeration or air conditioning systems.
- Forestry – entities that own or have rights to forest land can earn NZUs for some activities that remove greenhouse gas from the atmosphere.
- Agriculture – farmers do not have NZ ETS obligations, but businesses carrying out agricultural activities such as importing synthetic fertilisers, animal slaughter, dairy processing or export of livestock must report their emissions – although they are not required to surrender NZUs.
- Horticulture – growers in this industry do not have NZ ETS obligations, but growers of fresh tomatoes, cucumbers, capsicums and cut roses may be eligible for an ‘industrial allocation(external link)’ of NZUs from the Government that they can sell on the NZ ETS market. They get this benefit because these activities are recognised as being particularly impacted by the costs of the NZ ETS due to high energy requirements, coupled with risk from international competition in countries that don’t have an NZ ETS.
Supply and demand
Demand for emissions units (NZUs) is forecast to increase in the coming years, mainly due to forest harvesting. Meanwhile the supply (from the Government) of new units to the scheme will decrease each year. The shortfall between supply and demand is likely to initially be buffered by the current stockpile of NZUs held by NZ ETS participants, but this will be used up over time, leading to increased cost pressures.
What does the NZ ETS mean for you?
Although consumers and smaller businesses don’t participate in the NZ ETS, the cost of emissions units can be passed on. For example, when you buy petrol at the pump, electricity from your retailer, steel and cement from the hardware store, or anything made using energy or other NZ ETS-exposed products, a portion of the price you pay covers the cost of the NZUs. Over time the cost of NZUs will increase, making high-emissions business practices more expensive. You can avoid paying this NZ ETS cost by making more climate-friendly choices.
Keep in mind that not all your personal emissions are covered by the NZ ETS. For example, the NZ ETS doesn’t fully price emissions from meat and dairy, and imported consumer goods often aren’t covered at all. This means that there is less NZ ETS cost pressure applied to these items. So, if you want to ensure you are doing what you can to fight climate change, it’s important to consider your own carbon footprint as a consumer, and take action to reduce your personal emissions.
Money raised from the NZ ETS helps finance the Climate Emergency Response Fund(external link), which supports a wide range of activities from supporting Kiwi businesses in the transition to clean energy to getting more Kiwis into EVs.
Calculate your carbon footprint
Your carbon footprint is made up of everyday choices like how you get around, what you eat, and how much energy you use. Once you know where your emissions are coming from, you can find opportunities to cut down.
How else is the government working with business to fight climate change?
Climate change is a huge problem that will require more than just the NZ ETS to solve. Cost is not the only factor when it comes to business decision-making and drivers for change. And at the pace that New Zealand needs to transition – to reach our targets of zero emissions by 2050, and net emissions 50% below 2005 gross emissions by 2030 – we need to take action fast, and in multiple ways.
On 16 May 2022, the Government released Aotearoa New Zealand’s first emissions reduction plan. The plan sets out what strategies, policies and actions to keep us on track to meet our climate change goals. The Government has also established the Climate Emergency Response Fund (which is largely funded by revenues from the ETS) to provide a multi-year dedicated funding source for public investment on climate-related initiatives, including the actions included in the Emissions Reduction Plan.
EECA, the agency that backs Gen Less, has a significant role to play in this plan, such as working with businesses to address barriers to change, and helping them reduce emissions by transitioning to clean energy and more efficient energy use.
We all benefit if businesses are reducing their emissions and helping prevent further climate change.