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The New Zealand Emissions Trading Scheme de-link from Kyoto: impacts on banking and prices

Author

Listed:
  • Suzi Kerr

    (Motu Economic and Public Policy Research)

  • Judd Ormsby

    (Motu Economic and Public Policy Research)

Abstract

The New Zealand Emissions Trading Scheme (NZ ETS) presents an opportunity to compare the theory of linked emissions trading with practice. From 2009 until late 2012 New Zealand was linked to the Kyoto market and there was no indication that this link would be broken. In November 2012 the New Zealand government announced that it would not proceed with the second commitment period of the Kyoto Protocol and future linking became uncertain. This de-link was confirmed by the government in December 2013 and it was announced that it would take effect from 31 May 2015. After this date overseas Kyoto units were no longer acceptable for surrender within the NZ ETS. We find that prices within the NZ ETS behaved as theory would predict. In a climate of certain linking, from 2011 when New Zealand began buying overseas units to surrender, New Zealand Unit (NZU) prices were roughly equal to Kyoto prices. Once the possibility of a future de-link emerged, NZU and Kyoto prices decoupled. NZU prices traded at a price reflecting their anticipated future scarcity – for New Zealand as a buyer of units this implies that NZUs traded at a higher price. In anticipation of the coming de-link NZ ETS participants banked (almost) all of their NZUs for future use and used cheap Kyoto units to meet (almost) all of their current obligations. The long delay between the announcement and implementation of de-linking led to a large bank of NZUs.

Suggested Citation

  • Suzi Kerr & Judd Ormsby, 2016. "The New Zealand Emissions Trading Scheme de-link from Kyoto: impacts on banking and prices," Working Papers 16_13, Motu Economic and Public Policy Research.
    • Handle: RePEc:mtu:wpaper:16_13
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    File URL: https://motu-www.motu.org.nz/wpapers/16_13.pdf
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    References listed on IDEAS

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    Cited by:

    1. Thomas Carver & Patrick Dawson & Suzi Kerr, 2017. "Including Forestry in an Emissions Trading Scheme: Lessons from New Zealand," Working Papers 17_11, Motu Economic and Public Policy Research.
    2. Catherine Leining & Suzi Kerr, 2019. "Managing Scarcity and Ambition in the NZ ETS," Working Papers 19_07, Motu Economic and Public Policy Research.
    3. Liao, Ling & Diaz-Rainey, Ivan & Kuruppuarachchi, Duminda & Gehricke, Sebastian, 2023. "The role of fundamentals and policy in New Zealand's carbon prices," Energy Economics, Elsevier, vol. 124(C).
    4. Diaz-Rainey, Ivan & Sise, Greg, 2018. "Green Energy Finance in Australia and New Zealand," ADBI Working Papers 840, Asian Development Bank Institute.

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    More about this item

    Keywords

    New Zealand Emissions Trading Scheme (NZ ETS); climate change; mitigation; emissions trading; linked tradable permit market; Kyoto units; Certified Emission Reductions (CERs); Emission Reduction Units (ERUs); greenhouse gas; carbon markets;
    All these keywords.

    JEL classification:

    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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