Evolution of the New Zealand Emissions Trading Scheme: Sectoral Coverage and Point of Obligation

When it was launched in 2008, the New Zealand Emissions Trading Scheme (NZ ETS) pioneered the design concept of implementing an emissions trading scheme (ETS) across all sectors of the economy (e.g. stationary energy, transport, industrial processes, forestry, waste and biological emissions from agriculture) and all six major greenhouse gases (GHGs). This reflected New Zealand’s relatively unique emission profile among industrialised countries (with heavy renewable generation, nearly half of emissions from agriculture, and a large land area suitable for forestry) and its interest in finding effective, efficient, and equitable solutions to the challenge of meeting its international emission reduction targets. Further innovations at the time – influenced in part by the government’s previous efforts to implement a carbon tax in the energy and industry sectors – were the selection of predominantly upstream points of obligation in the energy sector, with the potential for some major downstream energy users to opt in voluntarily, and the selection of a default processor-level obligation in the agriculture sector, with the option to shift to a farmer-level obligation. As of 2017, the entry of biological emissions from agriculture has been deferred indefinitely. Otherwise, the proof of concept on both broad sectoral coverage and upstream points of obligation has been demonstrated through practical experience. To help inform future ETS policy making in New Zealand and internationally, this paper provides a conceptual foundation for design decisions on ETS coverage and points of obligation, and explores the history of and rationale for the specific design choices that have been made in this regard in New Zealand.