Lessons Learned from the New Zealand Emissions Trading Scheme

The New Zealand Emissions Trading Scheme (NZ ETS) was launched in 2008 following more than a decade of policy deliberation on how emission pricing could support New Zealand’s contribution to international climate change mitigation efforts. Reflecting the unique emissions and economic profile of New Zealand, New Zealand’s regulatory culture, and lessons learned from earlier environmental markets, including within New Zealand, it pioneered many ETS features. Examples include design for coverage of all economic sectors and major greenhouse gases (GHGs); an upstream point of obligation in the energy sectors with opt-in by major downstream users; output-based free allocation to eligible emissions-intensive, trade-exposed activities where the firms involved were not necessarily points of obligation; zero free allocation to energy-sector participants in recognition of the fact that they could pass on emission prices; and a monitoring, reporting and verification system based on self-assessment with audits and penalties to deter non-compliance. From 2008 to mid-2015, the NZ ETS operated without a cap on domestic emissions but instead was nested within the international Kyoto Protocol cap, enabled by buy-and-sell linkages to the Kyoto market. Legislative amendments to moderate the system’s impact combined with an oversupply of units in the international market contributed to low domestic emission prices in recent years, and policy uncertainty has obscured the system’s long-term price signal. While the NZ ETS may have had a small impact on the forestry sector, officials have found no evidence that it has contributed significantly to domestic mitigation. From 2012 through to mid-2015, participants predominantly met their NZ ETS obligations by purchasing overseas Kyoto units at low cost. The NZ ETS did enable the government to meet New Zealand’s international obligations for the first commitment period of the Kyoto Protocol (2008–2012) with a substantial unit surplus. In 2015, the NZ ETS delinked from the Kyoto market and it currently operates as a domestic-only system. The government is reviewing the system in 2016. The system requires changes to align with New Zealand’s Intended Nationally Determined Contribution (INDC) under the 2015 Paris Agreement and to effectively support New Zealand’s decarbonisation pathway.