The Government is consulting on four options to amend the carbon market to better incentivise cutting climate pollution instead of offsetting it by planting trees, Marc Daalder reports
Major changes to the country's most important climate-fighting policy could be in the pipeline.
The Government released a consultation document on reforming the Emissions Trading Scheme (ETS) on Monday morning, with proposed alterations ranging from minor (and ineffective) to structural (with big impact). The document follows a review of the carbon market, after the Climate Change Commission recommended it be amended to incentivise reducing climate emissions rather than planting trees.
The review found the current structure of the ETS will see ever greater swathes of New Zealand planted in exotic pine. That land would then be locked up permanently, unable to be converted to other uses. Actual climate emissions, meanwhile, would hardly fall. Instead polluters would just pay a relatively low price to offset their carbon emissions.
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In its first advice on the transition to net zero in 2021, the climate commission said around 600,000 hectares would need to be planted in pine by 2050 to offset the hard-to-abate sectors like aviation. Officials said Monday that at current rates, we'll hit that target in the 2030s.
To address this, the Government has proposed adopting a new approach to the ETS, tweaking it to deliver both gross emissions reductions and the carbon removals needed to hit and exceed net zero. This process started last year, when the Emissions Reduction Plan set sub-sector gross reduction targets alongside an economy-wide emissions budget. The consultation released Monday offers four options to get the ETS to meet those targets.
The first two involve relatively minor changes to the way the market operates, but officials said they were unlikely to help cut climate pollution much more than the status quo.
Option one involves using existing levers to incentivise greater reductions in net emissions. This would see the Government cut down on the number of emissions credits in the ETS and therefore raising the carbon price. While this might trigger some gross reductions in the short term, the vast oversupply of forestry units would still be expected to depress the price in the 2030s and beyond. Companies considering big capital investments on the basis that they will face lower carbon costs in the future might decide not to invest if the price of carbon is still set to crash.
The second option has similar drawbacks, officials said. In this scenario, the Government or overseas buyers would purchase more forestry units, similarly raising the carbon price in the short term.
"However, the increase in demand may be limited in practice (as purchase is unlikely to be attractive.) This option is only expected to be marginally more effective than the status quo," officials wrote.
The third option entertains a more fundamental change to the way the ETS functions, by separating the incentives for gross emissions cuts and carbon removals.
This could be done by limiting the percentage of forestry units that polluters can use to cover their emissions (in California, that figure is just 4 percent, compared to 100 percent in New Zealand). Alternately, foresters might receive one unit for every two tonnes of carbon dioxide they sequester, raising the price of forestry units and evening out the playing field between the costs of cutting pollution versus offsetting.
According to the consultation document, this option is likely to be more effective at reducing gross emissions, but may go too far in removing the incentive for removals, which are still needed to help New Zealand meet its climate goals.
The fourth option is the most radical one. It would see the the Government remove forestry from the ETS entirely and instead incentivise removals through a different system - potentially a biodiversity credit market or direct purchasing to offset public sector emissions. Polluters within the ETS would then face a much higher carbon price, as units would only enter through auctions and the industrial allocation system.
This is described as the most effective option at both reducing emissions and maintaining the incentive for removals. However, it represents a major structural change. Officials warned the changes "could be costly and take several years to implement".
A fifth option, of removing forestry from the ETS but providing no replacement mechanism for incentivising removals, was discounted.
The consultation document also asks for feedback on adding other forms of carbon removal to the ETS, like wetland rejuvenation or direct air carbon capture. This sequestration is more expensive than tree-planting, but could be incentivised through taking the co-benefits into account and prioritising these removals. Any expansion of removals in the ETS would further water down the incentive to cut emissions, officials noted.
One chapter of the document noted the importance of the issue to Māori, who own around 30 percent of the plantation forestry estate. A group of Māori foresters filed urgent legal action against the Government earlier in June to stop the release of the consultation document, but the claim was tossed out by the High Court.
A separate consultation document released on Monday morning deals specifically with the incentives for permanent pine forests in the ETS. A new category for forests which won't be harvested for at least 50 years was added to the ETS in January, but is expected to see even more pine trees planted than natives.
Efforts to amend this category were stalled last year after significant opposition from Māori foresters. The document suggests a new way forward, by limiting the permanent category to native and transition forests or placing conditions on the exotic forests permitted. One option would be to allow permanent pine on Māori land but not elsewhere.
The document also seeks feedback on changing the rules to require better management of permanent forests and to ensure that transition forests really do move from exotic trees to natives over their lifetime.
The reforms could go some way to addressing the recommendations from the ministerial inquiry into forestry in Tāirawhiti and Wairoa, which was launched after the devastation caused by forestry slash during Cyclone Gabrielle.
