A researcher who was heavily involved in the design of New Zealand's Emissions Trading Scheme says a new cap could make the much-criticised carbon trading tool effective again.

Dr Suzi Kerr, along with colleague Catherine Leining at Motu Economic and Public Policy Research in Wellington, have laid out a fix-it plan in their just-released submission to the Government's current review of the ETS.

The review comes amid a fresh flurry of criticism of the scheme, which is used to meet our emissions reduction target through buying carbon credits from a range of sources.

Last month, a high-level climate change report by the Royal Society of New Zealand noted how its impact had been limited in reducing actual domestic emissions.

Advertisement

The ETS was launched in 2008 to help New Zealand meet its carbon-cutting Kyoto obligations.

Under the scheme, companies were required to match each unit of emissions they reported with an allowance, or credits, they must pay to the Government.

People who planted forests, meanwhile, could report the carbon dioxide they took out of the air and claim credits, which they could sell, thus creating a trading market and an incentive to lower emissions.

But many have argued its effectiveness was compromised following a raft of amendments brought in not long after its introduction -- which included the acceptance of cheaper, low-value credits from overseas.

The Motu submission argued that while the ETS was a world-first in many respects, it was calibrated to operate in a world which no longer exists.

"Fundamentally, the NZ ETS offers a sound foundation for supporting New Zealand's contribution to global mitigation effort," said Dr Kerr, who helped craft the original ETS and is now helping other international jurisdictions in setting up their own trading systems for emissions.

"For most sectors it is simple and administratively it works well."

New Zealand's gross and net emissions have increased since 1990.

Projected emission trends through 2030 suggest the New Zealand government would need either more effective domestic policies or international mitigation credits to achieve the 11 per cent reduction below 1990 levels it had promised at December's climate conference in Paris.

Presently, New Zealand didn't have access to mechanisms for purchasing such credits and, as of June last year, there were 329 mandatory participants and 2207 voluntary participants, mostly in forestry, using the NZ ETS.

Dr Kerr argued a market cannot function when no one could predict supply, and the first thing the NZ ETS needed was greater certainty over the domestic supply of units by fixing a cap on units issued into it other than for removal activities.

"This option was legislated but has never been implemented," Dr Kerr said.

"Greater certainty over the future supply of international credits could be provided by clearly signalling that once market access resumes -- which may not happen for an extended period -- it will be limited and strictly controlled.

"These changes would help focus domestic attention on domestic mitigation."

In addition to fixing a cap in the short term, she said, there was merit in setting a longer-term trajectory for both emissions and emission prices.

"This would signal to investors how quickly we aim to reduce our domestic emissions and how much effort we expect to make."

It would also guide policy makers in setting future caps and rules on the use of international credits and price protection measures.

"Confidence in low-emission investment is really important for New Zealand's cost-effective transition. Providing clarity around policy intentions is a key step."

Ms Leining said a new cap trajectory should reflect New Zealand's international targets, the desired rate of domestic decarbonisation, the relative contribution toward target achievement from capped and uncapped sectors, and the operation of other mitigation policies.

A particularly contentious issue has been the NZ ETS's past acceptance of cheap "hot air" credits in unlimited quantities -- a practice slammed by a Morgan Foundation investigation last month -- but the system was de-coupled from the international market in June 2015.

"At the moment there is no mechanism for New Zealand to fund and take credit for emissions reductions abroad so the NZ ETS price will be determined by the cap we choose and the reductions we can do within New Zealand," Dr Kerr said.

"If future access to international credits becomes feasible again, then we'll need limits on international credits to safeguard environmental integrity and manage domestic prices.

"One option would be for the Government to assume responsibility for purchasing international credits and managing the corresponding supply of units in the NZ ETS."

Another contentious issue was how to manage the substantial bank of New Zealand units held by NZ ETS participants, as well as the Government's target surplus from the 2008-2012 Kyoto commitment period.

But Ms Leining argued that as long as mitigation ambition was increasing and banking incentives were retained, then the domestic price would be set by longer-term expectations of unit supply and the price would rise.

Both Dr Kerr and Ms Leining emphasised the vital importance of policy stability.

"The history of the NZ ETS means that it's been a bit of a political football," Dr Kerr said.

"That sort of volatility makes it very difficult for everyone involved in a trading scheme, so government has to reach cross-party consensus on how to move forward.

"Once we have a cap that is clearly linked to our international targets and other domestic mitigation policies, a longer-term vision for New Zealand's emissions and predictable ways to make adjustments as conditions change and we learn, we could have a system that drives an effective transition to a successful low-emission economy."

Submissions on the Government review's priority issues, set out in a discussion document released last year, closed in February, while submissions on its other matters closed at the end of last month.