Latest reforms will do little to keep NZ from going over its carbon budget.

One small step towards rendering the Emissions Trading Scheme fit for purpose has been taken with legislation to remove its buy one, get one free provision.

That is a measure - introduced in the wake of the global financial crisis - which allows those with obligations under the scheme (apart from forest owners) to surrender a unit for every other tonne of emissions they are liable for.

The Government cannot be accused of going at this like a flatulent bull at a gate: buy one, get one free will be phased out over three years, starting next year.

And a majority of New Zealand's emissions will continue to escape a carbon price, even in 2019.


Emissions of methane and nitrous oxide from pastoral farming - making up nearly half of national emissions - will continue to be exempt. And the level of protection accorded to the emissions-intensive, trade-exposed (EITE) sector will continue. Those firms will be allocated more free New Zealand units (NZUs) to compensate for the phasing out of buy one, get one free.

They will, however, have to pay more for the fraction of their emissions they are liable for: 10 per cent for enterprises whose annual emissions exceed 1600 tonnes per $1 million of revenue or 40 per cent for those whose emissions intensity is between 800 tonnes and 1600 tonnes per $1 million of revenue. Between them, pastoral farmers and the EITE sector account for around 57 per cent of emissions. Those who will mainly feel the effects of the eventual removal of buy one, get one free, will be domestic energy consumers, on the assumption that oil companies and power companies will have no problem passing on the increase in their costs to their customers.

The regulatory impact statement that the Ministry for the Environment prepared for this legislation estimates that at an NZU price of $11, the cost to the median household will rise to $33 a year by 2019. NZUs are currently trading at close to $15. The cost to the average dairy farmer is expected to be $1500 to $5000 a year, depending on the carbon price, or between 1c and 4c a kilogram of milk solids.

The corresponding benefit to the Crown's accounts from eliminating buy one, get one free would be around $130 million a year by 2019. Even at a carbon price of $25 a tonne by 2020, modelling by the New Zealand Institute of Economic Research indicated removal of buy one, get one free would mean the level of gross domestic product in 2020 will be just 0.1 per cent lower than it would otherwise be and would reduce net emissions by 0.7 per cent. Radical change this is not. It nibbles at the problem of reducing emissions and putting the economy on a path to a low-carbon future. It is more about reducing fiscal risks in the 2020s, the period covered by the Paris Accord agreed last December. New Zealand's commitment under the accord would give us a carbon budget of 611 million tonnes of CO2 equivalent over the decade.

But our actual emissions are forecast to be 38 per cent higher than that, at 846 million tonnes. The most recent annual tally indicates no slowing in emissions growth, at around 1 per cent a year.

The overshoot of 235 million tonnes, unless reduced by lower emissions, will have to be offset in one of two ways. One is planting a lot more trees, which earn credits while they are growing (though not so much in their early years, when they have less foliage exposed to the atmosphere).

That would require a reversal of the net deforestation trend in recent years, which in turn will require, among other things, a carbon price high enough to incentivise planting.

The only other way of covering the overshoot is to buy carbon (units representing emission reductions elsewhere) on the international market. Since the middle of last year, New Zealand emitters can no longer do that.

But during the years when they had unrestricted access to international units excluded from the European market on grounds of environmental worthlessness, they were able to meet their ETS obligations at ultra-low prices, eventually a few cents a tonne.

That crowded out of the market New Zealand units issued gratis by the Government to forest owners and the EITE sector. The need to soak up the resulting stockpile of around 150 million NZUs overhanging the now-insular carbon market is a key part of the case for eliminating buy one, get one free.

The Government's objectives include reducing the emissions allowed under the ETS during the 2020s to within the national carbon budget of 611 million tonnes. In other words, the free emissions allowed either by the carve-out of agriculture (414 million tonnes) or covered by continued free allocations of NZUs (65 million) or by the overhang of banked NZUs (still 87 million by 2020) will still amount to 93 per cent of the carbon budget for the 2020s, even with the elimination of buy one, get one free. But it still leaves the problem of reducing, offsetting or deciding who pays for, the extra 235 million tonnes by which emissions are projected to overshoot the carbon budget.

So the second part of the ETS review, to be concluded later his year, remains crucial. The options are constrained by the Government's determination to treat pastoral farming differently from other trade-exposed sectors and continue to exempt agricultural gases from any carbon price.

It justifies this by saying there are no viable and practical means of reducing those emissions in response to a price signal to do so. That rationale ignores the fact that one purpose of a price signal would be to influence decisions about land use.

Instead, the Government points to its "world-leading" investment in research and development on mitigation options for pastoral farming. The Budget included an additional $20 million over four years for the Global Research Alliance charged with that work, which will bring the Government's investment in this area since 2010 to $65 million.

Given that the agricultural gases are half of New Zealand's emissions, and 14 per cent of global emissions, it is a paltry sum.