KEY POINTS:
What is emissions trading?
It is a market in a new commodity - the right to emit the greenhouse gases blamed for global warming ("carbon" for short).
The idea is to limit the supply of those rights and progressively reduce it, by international agreement, to a level
of emissions the planet can handle.
As demand rises and supply falls the price of carbon will climb, creating an ever-stronger financial incentive to figure out ways of reducing emissions.
How will it affect the average New Zealander?
Mainly through higher petrol and electricity prices.
An oil company will have to buy emission rights to cover the CO2 emitted when petrol, diesel and avgas are burned. It will pass that cost on to the consumer.
It will surrender those emissions rights to the Government, which will need them when the time comes to square accounts with the other countries in the Kyoto system in 2014.
Transport fuels were to have been the first sector hit by the scheme, at the start of next year. This week the Government said it was willing to push that back by two years to 2011.
Drivers were already getting a loud and clear signal from the effect of the rise in world oil prices to go easy on petrol, it said.
From 2010 power companies which burn coal or natural gas will also need to buy in the carbon market to cover their emissions. They will pass the cost on too.
Who else will pay?
Eventually the scheme will be economy-wide. "All sectors, all gases" is the slogan, though no other country which has or is planning an emissions trading scheme is so ambitious.
The problem is that most of our emissions come from exporters or import-competing industries such as cement manufacturing. Nearly half NZ's emissions are from the bodily functions of cattle and sheep.
Farmers and the smokestack industries say their international competitors are not going to face a carbon price any time soon and they can't afford the loss of competitiveness if they have to pay what, from a strictly domestic point of view, is their fair share.
So agricultural emissions will not be brought into the scheme until 2013 and for the first five years will have only to account for the increase in their emissions above 90 per cent of what they were in 2005.
But between 2018 and 2030 that "grandfathering" shelter will be reduced to zero. That process was to have started five years earlier but the Government last week yielded to business pressure on the issue.
But they are still being asked to be carbon neutral by 2030 - a big ask.
Where will these emissions rights come from? Who are the sellers in this market?
One domestic source will be "Kyoto" foresters, people who own forests established since 1990 on land not previously forested.
The Kyoto Protocol's rules allow credits for the CO2 those trees suck out of the atmosphere and lock up while they are growing.
The Government was going to keep the credits but it relented last year and will now devolve them to the forest owners, if they want them.
The catch is that if you take the credits you are also liable for the emission of that carbon, which is deemed to occur when the trees are felled. It only buys time.
One uncertainty about the market is how many Kyoto forest owners will decide it is not worth the hassle, or will take their credits and put them in the bottom drawer.
It is expected emitters will need to import emission rights from the international market.
Kyoto's rules allow for the creation of United Nations-certified emissions reductions (CERs) from climate-friendly projects in the Third World.
It is the price of imported CERs that is expected to set the carbon price within New Zealand.
And what will the price be?
Who knows. There is a lot of uncertainty about both the demand and the supply sides of the international carbon market for now.
At present people are talking about $30 a tonne. That would add 8c a litre to petrol and raise residential electricity bills about 10 per cent.
The estimates keep going up. And for the system to work it needs to be high enough to change behaviour by individuals (how you commute, how you heat your home) and by companies (what sort of power station you build next).
Wasn't there supposed to be a carbon tax? Is this it?
That was Plan A in 2002. Business opposed it and it was dropped in 2005.
Emissions trading will feel like a tax for most households and businesses. But the level of the impost will be set by an international market, not by Parliament.
