The Government will introduce the auctioning of carbon units, limit use of international units and roll in a new price ceiling under just-proposed changes to New Zealand's Emissions Trading Scheme.
But a forestry expert has criticised the moves, calling them the "final nail in the coffin" of the country's main mechanism to meet its 2030 emissions reduction target under the Paris Agreement to curb climate change.
How could you recommend to anyone to participate in New Zealand's emissions trading scheme when the supply of bogus credits is infinitely variable? This is the nail in the coffin of our ETS.
After a lengthy review of the ETS, Climate Change Minister Paula Bennett today announced the proposed reforms, which she said would ensure the system was "fit for purpose" going into the 2020s.
The Government has already scrapped controversial so-called "hot air" credits bought from other countries, and announced a phasing out of the one-for-two measure in the ETS.
"I am now announcing further changes as a result of stage two of the review," Bennett said.
The four main changes would: introduce auctioning of units; limit participants' use of international units when the ETS reopens to international carbon markets; develop a different price ceiling to eventually replace the current $25 fixed-price option; and co-ordinate decisions on the supply settings in the ETS over a rolling five-year period.
Responding to the announcement, Professor Euan Mason of the University of Canterbury's School of Forestry said the changes would allow "thin air" carbon credits with no environmental credibility to be given to polluters and also auctioned.
"The carbon price will be suppressed and the notion of 'greenhouse gas neutrality' will be undermined," he said.
"How could you recommend to anyone to participate in New Zealand's emissions trading scheme when the supply of bogus credits is infinitely variable?
"This is the nail in the coffin of our ETS."
Bennett rejected those criticisms.
"Professor Euan Mason is wrong to say the changes announced today would allow 'thin air' carbon credit with no environmental integrity," she said.
"We will only be letting in units of high environmental integrity that represent real emissions reductions."
She said the proposals would provide businesses with the clarity they needed about the direction of the ETS.
We are committed to ensuring New Zealand businesses whose emissions are a big part of their costs are not disadvantaged.
There would be further work to determine how to implement these proposals, including further consultation and engagement over the next 12-18 months, she said.
"We are also making no changes to free allocation or to the $25 price ceiling at this point," Bennett said.
"We are committed to ensuring New Zealand businesses whose emissions are a big part of their costs are not disadvantaged compared to their international competitors.
"This means there will be no changes to the current level of free allocation at least until the end of 2020, and any changes would be well-signalled and take into account what is happening internationally."
The $25 price ceiling would also remain in place until auctioning or links with international markets were established, she said.
More work was planned in forestry accounting and operational improvements to make the system less complex, and a package of options would be developed next year with input from the Climate Change Forestry Reference Group.
A Productivity Commission inquiry into a low emissions economy and work to progress policy options would also feed into work around the ETS.
Catherine Leining, a fellow at Wellington-based Motu Economic and Public Policy Research, said the changes would make the ETS a more useful tool for helping to meet New Zealand's targets.
"This package signals the mechanisms that the Government will use to manage future supply and prices in the NZ ETS in alignment with New Zealand's targets. It does not tell us what unit prices will be," she said.
"The mechanisms have potential to shift New Zealand onto a low-emission pathway, but only if they are implemented well. The current uncertainty for low-emission investors will continue until further decisions are made."
But she noted the Government had chosen not to implement a price floor, which would have offered a minimum return on low-emission investment and served as a price safeguard against interactions between the ETS and other policies.
"We looked at this in our recent paper and it would be worth reconsidering."
She also noted New Zealand faced a projected target gap of 220 metric tonnes of carbon dioxide equivalent, which would be met through domestic emission reductions, forestry and purchase of international emission reductions.
"The Government has not signalled how the cost of bridging this target gap will be allocated across ETS sectors, non-ETS sectors and New Zealand taxpayers.
"The Government did affirm that current free allocation to industrial producers will remain unchanged through 2020 and biological emissions from agriculture will remain outside the NZ ETS for the foreseeable future.
"In an ETS, prices are set by long-term expectations of supply.
"If the market expects future prices to rise significantly in line with New Zealand's target, there is a possibility participants will choose to bank NZUs for a future where they will have more value, and meet their obligations using the $25 fixed-price option instead."
This posed a fiscal risk to Government, she said.
"The Government's decisions represent a crucial signalling of the direction of travel for the NZ ETS, but the ultimate effectiveness will depend on the details of implementation."
Green Party co-leader James Shaw called the proposed changes "tinkering" that was "unlikely to have any real effect".
"I would have liked to see a progressively rising price cap and the introduction of a minimum price floor, so foresters had the certainty to go out and plant trees."
Shaw also criticised the Government for not folding agricultural emissions into the ETS, something he said would kick "another long-term problem down the road for future generations and governments to fix".
"There is one measure, and one measure only, of whether a government is succeeding or failing on climate change and that's whether climate pollution is falling or rising.
"In New Zealand, climate pollution has increased by almost 20 per cent since the National Government took power."
New Zealand has pledged to slash its greenhouse gas emissions by 30 per cent from 2005 levels and 11 per cent from 1990 levels by 2030.
What is the Emissions Trading Scheme?
• The ETS puts a price on greenhouse gas emissions from all sectors of the New Zealand economy except biological emissions from agriculture.
• This creates a financial incentive for businesses and households to invest in technologies or products that have lower emissions. It also gives foresters financial recognition of the carbon their trees remove from the atmosphere, which encourages the planting of more trees.
• Over the last few months, the carbon price has ranged around $16-$18.