Climate change is a hot topic as the mercury rises ever higher around the world. Legislatures are increasingly looking to new mechanisms to combat climate change and the New Zealand Government is now no exception.

In December 2007, the Government introduced the Climate Change (Emissions Trading and Renewal Preference) Bill which will give rise to New Zealand’s first domestic emissions trading scheme.

Purpose

The Bill has two primary purposes.  Firstly, to establish the New Zealand Emissions Trading Scheme (NZ ETS) and secondly, to create a preference for renewable electricity generation by implementing a 10 year moratorium on new fossil-fuelled thermal electricity generation.

Staged Entry

The government has provided for staged entry into the scheme as follows:

Stage 1 - Forestry sector, retrospectively from 1 January 2008.  However, the obligation to comply with the standards does not take effect until 31 December 2009;

Stage 2 - Liquid fossil fuel sectors, from 1 January 2009.  As with forestry, the obligation to comply takes effect from 31 December 2009;

Stage 3 - Stationary energy sector and industrial process (non-energy) emissions, 1 January 2010;

Stage 4 - Agriculture, including farming and horticulture, and waste, 1 January 2013.

Participants

The NZ ETS affects three types of participants. 

1.       Businesses that are labeled as “points of obligation”.  These businesses (yet to be identified) will have specific obligations and must surrender New Zealand Units (NZUs) to cover direct emissions or emissions associated with their products.  These businesses will generally be at the top end of the sector.  For example, fuel companies, rather than motorists. 

2.       Businesses that receive freely allocated emission units for eligible afforestation. 

3.       Businesses that trade NZUs to take advantage of market opportunities that could arise. 

Allocation of Units

The Government is yet to show exactly how it will allocate NZUs.  It will do so depending on how different sectors and participants will be affected and whether they can pass costs on to consumers.  Businesses such as fossil fuel providers and electricity generators, who can pass on cost increases to consumers, will need to purchase credits to meet their obligations.  However, businesses, such as forest and farm owners, that cannot pass on costs will have units allocated to them.

Societal Impact

Expect an increase in transport and energy costs and the cost of products arising from various industrial processes.  Essentially the cost of business will be directly related to the extent to which a business is able to reduce or offset omissions, thereby reducing the cost of NZUs.  Consumers are inevitably going to resist these costs being passed on. 

Eventually everyone will be affected in some way by climate change legislation. It is necessary for the business world to turn its mind to mitigating those cost consequences now.  If you are an emitter, you can plan to reduce emissions, purchase NZUs, or reduce emissions below the sector level and sell spare units to another emitter.

Whichever way you look at it, humankind is going to inevitably pay for emitting carbon and, as some might say about politics: left or right is dead; it’s all about the environment.