Reforming industrial allocation in the NZ ETS

I suggest the following changes:

1. Plan for a future in which there are no allocations. The future of industrial allocation should be grounded in approaches that achieve fastest emissions reduction. Implementations of this include: Allocations or grants given only to companies with roadmaps to zero allocations usage. This enables government and industry to give certainty over future allocations and to scale down to zero, by 2030.

2. Capping emissions grants to ensure companies take on their responsibilities of environmental impact. Industry Allocations should avoid granting over 25% of carbon emissions to any company.

3. Add criteria to strengthen fairness and climate justice. The transition away from fossil fuels must be a just transition, and this needs to be built into all aspects of the system.

Yes. Over-allocation is one of the worst features of the ETS as it stands. It has created perverse incentives for companies to gain windfall profits from continuing to burn fossil fuels, and there is no evidence that those companies that have received over-allocations have used them to fund the transition away from fossil fuels. Over-allocation is an especially bad use of taxpayer funds and it must stop now.

Over-allocation has been enabled by a highly permissive approach to baselines updates. This must end now. Therefore, allocative baselines need to be reviewed annually, with the aim to end over-allocation and in the context of a phaseout of all industrial allocations by 2030.

Annual reassessment will require greater support from both government and industry. Given the critical importance of responding to the climate emergency, and the increasing pressure that will come on both Aotearoa as a nation and our most carbon-intensive industries, this will be money well spent.

Every year. The period to 2030 is especially critical in reducing emissions, and ending the use of coal, gas and other fossil fuels in industries is one of the areas it’s possible to move fastest. Instead, the ETS in its present form is subsidising industries not to transition from fossil fuels. Annual reviews should occur in the context of a plan to reduce industrial allocations to zero by 2030. This will provide certainty to industries that they must act to transition - now. This can be supported by grant money where industries are able to demonstrate a clear need for such assistance.

No. Only the most recent years should be used, given that earlier years do not reflect the rapid introduction of low emissions technologies.

Financial years 2019/20 and 2020/21 should be used as the baseline years, with COVID-appropriate weightings included, so that allocative baselines are based on the most recent data available.

Yes. Far too many industries, including many non-essential industries, are currently covered by industry allocations. Eligibility should be reassessed using new base years, and the goal of the reassessment should be to ensure that as many industries and businesses as possible are removed from eligibility as soon as possible.

Yes. Both New Zealand specific thresholds and New Zealand specific baselines should be developed, so that our decisions are made on the basis of information that applies to the New Zealand context.

New thresholds should be added if and only if they are needed to reduce over-allocation. Under-allocation should not be a criterion for the development of thresholds - their purpose should be to reduce over-allocation.

A sliding scale threshold system should be developed if and only if it is needed to reduce over-allocation. Under-allocation should not be a criterion for the development of such a system - its purpose should be to reduce over-allocation.

I strongly support using the New Zealand electricity allocation factor. As Australia has a considerably higher electricity emissions profile than Aotearoa, the effect of using the Australian EAF has been to allow businesses which should not have been subsidised to receive subsidies to pollute. This is utterly unacceptable. It must end now.

Yes. The aim of reassessing eligibility should be to rapidly minimise the number of companies and industries receiving subsidies to pollute under the scheme.

The present trade exposure test is weak. It must be made far more rigorous. To pass it, businesses must be able to prove that they will suffer strong adverse effects from NZ’s ETS. Given the rise of carbon reduction policies and carbon border adjustment mechanisms around the world, “emissions leakage” will become much less plausible as an argument that businesses can legitimately use. Again, the aim of this test should be to disqualify businesses unless they meet very rigorous criteria for inclusion.

It should be up to businesses to prove not only that they are trade exposed, but that they meet rigorous criteria for inclusion in the scheme. The aim of all such tests and thresholds under the ETS should be to minimise the number of companies and industries receiving industrial allocations.

Yes. The process should be simplified to ensure that it is straightforward and agile. This will enable us to rapidly increase our ambition and meet our commitments under the Paris Agreement. The ETS must provide means of increasing our ability to reduce emissions, not put barriers in the way of emissions reductions.

If any further changes are made, they should contribute to the goal of making the ETS a tool for rapidly reducing emissions and decreasing industrial allocations so that they reach zero by 2030.

No new activity should be eligible for support from the ETS for burning fossil fuels. For example, no new heat plant (including high-temperature heat) should receive any industrial allocations for any fossil fuels that it burns.

The ETS must not be used to encourage or subsidise the establishment of new high-emitting businesses. If a business applies for inclusion on the basis that it is directly replacing a higher-emitting business or process, these claims should be subject to rigorous scrutiny, and should not be approved except in exceptional circumstances, bearing in mind the aim to phase out all industrial allocations by 2030.

See q 17

See q 17

Yes. This will help reduce over-allocation and other potential abuses of the system.

No. Reporting must be mandatory. Companies under the scheme are receiving taxpayer subsidies to pollute, amounting in some cases to many million dollars, and must present detailed, verifiable reporting. They must also prepare, and report annually against, emissions reductions plans. Voluntary reporting increases both the opportunity and the temptation to game the system.

The Government needs to fund internal audit and compliance capacity to ensure that company reports are subject to rigorous scrutiny.

Yes, it must be changed. The transition period should be one year. A five- or ten-year transition period is utterly unacceptable and would continue to provide opportunities for companies to further delay urgently needed transitions.

Yes. There has been leakage both inside and outside the industrial allocation system (examples include NZAS, Marsden Point refinery, and consumption emissions). Other mechanisms should be considered but they must contribute to the overarching goal of reducing emissions.

Providing decarbonisation grants to industry in return for sectoral decarbonisation plans should be seriously considered. The Swedish industry-led process is a possible model (https://fossilfrittsverige.se/en/roadmaps/)

Where industries are both high-emission and deemed to be essential, they will need protection and support, e.g. through targeted border tariffs and grants, but such support must be coupled with decarbonisation plans that have a set end date and verifiable, measurable progress targets that can be reported against. In addition, consumers (e.g. the construction industry) need to be exposed to the carbon cost of products such as cement and steel to some degree.

At present, the embodied emissions of imports are not regulated in any way and represent a large source of leakage as we are net CO2-importers. For example, an EV-heavy route for land transport could mean higher consumption emissions than an active/public transport route.
In addition to building credible roadmaps, industries could be required (e.g. in order to apply for grants) to demonstrate participation in the global decarbonisation plan of their industry.

Yes, there should be explicit encouragement to reduce emissions. By requiring firms to have a verifiable decarbonisation plan with a set end date and measurable progress, and reviewing their targets annually, this could be achieved. MBIE found that even a carbon price of $250/tonne by 2050 would not achieve the goals of the Zero Carbon Act. The ETS by itself is insufficient, and complementary policies are needed. We stand at a position where there are choices to be made between different pathways and technologies that cannot be put off much longer if we are to meet our Paris Agreement obligations. Government, industry and the public need to work together to choose.

A higher shadow price of carbon (see recent UK decision) for the government; high emitting industries to report their shadow carbon prices.

Yes. All such work should be done within the framework of a commitment to honour Te Tiriti o Waitangi, protect and enhance the biophysical basis of life, and embody a just transition approach.

Our society, our economy and our planet are at a crossroads. The ETS and industry policy as a whole should be designed to require and support high-emitting industries to decarbonise in a planned, verifiable way, foster low-carbon industries, and enable a just transition to a low-carbon economy.

They would support it and embrace a wider concept of leakage, i.e. the global transition (not just the emissions of existing industries), and consumption emissions.

New Zealand needs to immediately phase out, and find ways to decarbonise all of our emitting industry, starting with the highest emitters. It is not something we should subsidise as it cannot be a part of our future.

By continuing to subsidise our biggest emitters, we’re exposing these companies to the risk of being subject to a carbon border adjustment mechanism in other countries, and not having a sustainable long-term plan to transition off fossil fuels.

Instead of increasing risk to industry, and giving out free emissions credits, we must incentivise industry to transition to carbon neutral, by developing solid roadmaps to reduce their emissions and commit to carbon zero by 2030. This plan should support the just transition.

With regard to industry-specific funding, our government has the opportunity to set a precedent for how the future will look and enable industry to support this. Don’t fund high-emitting industries to keep emitting - make them commit to decarbonisation, and if necessary, help fund the transition by direct grants in response to verifiable, ambitious industry decarbonisation plans.

The transition to low-emissions industry is not only vital for our climate future - it’s better for our wellbeing, our environment and the future of Aotearoa. Major systems change all across Aotearoa is needed to bring our emissions curve in line with the requirements of our Paris Agreement commitments. The ETS as it stands has not only failed to reduce emissions - it has subsidised polluters to continue polluting, and in some cases has handed them windfall profits for doing so.

Therefore, if the ETS is to have a future, it must be redesigned in line with these overarching commitments, and able to respond rapidly to developing circumstances.