Greenhouse Gas Emissions Trading: Cross-Sectoral Issues
[ Last Updated 11 January 2006 ]
Emissions Trading Working Group
March 2001
Contents
Following meetings in February with stakeholders on the implementation of an "emissions trading" regime, this paper explores issues that arose in more than one meeting. Issues specific to individual sectors are discussed in additional papers.
Issues Common to Various Sectors
The February round of dialogue meetings on points of obligation raised some issues that were common across the groups. These included the following:
- Whether the objective of emissions trading is to reduce emissions or simply to ensure compliance with Kyoto Protocol (KP) obligations by allowing emitters to purchase units for their emissions.
- How the criteria will be weighted, and in particular whether the "strength of incentives" criterion is being given sufficient weight.
- Concerns about competitiveness vis-à-vis producers in other countries without emission obligations.
This paper examines each of these questions, in order to provide a basis for further discussion at the next round of dialogue meetings.
This paper should be read in conjunction with the Overview information sheet distributed prior to the February meetings and the notes from those meetings.
Objective of Emissions Trading
As noted in the presentation at the February meetings, the Government's climate change objective for the 2008-2012 commitment period is as follows:
Ensure achievement of New Zealand's Kyoto Protocol emissions obligations in a manner that demonstrates environmental integrity and leadership while keeping as low as practicable the social and economic costs of measures to achieve those obligations.
This must be seen in a global context. The Kyoto Protocol is designed to achieve a total reduction of net emissions of 5.2% compared to 1990 levels, across all signatory nations. It does not matter in which country the emission reductions are achieved. In fact, the "flexibility mechanisms" provided by the protocol, which include emissions trading provisions, are designed to encourage reductions where they are most cost effective, in order to reduce any negative impact on the world economy and associated social implications.
We therefore talk of New Zealand "taking responsibility" for its emissions, i.e. reducing its emissions or paying someone else to reduce their emissions by purchasing emission units for any amount in excess of the Kyoto target.
Domestic emissions trading devolves this responsibility to organisations and businesses within the economy, on the basis that they are best placed to decide how many emission units to buy, and how much to reduce emissions, according to their abatement opportunities and the market price of the units.
In New Zealand, we want to reduce emissions where the reductions are part of the global "least-cost" set, i.e. where the cost is less than or equal to the current or expected international purchase price for emission units. Similarly, we want to avoid forcing emissions reductions by imposing excessive costs, i.e. where the costs are greater than the price of emission units.
Emissions trading is considered a key element in ensuring the durability of the Kyoto Protocol and the ability to negotiate future rounds of emission reductions, because it allows the total cost of managing climate change to be reduced. If costs were to escalate in key countries, and there were no ability for countries to comply by finding lower cost reductions in other countries, the continued participation of the high cost countries would be jeopardised.
Criteria for Selecting Points of Obligation
The criteria for selecting points of obligation for emission trading were described in the Overview information sheet. In summary they are:
- Coverage of emissions
- Feasibility of monitoring and enforcement
- Strength of incentives to reduce emissions
- Costs, including compliance costs for business and administration costs for government
At some of the February dialogue meetings, stakeholders queried how these criteria would be weighted, and in particular whether the "strength of incentives" criterion is being given sufficient weight. Some expressed the view that incentives would be stronger if obligations were placed close to the "end user". Others thought obligations should be on the actual emitters.
The Incentive Criterion
In general, if the coverage, feasibility, and transaction costs are the same for all point of obligation options, obligations should be placed on the person or company that is best placed to take actions to reduce emissions. In some cases this is the emitter, in others it may be the end user of the product or service.
Often, decisions by more than one part of a sector affect emissions, and some parts may be more responsive to price signals than others. For example, with electricity generation, once a household has taken cost-effective energy efficiency measures, an obligation for a small amount of emission units would, arguably, be more of a nuisance than an incentive to reduce emissions further. The same obligations, however, concentrated at generation companies using thermal power, might create a greater incentive for emissions reduction.
A similar issue arises in the waste sector. Households and businesses can reduce waste to an extent, but landfill operators can implement gas collection systems and composting and recycling schemes, plus they can encourage waste reduction by charging for waste disposal.
It is important not to mistake as an appropriate "incentive" the transaction costs that a household or small business with emissions obligations would bear. We do not want to use high transaction costs to create incentives to avoid emitting activities. The appropriate incentive is the cost of emission units, not transaction costs.
Weighting of Criteria
Officials are giving equal weight to all criteria. If coverage, feasibility, and transaction costs do not vary across the different options for points of obligation, one would place obligations on the organisations or activities that are best placed to respond to incentives to reduce emissions. That is, on those that are best able to identify and act upon cost-effective emission reduction strategies. In practice, there can be more than one class of activities or organisations that can take emission-reducing actions, so ideally the price signal is passed to each of these.
As long as the price signal is transmitted from the point of obligation to those with abatement options (i.e. emission reduction possibilities), the strength of incentive would not vary much across the options, and the other criteria become more important. Thus it is important to identify where the abatement options are, and the likely nature of price transmission.
Competitiveness Issues
Stakeholders raised concerns about the effects of possible emissions obligations on competitiveness vis-à-vis producers in other countries without emission obligations. Some argued that their margins were already very thin, and would not be sufficient to absorb the additional costs that emissions obligations might entail. Officials are aware of this issue in general, and comments by stakeholders have been helpful in providing some practical examples.
The current dialogue meetings are aimed at identifying the technical criteria for points of obligation, so that "in principle" decisions can be made by government in June. Once those decisions are made, officials intend to explore in more detail, with stakeholders, how obligations will be implemented in a given sector and what the impacts would be, including issues of competitiveness. These issues will be examined in more detail, and be the subject of further consultation, after June.
Relationship with Any Carbon Charge
Officials noted that among the other measures being considered by Government is a carbon charge. This is for the pre-2008 period. For the period 2008-2012, assuming emissions trading is implemented, a carbon charge would only be considered as a possible incentive measure for sectors or emissions that are not covered by emissions trading.
For more information, please contact:
Jim Sinner
Convenor, Emissions Trading Working Group
ph 03-548 8778
email: jim.sinner@med.govt.nz
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