Greenhouse Gas Emissions Trading: Overview
[ Last Updated 11 January 2006 ]
February 2001
Flexibility in managing greenhouse gas emissions is central to the 1997 Kyoto Protocol. This sheet discusses the design of a possible domestic regime involving tradable emission units and focuses in particular on "points of obligation". This regime would apply to the period 2008-2012 and possibly beyond.
Contents
The Kyoto Protocol
In December 1997, in Kyoto, Japan, New Zealand and other countries signed an international agreement to reduce emissions of greenhouse gases. This has become known as the Kyoto Protocol (full text [link to UNFCCC website]).
Under the Protocol, each country has agreed to restrict their national emissions to a quantified target and will receive a corresponding amount of emission units. The Protocol gives signatory governments flexibility on how to ensure that emissions do not exceed the country's total available emission units. Governments can, for example, require businesses and other organisations to manage their emissions within certain constraints. The Protocol also allows the trading of emission units.
These mechanisms are expected to encourage innovation in the management of greenhouse gas emissions and, as a consequence, lower the overall economic and social impacts of reducing emissions.
Implications for New Zealand
For the "first commitment period" of 2008-2012 New Zealand agreed to a target based on 1990 emission levels.
According to forecasts, and assuming no additional measures were taken to reduce emissions (i.e. "business as usual"), New Zealand's emissions would exceed its initial assigned amount in the commitment period by 9% - 14%, or 34 - 50 Mt CO2.
The Protocol does not require New Zealand to reduce its emissions by this amount, but New Zealand does need to account for any excess by purchasing further emission units (see Figure).
Reducing emissions and purchasing further units both involve a cost, but by being able to choose, New Zealand can lower the cost of complying with the Kyoto Protocol.
Managing New Zealand's Emissions
One option for managing emissions is to require, by law, businesses and other organisations to monitor and report emissions and to acquire emission units equal to their emissions. Although individual households are unlikely to have such requirements placed on them, they would bear much of the cost through higher prices for energy and related products.
The Government could allocate the emission units it receives under the Protocol by selling them, giving them away, or a combination of both. It will also hold some in reserve. Once allocated, units would be freely tradable within New Zealand and internationally.
Tradability gives emission units a value and creates incentives for businesses and households to implement all economically worthwhile initiatives for reducing emissions. Those faced with high costs could purchase units and possibly reduce disruption to their activities and employees, and New Zealand would still meet its international obligations. Those with excess units could sell them rather than use them to increase emissions.
Other measures are also likely to be required to meet New Zealand's Kyoto obligations. Other options include regulations, carbon charges, negotiated industry agreements, research, education and awareness-raising, and incentives, or combinations of these. Some of these may be used to complement tradable emission obligations.
Note that if a sector were not included in an emissions trading regime, it would be subject to other measures aimed at providing comparable incentives to reduce emissions. All options require effective monitoring and compliance programmes.
Emissions Trading Design Issues
A 1998 discussion paper from the Ministry for the Environment1 identified four key design issues for emissions trading:
- Defining the unit of trade;
- Administration and market issues;
- The points of obligation; and
- Initial allocation of emission units.
The unit of trade will be a legal instrument that holders can retain, trade, or retire against their emissions. Technical details on administration and market trading are still under development. Allocation refers to the initial distribution of emission units, and will be addressed after points of obligation have been determined. Consultation on these issues will take place later in 2001. The initial focus is on points of obligation, which are discussed below.
"Point of Obligation"
The term "point of obligation" refers to a particular activity for which there is a responsibility to monitor and report emissions, and to obtain and retire emission units to match actual emissions.
Units would be obtained from an initial allocation by government or by purchase in the marketplace, or by enhancement of certain forest "sinks". Retiring units means using them to account to government for emissions, after which the units no longer have market value.
A point of obligation can be placed:
- Directly on an emitter;
- Upstream of the emissions point, e.g. on suppliers of inputs; or
- Downstream on users of outputs, or on other associated activities.
A point of obligation does not necessarily determine who bears the cost of the emission requirements. For example, if an obligation were placed upstream, one would usually expect the cost of emission units to be passed on to emitters and consumers through higher prices.
Criteria for Points of Obligation
The point of obligation could vary between sectors, depending on the nature of the activity and the practical feasibility of imposing obligations on specific points. There is a trade off between the need to achieve as wide a coverage of gases as practically possible and the need to keep the costs of complying with, administering, monitoring and enforcing the emissions regime as low as possible.
The main criteria for selecting a point of obligation for a given sector are as follows:
- Coverage: Does a proposed point of obligation capture as many of the sectors' emissions as practicable?
- Feasibility: Is it feasible to monitor and verify emissions at each point?
- Incentives: How strong an incentive does it create to adopt cost effective initiatives to reduce emissions while not unduly deterring worthwhile economic activity and investment?
- Costs: Are costs of administering the system, and costs of compliance for participants, kept to low levels?
These criteria relate to the environmental integrity of the scheme and its likely efficiency. Equity considerations arise with allocation, which will be considered after points of obligation are chosen.
Input Sought from Stakeholders
The above criteria are being used to identify potential points of obligation in each of four sectors: energy and transport, agriculture, industrial processes and waste management.2
Information sheets have been developed for each of these four sectors, describing preliminary views of officials. Officials are seeking technical input from stakeholders in these sectors on which businesses or activities might be designated as points of obligation. A series of informal meetings will be held in early 2001 for this purpose.
For more information, please contact:
Jim Sinner
Convenor, Emissions Trading Working Group
ph 03-548-8778
Email: jim.sinner@med.govt.nz
Back to Top