NEWS ON POLICY AND POLITICS
10 September, 2008

Watching Brief is a regular publication from Russell McVeagh on developments in public law and policy of interest to New Zealand business.

www.russellmcveagh.com

Watching Brief - Special Climate Change Issue

Emissions Trading Scheme Passed Into Law

Following the last few weeks' polarised debates in Parliament, and a large number of Supplementary Order Papers containing more than 750 additional legislative amendments, the Climate Change (Emissions Trading and Renewable Preference) Bill ("Bill") has passed its third reading and now awaits assent by the Governor-General before passing into legislation (expected in the next few weeks). 

The Bill was divided into two Bills and has become:

• the Climate Change Response (Emissions Trading) Amendment Act 2008 (establishing the new Emissions Trading Scheme and associated obligations and liabilities); and
• the Electricity (Renewable Preference) Amendment Act 2008 (establishing the 10 year restriction on thermal electricity generation).

Most amendments introduced in the Bill's last stages came about from the Finance and Expenditure Select Committee's report (which proposed 1000 amendments - click here for our previous newsletter outlining these amendments). 

In addition, a number of amendments were introduced pursuant to the agreement reached by the Labour Party with the Greens and NZ First, including the controversial restriction on the type of AAUs allowed to be imported into the NZ ETS (for payment of emissions obligations).  AAUs are a type of carbon credit, assigned to each developed country under the Kyoto Protocol.  Russia, and its former smaller states, has a large number of AAUs available that could potentially be sold into the international market, and probably at a much lower price than other carbon credits on the market.  The Greens don't like these Russian AAUs because they have no link with any environmental benefits.  Instead, they have simply been generated in proportion to the amount of emissions made by these Russian states as at 1990, and now that there are a smaller number of states, they have left-over carbon credits to sell.  It is a technical glitch under the Kyoto Protocol, which New Zealand businesses may have been able to take advantage of in order to source cheaper carbon credits (still expected to cost around the NZ$30/tonne mark).  Now that the Greens have won this battle, and in light of the projected 2010 shortfall in the global supply of CERs (another source of international carbon credits), New Zealand businesses could be facing much higher costs in carbon in these upcoming transitional years.  Unfortunately the business sector's calls for caution and flexibility in this area appear to have fallen on deaf ears.  If emitters are unable to source carbon credits to surrender at the end of year reporting period, they (and, importantly, their consumers) will have to pay the significant penalties set out in the legislation.  Hence why the Greens' battle has not been popular with business.

Debates in the House have focused predominantly on the apparent rush in passing the legislation before the impending election, and the fact that many of the numerous amendments were not well understood by the MPs, and there was not enough time to debate many of them.

What happens now?

The NZ Emissions Trading Scheme ("NZ ETS") requires emitters of greenhouse gases (measured in carbon dioxide equivalent figures, or "CO2-e") to monitor their emissions on an annual basis, and then surrender emissions units (ie carbon credits) to the Government at the end of each one year accounting period.  The scheme is based on the tax self-assessment model (including the 1 April-31 March calendar year).

Each business sector will be phased into the NZ ETS as follows:

So, the forestry sector is now required to monitor and record its emissions, dating back to 1 January this year, and report on these in March 2010 (they have an extra year before needing to report back).  And the energy and industrial processes sectors will need to monitor and record emissions from 1 January 2010, reporting back in March 2011.  And so on.

It is intended that emitters will pass through their carbon costs downstream to consumers.

It is currently projected that New Zealand emitters will need to purchase the bulk of the carbon credits required offshore, and this is where things could get expensive.  In 2010, when our energy, industrial processes and fuel companies will be out in the international market sourcing carbon credits to purchase, it is projected that there will be a global shortfall in the low end market, meaning that companies will be forced to pay much higher prices.

National plans confirmed

The National Party has confirmed that it will introduce an amendment Bill next year if there is a change in government after the upcoming election.  The amendment Bill would be fast-tracked and passed into law within nine months of taking office.

The proposed amendment Bill would:

• introduce a forestry offset scheme for pre-1990 forest owners so that they can change land use to more profitable uses such as dairy farming or urbanisation without paying significant penalties.  An offset scheme would enable forest owners to deforest existing forestry land, but then plant the same number of trees, or more, on another block of land more suitable for forestry;

• provide further assistance to the fishing industry by grand-parenting emissions at 90% of 2005 emissions levels (similar to other commercial sectors receiving assistance);

• have a more flexible plan for the phasing out of free allocation of emissions units to business sectors;

• allow small and medium-sized businesses to get involved in the ETS if they choose to do so (by lowering, or removing, the 50,000 tonne threshold currently proposed);

• set an objective in the legislation of a 50% reduction of total 1990 emissions by 2050; and

• remove the 10 year thermal electricity generation restriction.

These plans will come with a hefty price tag, and the National party is yet to announce how it plans to offset the costs (although John Key has said in the past that he would likely use the 'windfall' profits set to be earned by SOEs such as Meridian under the new ETS).

Biofuel Sales Obligations Passed Into Law

After languishing on indefinite hold in the Parliament Order Paper, the Biofuel Bill was finally passed last week.  The Bill was divided into four separate new amendment Acts:

• the Energy (Fuels, Levies, and References) Amendment Act 2008;
• the Customs and Excise Amendment Act 2008;
• the Tariff Amendment Act 2008; and
• the Local Government Act 1974 Amendment Act 2008.

The new legislation introduces the mandatory use of biofuels (via the Biofuel Sales Obligation) and regulates engine fuel including biofuels and blends, effective from 1 October 2008.

The Biofuel Sales Obligation applies to firms that first purchase or obtain petrol or diesel from a New Zealand manufacturer or import it directly from overseas.  The obligation will require a percentage of the energy content of the combined petrol and diesel sold or used by each oil company to comprise biofuels.  The requirement will begin from the passage of the legislation at 0.5 percent, and will increase to 2.5 percent by 2012 (these thresholds were lowered after recommendations made by the Select Committee).

The National Party strongly opposed the passing of this Bill, saying that it was "very poor public policy".  In particular, the National Party was concerned that the advice of New Zealand’s Parliamentary Commissioner for the Environment that the Bill not proceed, had been ignored. The Commissioner's advice to the Select Committee noted that biofuels pose a risk to New Zealand’s clean green image.

New Legislation To Better Enable Carbon Trading

The Settlement Systems, Futures, and Emissions Units Bill ("Bill") was introduced by Commerce Minister, Hon Lianne Dalziel, last week and now awaits its first reading and referral to a Select Committee.

The Bill is intended to:

• signal that trades in securities and other products can be cleared and settled in New Zealand through systems that meet the expectations of international and domestic participants;
• align the regulation of exchanges seeking to operate in both the securities and futures markets and codify that participants approved by the operator of an authorised futures exchange are authorised futures dealers; and
• clarify the regulatory treatment of emissions units to support the development of the market for emissions units.

Forestry Update

MAF has granted nearly $1 million in the first public pool tender round of the Afforestation Grants Scheme (AGS).  The AGS is a new initiative introduced this year to sit alongside the NZ ETs, and will establish new forest on Kyoto-compliant land (ie land that was not in forest as at 31 December 1989).  Under the scheme, grant recipients own the new forests and earn income from the timber, but the Crown retains the carbon credits generated (under the Kyoto Protocol) and takes responsibility for meeting all Kyoto harvesting and deforestation liabilities.

MAF received 13 applications for funding, of which nine applicants will receive $927,000 over the next two years.  These projects will create 447 hectares of new forest in 2008 and 2009 (with 124 hectares planted this year).  Applications are now being sought for the second public pool tender.  These close on 31 October 2008.

The first approved covenant under the Permanent Forest Sink Initiative (PFSI) was registered last month.  The covenant, signed between the Government and Ararewa Station Limited, covers 362 hectares of forest in the Wanganui region.  According to MAF, they have received expressions of interest under PFSI covering a total area of approximately 60,000 hectares.

The PFSI scheme promotes the establishment of permanent forests on previously unforested land.  It offers land owners the opportunity to earn Kyoto Protocol compliant emission units (Assigned Amount Units or AAUs) for carbon sequestered in permanent forests established after 1 January 1990.  Limited harvesting is allowed, on a continuous forest canopy cover basis.  Forest owners must meet all costs of administration, monitoring, auditing and compliance, and also carry the liability for maintaining the carbon stocks.

MAF has announced that the PFSI regulations are to be amended to address some technical requirements, in addition to aligning the scheme with the new NZ ETS.  Amending the regulations will entail public consultation, details of which are yet to be announced.

MFE Drafts Kyoto Project Investment Rules

The Ministry for the Environment (MFE) has published draft rules for approving investment in Kyoto Protocol Clean Development Mechanism (CDM) and Joint Implementation (JI) projects, making it possible for New Zealand companies to invest in Kyoto projects abroad.

Under the Kyoto Protocol, all CDM and JI projects must have letters of approval (LoAs) from both the host country and investor country before the United Nations can approve and issue carbon credits.

The draft rules give the MFE's Climate Change Implementation Team the authority to approve or reject New Zealand investment in Kyoto projects abroad.  No approval is needed for companies that wish to invest in domestic JI projects.

The MFE is taking submissions on the draft rules until 23 September 2008.

Commerce Commission Makes 'Green' A Priority

In its July newsletter, the New Zealand Commerce Commission confirmed that it is putting "greenwashing" in the spotlight.  Director of Fair Trading, Adrian Sparrow, says the Commission has decided to add sustainability claims to its focus areas over the coming three years because it is an area of growing concern, both internationally and in New Zealand.

A quick scan of supermarket shelves and advertising on television and in newspapers confirms the burgeoning of sustainability claims.  "Consumers are being influenced to purchase products or services by these claims.  We want to ensure consumers are being provided with accurate information and are not being misled," says Mr Sparrow.

The Commission says it is signalling early that it intends to take a "no-nonsense" approach to this, and is encouraging all people in business who make sustainability claims to check the Fair Trading Act and satisfy themselves that they are not breaching it.

Russell McVeagh's Climate Change team recently presented a seminar to clients in Wellington on Green Marketing issues and implications in respect of the Fair Trading Act.  A similar seminar is planned for Auckland in the near future.  If you would like to know more about this particular area, please contact Doug Bailey for more information.

Australia Climate Change Update

On Friday, Professor Ross Garnaut released a Supplementary Draft Report, entitled 'Targets and Trajectories', as part of the overall Garnaut Climate Change Review (being undertaken for the Australian Federal Government).  See the report here.

The report recommends that Australia should put its strongest possible efforts into securing a global agreement to limit global emissions to no more than 550 parts per million (ppm) CO2-e and encourage the world onto a lower emissions path as soon as feasible.  The report notes that achieving reductions of 450 ppm CO2-e, still a steep ask, would suit Australia's interests better.

In the report's economic modelling, it is suggested that permits under the new Carbon Pollution Reduction Scheme (ie Australia's version of the NZ ETS) would be sold starting at $20 in 2010, rising each year by 4 percent plus the percentage increase of the consumer price index.

The Garnaut-Treasury modelling suggests that the cost to Australia of mitigation would be 1.1 percent GDP by 2020 under a 550 ppm scenario, and 1.6 percent GDP by 2020 under a 450 ppm scenario.

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