Joint Implementation in Climate Change Policy

The textbook economists' model of a tradable permit system cannot usually be applied perfectly at either the domestic or international scale because of the difficulty and/or expense of defining allocations to and monitoring emissions of some groups, as well as for political reasons. It may be impossible to bring these groups fully into a tradeable permit system but it is often possible to find compromise solutions to gain some benefits from trade. This paper explores this problem in the context of the Joint Implementation mechanism associated with the Kyoto Protocol. This paper starts by outlining the current international rules governing Joint Implementation. We provide a summary of key jargon for those who are unfamiliar with the complex Kyoto language. We then discuss two key international issues that are still unresolved: baseline development and monitoring. We then turn to domestic governance of Joint Implementation and how the private sector might engage in Joint Implementation. At this point we consider how Joint Implementation fits within the suite of Kyoto flexibility mechanisms, why sellers and buyers might choose to engage in each, and how the different mechanisms might interact in the market for tradeable units. We conclude with some thoughts about productive directions for future research.Climate, Joint Implementation, tradeable permits, emissions trading

Developing a Policy Framework with Indicators for a ‘Just Transition’ in Aotearoa New Zealand

As Aotearoa New Zealand responds to climate change, policymakers are being challenged to ensure a ‘just transition’ for workers, households and communities. However, no domestic consensus exists about how to define, measure, monitor or manage a ‘just transition’. Maintaining public support for ambitious domestic decarbonisation will require an integrated policy framework which operationalises principles of justice and safeguards wellbeing. This article examines the concept of a ‘just transition’ for climate change and explores three tools for improving policy: inclusive, informed and iterative processes for decision making; an assessment framework for social resilience to change; and progress indicators

Time-travelling on the New Zealand Emissions Trading Scheme

This resource discusses the history of the New Zealand government policy-making process in relation to the Emissions Trading Scheme. Emissions trading can be a powerful tool for helping to reduce greenhouse gas emissions. An ETS transforms a regulatory limit on emissions into an emissions price set by the marketplace, enabling economic incentives for producers, consumers and investors to choose lower-emission alternatives without losing competitiveness. Both the New Zealand Emissions Trading Scheme (NZ ETS) in operation today and the world in which it is operating are markedly different from those anticipated by policy makers when designing the system back in 2007-2008. As the New Zealand government reviews the NZ ETS, history can be a powerful teacher. What might we learn by looking back in time at how and why we arrived at today’s NZ ETS? Motu Economic and Public Policy Research has compiled an interactive timeline for the development and implementation of the NZ ETS from 2005 to 2015

Lessons Learned from the New Zealand Emissions Trading Scheme

The New Zealand Emissions Trading Scheme (NZ ETS) was launched in 2008 following more than a decade of policy deliberation on how emission pricing could support New Zealand’s contribution to international climate change mitigation efforts. Reflecting the unique emissions and economic profile of New Zealand, New Zealand’s regulatory culture, and lessons learned from earlier environmental markets, including within New Zealand, it pioneered many ETS features. Examples include design for coverage of all economic sectors and major greenhouse gases (GHGs); an upstream point of obligation in the energy sectors with opt-in by major downstream users; output-based free allocation to eligible emissions-intensive, trade-exposed activities where the firms involved were not necessarily points of obligation; zero free allocation to energy-sector participants in recognition of the fact that they could pass on emission prices; and a monitoring, reporting and verification system based on self-assessment with audits and penalties to deter non-compliance. From 2008 to mid-2015, the NZ ETS operated without a cap on domestic emissions but instead was nested within the international Kyoto Protocol cap, enabled by buy-and-sell linkages to the Kyoto market. Legislative amendments to moderate the system’s impact combined with an oversupply of units in the international market contributed to low domestic emission prices in recent years, and policy uncertainty has obscured the system’s long-term price signal. While the NZ ETS may have had a small impact on the forestry sector, officials have found no evidence that it has contributed significantly to domestic mitigation. From 2012 through to mid-2015, participants predominantly met their NZ ETS obligations by purchasing overseas Kyoto units at low cost. The NZ ETS did enable the government to meet New Zealand’s international obligations for the first commitment period of the Kyoto Protocol (2008–2012) with a substantial unit surplus. In 2015, the NZ ETS delinked from the Kyoto market and it currently operates as a domestic-only system. The government is reviewing the system in 2016. The system requires changes to align with New Zealand’s Intended Nationally Determined Contribution (INDC) under the 2015 Paris Agreement and to effectively support New Zealand’s decarbonisation pathway

Paying for Mitigation: How New Zealand Can Contribute to Others’ Efforts

Purchasing international emission reductions (IERs) can help New Zealand make a more ambitious and cost-effective contribution toward global climate change mitigation and support developing countries in accelerating their low-emission transition. However, New Zealand must avoid past mistakes by ensuring international purchasing does not derail its own decarbonisation pathway. Furthermore, the Paris Agreement has fundamentally changed how countries will trade IERs over the 2021–30 period. This working paper, which evolved under Motu’s ETS Dialogue process from 2016 to 2018, focuses on how we can balance our international and domestic mitigation efforts. It explores how many IERs we may want, how we should integrate international mitigation support with participants’ obligations under the New Zealand Emissions Trading Scheme (NZ ETS), and what mechanisms we can use to fund international mitigation effectively. Fundamentally, the New Zealand government will need to ensure that all IERs counted toward its targets and accepted in the NZ ETS have environmental integrity and are both approved and not double counted by seller and buyer governments. This paper presents a working model for New Zealand’s purchase of IERs, in which the quantity is controlled by government, purchasing is managed by government for the foreseeable future (with potential participation by private entities), and the quantity is factored into decisions on the NZ ETS cap and price management mechanisms. If NZ ETS participants are able to purchase IERs in the future, then a quantity limit should apply as a percentage of the surrender obligation and the volume should offset other supply under the cap. The paper also highlights an innovative “climate team” mechanism for international climate change cooperation that could facilitate purchasing by the New Zealand government. Two companion working papers address interactions between decisions on international purchasing and the choice of NZ ETS cap and price management mechanisms. The three working papers elaborate on an integrated proposal for managing unit supply, prices, and linking in the NZ ETS that was presented in Kerr et al. (2017)

Managing Scarcity and Ambition in the NZ ETS

The fundamental purpose of an emissions trading system (ETS) is to constrain emissions and enable the market to set an emissions price path that facilitates an effective transition to a low-emissions economy. In a conventional ETS, the emissions constraint is defined by a cap (a fixed limit) on tradable, government-issued emission units together with a quantity limit on any external units allowed in the system (e.g. via an offsets mechanism). Essentially, an ETS cap underpins the ambition, cost-effectiveness, distributional implications, and credibility of a jurisdiction’s approach to decarbonisation. From 2008 to mid-2015, the New Zealand Emissions Trading Scheme (NZ ETS) broke from convention by linking to the global Kyoto cap without its own limit on domestic emissions. NZ ETS participants met compliance obligations using unlimited overseas units at low prices and faced little incentive to reduce their own emissions. The NZ ETS delinked from the Kyoto market in mid-2015, creating uncertainty over the future of domestic unit supply and an efficient price path for domestic decarbonisation. This working paper, which evolved under Motu’s ETS Dialogue process from 2016 to 2018, explores key considerations for ETS cap setting and proposes the design for a cap on units auctioned and freely allocated in the NZ ETS. The recommendations focus on issues of cap architecture rather than ambition. The proposed cap is defined in tonnes of emissions per year, fixed for five years in advance, extended by one year each year, and guided by an indicative ten-year cap trajectory. The fixed cap and cap trajectory need to reflect consideration of New Zealand’s domestic decarbonisation objectives, international targets, mitigation potential and costs in both ETS and non-ETS sectors, and prospects for cost-effective investment in overseas emission reductions. Two companion working papers address how the choice of cap will interact with decisions on ETS price management mechanisms and linking to overseas markets. The three working papers elaborate on an integrated proposal for managing unit supply, prices, and linking in the NZ ETS that was presented in Kerr et al. (2017)

Uncertainty, Risk and Investment and the NZ ETS

New Zealand is facing a challenging low-emission transition, and effective emission pricing needs to be part of the solution. In its pure form, an emissions trading system (ETS) fixes the quantity of emissions in regulated sectors and the market sets the emission price. In New Zealand’s current policy and market context, there is value in managing both unit supply and emission prices under the NZ ETS. While emission price changes in response to policy and market conditions are desirable to drive efficient abatement, excessive price instability can deter low-emission investment. This working paper, which evolved under Motu’s ETS Dialogue process from 2016 to 2018, explores key considerations for emission price management in the context of a specific working model for unit supply in the NZ ETS. Emission price instability can be reduced at its source by reinforcing policy commitment and improving market regulation and development. Emission price instability can be mitigated by incorporating a price ceiling (cost containment reserve backed by a fixed-price option) and a price floor (auction reserve price) into the auction mechanism. Decisions on price management should be coordinated with other decisions affecting unit supply, guided by an indicative ten-year trajectory for both unit supply and emission prices, and informed by independent advice. Two companion working papers address interactions between ETS price management and the choice of cap and linking to overseas markets. The three working papers elaborate on an integrated proposal for managing unit supply, prices, and linking in the NZ ETS that was presented in Kerr et al. (2017)