Emissions Trading

What is the Emissions Trading Scheme?

The New Zealand Emissions Trading Scheme (ETS) is a way of meeting our international obligations around climate change. The ETS puts a price on greenhouse gases to provide an incentive to reduce emissions and to encourage tree planting.

For more information go to www.climatechange.govt.nz

What it a NZU?

A New Zealand Unit, or an emissions unit is the currency of the ETS. It is commonly referred to a "carbon credit".

It is the primary unit of trade in the ETS issued by the Crown. Participants are required to surrender NZUs to the Crown to meet their obligations under the scheme. During the transition phase (July 2010 to December 2012) one NZU will be required to cover every two metric tonnes of greenhouse gas emissions in a calendar year. After this, one emission unit will be equal to one tonne of emissions. Participants can also surrender a range of ‘Kyoto units’ which they can buy overseas.

After the transition phase, the price of an NZU will be determined in the trading market and will tend to match the international price of emission units. Participants can sell NZUs internationally by exchanging them for Kyoto units, within the limits on international sales set by the Kyoto Protocol.

For more information on NZUs, go to: www.climatechange.govt.nz

How does emissions trading work?

The emissions trading scheme can be explained by using a simple example.

Firm A is an oil company. It needs to buy emission units to cover the greenhouse gas emissions it is responsible for.
Firm B is a large forestry company that receives emission units for land it is planting in forests. It is also cutting down some trees, leading to emissions for which it has to surrender emission units. Initially, Firm B has a shortfall of units but, as the new forest matures over time, it will have spare units it can sell.
Firm C is a major industrial user of electricity for which it has to surrender emission units. To help Firm C adapt to these higher costs, the Government gives Firm C a free allocation of emission units, which Firm C can sell to offset its increased electricity costs.

Under the emissions trading scheme, Firm A and Firm B both buy Firm C’s units in the short term to cover their emissions. Because it now has to pay higher energy prices, Firm C finds it is cheaper to invest in energy efficiency.

Over time, as its forest matures, Firm B has spare units available and sells them to Firm A.

This example is also illustrated in the following diagram at www.climatechange.govt.nz

Who participates in the ETS?

The activities that are automatically included in the emissions trading scheme are: forestry, transport fuels, electricity production, industrial processes, synthetic gases, agriculture and waste. People carrying out these activities are required to participate in the scheme.

Some activities are optional under the emissions trading scheme. People carrying out these activities can choose to participate in the scheme.

Most participants are required to meet their obligations under the scheme by surrendering emission units. Surrendering a unit means it cannot be used again, for example, it cannot be given to another participant.

Some participants, such as those with forests planted after 1989, are able to earn emission units for carbon dioxide stored or removed from the atmosphere by their activities.

The participant is not necessarily the business at the actual point where emissions are produced. For example, a coal producer would be required to surrender units for the coal it sells, even though the actual emissions will occur when the coal is burned.

Alongside those who are required to participate in the scheme and those who can opt in, other people may also hold and trade emission units. These people are commonly referred to as ‘secondary market traders’.

How do particpants get NZUs?

Some participants are eligible to receive a free allocation of emission units from the Government to cover some of their emissions.

During the transition phase (July 2010 to December 2012), participants will also be able to buy emission units from the Government for NZ$25 each.

In addition, participants and secondary market traders can buy emission units from the following sources.

Approved overseas sources
Another participant or secondary market trader, either directly or by trading through a broker or trading exchange

An electronic register records who holds emission units and is like a share registry. It is called the New Zealand Emission Unit Register (NZEUR). It records:

who holds emission units and the number of units they hold
transfers of emission units between holders both within the NZEUR and between international unit registers
emission units surrendered by participants to meet their obligations under the emissions trading scheme.

As with a share registry, the NZEUR does not record information about the price or financial value of emission unit trades, nor does it provide a mechanism for exchanging cash for units traded.

You can find the NZEUR at www.eur.govt.nz

When must participants join the ETS?

Sectors will be introduced to the emissions trading scheme gradually over a period of seven years, starting in 2008.

The transport fuels, electricity production, industrial processes and waste sectors will be able to start reporting their greenhouse gas emissions voluntarily two years before their obligations to surrender emission units begin, and are required to report their emissions one year before. The agriculture sector can voluntarily report its emissions four years before its obligations to surrender emission units begin and is required to do so three years before.

More information about when participants must join the ETS

HSNO Application Register

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