19 February 2016 Ministry for the Environment P O Box 10362 Via email: nzetsreview@mfe.govt.nz To whom it may concern, Consultation on the New Zealand Emissions Trading Scheme Review 2015/16 priority issues Thank you for the opportunity to provide feedback on this consultation. ETS must motivate a change in behaviour The basis of an effective response to climate change is simple: New Zealand must reduce its greenhouse gas emissions by changing behaviour. The Government recognises this, noting on its Climate Change website that the NZETS: puts a price on emissions and therefore creates a financial incentive for all New Zealanders especially businesses and consumers to change our behaviour 1. However, as it currently stands, the New Zealand Emissions Trading Scheme (NZETS) is not motivating a change in behaviour. Likewise its initial ambition to cover all sectors of the economy is yet to be realised. Over the last few years the electricity sector has made substantial progress in reducing its emissions by moving to lower intensity fuels, however the NZETS has not been a significant factor in this improvement. Between 2012 and 2013 emissions reduced from 6,385 kt CO 2-e in 2012 to 5,043 kt CO 2-e in 2013 2, or 21 per cent, largely through the reduction of thermal generation, while in 2014 over 79% of New Zealand s electricity came from renewable sources 3. This has been achieved while managing the other objectives of the energy trilemma 4 ; energy equity and energy security, with the energy component of electricity prices remaining flat over this period. 1 http://www.climatechange.govt.nz/emissions-trading-scheme/about/what-it-means-for-me/index.html 2 Energy Greenhouse Gas Emissions-2013 Calendar Year Edition, Ministry of Business Innovation and Employment(MBIE), Table 2 3 Press Release by Hon. Simon Bridges, Minister of Energy and Resources, 12 August, 2015 in 2014 renewable electricity generation hit 79.9 per cent 4 https://www.worldenergy.org/data/trilemma-index/country/new-zealand/2014/
However, without creating cost or security of supply challenges we believe the electricity generation sector s ability to make further changes is more limited. This is because of the important role gas plays in meeting electricity demand during times of low hydro inflows and when the wind isn t blowing. This view is consistent with Business New Zealand Energy Council s (BEC) Energy Scenarios which each have gas playing a long term role. Even under their scenario where a very high level of renewable electricity penetration is reached 98% (the Waka scenario), the model still preserves a significant amount of flexible gas capacity for dry years 5. NZETS must find a way to deal with all sectors, all gases Given New Zealand s emissions profile, the NZETS must find a way for all sectors and all gases to play a role in reducing New Zealand s emissions. With an abundance of renewable energy resources, one of New Zealand s great advantages is our world-leading renewable energy position. This privileged position provides significant opportunities for New Zealand, including the ability to deploy these resources to transport and agriculture, for example through electric vehicles or the conversion of agricultural processes from coal to renewable energy. However, in order for this change to occur the appropriate economic signals must be in place. Meaningful change will only come if behaviour changes, therefore an ETS must incentivise that change. Please do not hesitate to contact me if you require any further information. Yours sincerely Head of Government Relations and Regulatory Affairs 5 1.1 GW of natural gas plant, please see page 82 of the New Zealand Energy Scenario work
Answers to Consultation Questions Moving to full surrender obligations 1. Should the NZETS move to a full surrender obligation for the liquid fossil fuels, industrial processes, stationary energy and waste sectors? Whilst there does not seem to be any compelling reason to keep the one for two 6 in place, we believe two issues need to be considered before a move to full obligations is implemented. Firstly, whilst auctioning and access to international units is not being addressed as part of the priority issues, we feel that the appropriateness of a move to full obligations cannot be satisfactorily addressed without providing some certainty of how these obligations will be met once the existing quantity of banked New Zealand Units (NZUs) have been exhausted. It is well known that the quantity of NZUs provided through free allocations and transferred to forest owners each year is less than the amount needed to meet annual emissions obligations 7. Whilst we acknowledge there is a surplus of banked NZUs, we believe that if the role of the review is to prepare for a carbon constrained future and increase certainty about future policy settings 8 then there needs to be a solid commitment and clear timeline relating to access to international units and the creation of an auction mechanism. Whilst Contact understands the Government is facing fiscal risk with regards to the 140 million of banked NZUs, Contact does not think it automatically follows that all these units will be available for purchase. The number of banked NZUs that will actually be available to the market is likely to be much less than the 140 million NZUs currently banked. As foresters retain liability for a portion of their allocation, they can therefore be expected to hold onto at least a portion of these until they are required. Other factors such as dairy and log prices will also affect the level of deforestation, foresters willingness to remain in the scheme and consequently the number of units that will be available. Increasing obligations on emitters introduces a risk that the bank will be depleted well before either auctioning or international linkages is introduced. 6 Surrender of 1 unit for every 2 tonnes of carbon dioxide equivalent emissions. 7 New Zealand Emissions Trading Scheme Review 2015/2016: Discussion Document and Call for written submissions, 24 November 2015. Page 38. Table 4: illustrative impact on NZ ETS supply demand and banked NZU s. Shows that the supply of NZUs is not sufficient to cover surrender obligations once banked units have been exhausted. 8 New Zealand Emissions Trading Scheme Review 2015/2016: Discussion Document and Call for written submissions, 24 November 2015. Page 8. Context and drivers for review
Secondly, participants in the New Zealand Electricity Market (NZEM) have invested heavily in renewable generation over the last eight years which has led to the globally enviable position of 79% of New Zealand s electricity coming from renewable sources 9. The NZEM has now reached an appropriate balance between the level where the variability of renewable generation can be managed through non-renewable sources to ensure security of supply. We believe that an increase in carbon costs will not change the make-up of New Zealand s generation portfolio, rather it will increase the running cost of some marginal generation and therefore the overall wholesale cost of power in New Zealand. 2. What impact will moving to full surrender obligations have on you or your business? Full surrender obligations will increase the cost to Contact of generating from thermal power stations. Contact would recover this additional cost by factoring it into the price at which it bids its thermal generation into the market. It is expected that this would flow through to the spot market and eventually end users over time. Carbon dioxide is also emitted from Contact s renewable geothermal power stations, though in much smaller quantities than Contact's thermal plant (approx. 75% less). Given the must run nature of Contact s geothermal plant Contact would not be able to recover the carbon cost through its geothermal bids into the electricity spot market. 10 3. If full surrender obligations are applied, when should this be implemented? Contact believes that given the current environment, full surrender obligations should be implemented gradually over time with full obligations in place by 2020. As noted above, any move to full surrender needs to be balanced with access to international units and/or an auctioning mechanism to ensure the market provides economically sensible outcomes. Quickly implemented policy changes have the effect of unduly increasing price volatility within the New Zealand Carbon market which increase risk premiums and may lead to inefficiencies that are unsustainable in the long run. It would be preferable that any changes are applied to a full ETS reporting year, with enough lead in that systems can be updated accordingly. Any changes should be forward looking and not retrospective, as retrospective actions do not 9 Press Release by Hon. Simon Bridges, Minister of Energy and Resources, 12 August, 2015 in 2014 renewable electricity generation hit 79.9 per cent 10 This was noted in MBIEs modelling for emissions factors that due to the must run nature of the plant emissions from geothermal do not effect market prices. https://www.climatechange.govt.nz/emissions-trading-scheme/building/regulatoryupdates/modelling-for-the-eaf.pdf page 29
change behaviour or reduce emissions and therefore do not support and encourage global efforts to reduce greenhouse gas emissions 11. Contact suggests the transition to full surrender should be on the following profile. Calendar Year Number of Units Surrendered for every tonne of carbon dioxide equivalent emitted 2016 1 for 2 2017 1 for 2 2018 3 for 5 2019 4 for 5 2020 1 for 1 Managing the costs of moving to full surrender obligations 4. If the NZ ETS moves to full surrender obligations, should potential price shocks be managed? Yes. The Government has repeatedly stressed its desire for certainty in the carbon market. Whilst it is appropriate to gradually move to full surrender obligations, some behaviour changes require lead in time to effectively implement and smaller businesses and consumers may need time to transition. 5. If potential price shocks associated with moving to full surrender obligations should be managed, how should this be done? a) maintain the fixed price option at $25 b) lower the fixed price option c) gradually move to full surrender obligation d) other methods. As we have noted earlier in this submission, without a significant increase in the price per tonne of carbon, there is unlikely to be any ETS related investment in renewable electricity generation going forward. We caveat our response below in light of this. Contact believes that maintaining the fixed price option at $25, whilst gradually increasing the surrender obligations is the best way to manage the transition. This is on the proviso that links to international markets are in place or an auctioning mechanism is introduced well before companies face full exposure. Quickly implemented changes will have the effect of unduly increasing price volatility within the market which increases risk premiums and may lead to inefficiencies that are unsustainable in the long run. 11 Climate Change Response Act 2002 s3(1)(b)
6. If the $25 fixed price surrender option value should change, what should it change to and why? At this stage Contact believes the fixed price of $25 is appropriate. In the previous review the uncertainty of carbon markets was the main driver for maintaining the cap at $25 12. It has been acknowledged in the consultation that the nature and stability of international carbon markets in the future is uncertain. We agree with this assertion and for this reason see no valid reason for increasing the cap price. 12 Doing New Zealand s Fair Share Emissions Trading Scheme Review 2011/Final Report, page 31