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  • The Carbon Fund

Government proposes capping emissions at 2020 levels with huge changes to ETS pricing

Henry Cooke Dec 19 2019

The Government wants to make greenhouse gas emissions peak at 2020 levels and start falling soon after, with huge changes to the Emissions Trading Scheme planned to force the economy to rapidly decarbonise.

This plan includes a ban on new coal-fired boilers for drying milk powder and other forms of heat - and a doubling of the emissions price cap in the Emissions Trading Scheme (ETS).

The Government has put out two discussion documents for consultation as part of a plan to start reducing emissions in the immediate term.

Climate Change Minister James Shaw announced the changes.

The main proposal is a change to the ETS so that there is an overall limit on the amount of emissions credits in the system, and a price cap of $50 instead of $25, along with a $20 price floor.

Prices would likely rise in relation to the new scarcity of emissions credits, which essentially act as licenses to emit.

Coal is squarely in the sights of the Government, with a proposal to ban most new coal boilers.

This means businesses will be paying at least $20 for every tonne of emissions and possibly up to $50. The fixed price at which the Government sell the credits would move from $35, up from $25 now.

Climate Change Minister James Shaw said research showed that a $40 price was around the point where businesses started seriously investing in cleaner technology.

The aim is to see net emissions peak at around 2020 levels and then begin falling from 2022, according to a draft "emissions budget" for the years 2021-2025. This budget would be superseded by the first emissions budget from the Climate Change Commission in 2022.

"The point of a provisional emissions budget is it gives you a total volume within any five year period in which we say 'this is the total that the country is going to emit.' And then the idea is that we will only auction the number of ETS unites into the market for that."

"Previously the ETS had no cap - it was a cap and trade scheme without a cap. Now we're introducing a cap, and what that means is we will issue a number of units up to a cap, and then business would have to find a way to work within that cap."

New War On Coal

One of the main prongs of the proposal is something of a war on the use of coal for heat.

All new coal boilers for low and medium temperature heating would be banned under the proposal.

Medium temperature heating includes drying milk powder and wood products, while low temperature heating is used to heat spaces and water.

Existing coal boilers used for low-temperature activities would be phased out by 2030.

Coal boilers would still be allowed for high temperatures of above 300C - used for things like making steel.

The Government is keen to do this quickly as new boilers have a long life and lock in emissions once installed.

Consultation will close on February 28 before the regulations are set in mid-2020.

The announcement was made on Thursday after the market had closed and with little fanfare.

Agriculture is not impacted by the immediate changes as it remains outside of the ETS.

It will come into the ETS in 2025 if another emissions pricing mechanism is not worked out, however.


National's climate change spokesman Scott Simpson said businesses didn't deserve to have an announcement like this dropped on them just before the Christmas break, especially as the consulting period was mostly over summer.

Simpson said it appeared that the minister was looking to get out ahead of the Climate Change Commission setting the budgets. (National supported the introduction of the Climate Change Commission.)

"This is a bit akin to the Government's minimum wage increases. The question that NZ businesses will be asking is is it too much, too soon, too fast," Simpson said.

He said National generally agreed with the direction of travel that the Government were on with climate change but had serious worries about the pace and size of the changes.

"Changes of this sort that are being proposed are a very very quick rude awakening to businesses making decisions about capital investments in energy."

He said the changes would add costs that would be passed onto consumers and could hurt exporters' international competitiveness.



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