New Zealand to begin phasing out free allocation

On 31 July 2019 the New Zealand government announced a final set of decisions on changes to its ETS (NZ ETS), including the start of a phase-out of free allocation for the industrial sector.

Currently, industrial activities deemed both emissions intensive and trade exposed (EITE) receive free allocation under the NZ ETS. Industries deemed highly emissions-intensive receive 90% free allocation, with 60% for moderately-intensive industries. Following two sets of reforms announced in December 2018 and May 2019, the third and final set of proposed changes to the NZ ETS centers around the phase-out of free allocation of emission allowances to industrial facilities after 2021.

Between 2021 and 2030, the government plans to apply a minimum phase-down rate of 1% per year across all industrial activities to further incentivize emissions reductions. Between 2031 and 2040 a 2% minimum rate will be established, which will be further increased to 3% between 2041 and 2050. The phase-down, however, will not affect the agreed 95% free allocation for agricultural activities currently proposed.

The minimum phase-down rate will be complemented by further phase-down rates for activities that are considered at lower risk of carbon leakage. A new process included in the proposed reforms will enable the Minister of Climate Change to determine those rates with advice from the Climate Change Commission and considering economic and environmental factors such as the availability of low-emission technology.

Other changes in the third tranche of reforms include some minor operational and technical decisions, as well as the announcement that privately held Kyoto units from the first commitment period of the Kyoto Protocol (which have not been eligible for surrender June 2015) will be cancelled on 30 November 2020.

All three NZ ETS reform packages, together with proposed changes to the forestry and agricultural sectors, will form an amendment bill to the Climate Change Response Act which is expected to be introduced to Parliament later this year.