Zealand Emissions Trading Scheme Research Articles

Comparing the Carbon Storage Potential of Naturally Regenerated Tea Trees with Default New Zealand Carbon Look-Up Tables: A Case Study

The New Zealand Emissions Trading Scheme allows landowners to be remunerated for the carbon sequestration capabilities of eligible forests established post 1990. For afforested areas of 100 hectares or fewer, carbon sequestration is estimated with the use of default carbon look-up tables administered by the Ministry for Primary Industries. However, a disparity exists between exotic pines (Pinus radiata), where carbon sequestration predictions are regionally differentiated, and native species, where carbon sequestration estimations are neither distinguished by species or locality. This paper aims to highlight this inequality by comparing the calculated carbon storage of endemic tree species with the ‘Indigenous Forest’ category in the carbon look-up tables. The carbon storage of 12-year-old naturally regenerated tea trees (Leptospermum scoparium and Kunzea ericoides) was calculated using allometric measurements and compared to the look-up tables. The results suggest that carbon look-up tables underestimate the carbon sequestration of native tea trees by 81.8%. A bimodal data distribution suggests that carbon sequestration is heavily dependent on light interception levels. It is recommended that carbon sequestration data for specific native species in different environments are collected and integrated into such tables.

Using long-term experimental restoration of agroecosystems in Aotearoa New Zealand to improve implementation of Nature-based Solutions for climate change mitigation

Tree planting has long played a major role in the New Zealand Government’s approach to climate mitigation and is increasingly understood as important for climate adaptation. However, large-scale tree planting in Aotearoa New Zealand has been dominated by exotic species. Although there is growing public and expert support for using native species for forest revegetation in farm landscapes, there are two key barriers. First, the lack of ecological and economic data on native species performance in different environmental conditions. Second, policy and market-related mechanisms associated with carbon sequestration, such as the New Zealand Emissions Trading Scheme, favor the continuing use of exotic tree species, especially Pinus radiata, over native species. Consequently, there are strong incentives for exotic forests and insufficient financial support for natives, even when native forest re-establishment is often the preference of landowners, Indigenous peoples, and local communities. The AUT Living Laboratories Program is a long-term, transdisciplinary, experimental restoration research program aimed at addressing scientific, social, and economic knowledge gaps for native revegetation as a Nature-based Solution (NbS) on farmland soils. Here, we present the project design and establishment information from the three experimental restoration sites, which vary in native species composition, planting configuration, and environmental and socio-cultural context. Each site involves partnerships with Indigenous communities, specifically Ngāti Whātua  Ōrākei, Ngāti Manuhiri, and Ngāti Pāoa, to value and embed mātauranga Māori as Indigenous knowledge. Monitoring carbon sequestration along with changes in ecological functions and outcomes, including native biodiversity, will be critical to ensure that large-scale tree-planting aligns with the government’s strategies for climate change, native biodiversity, and economic prosperity.

Including forestry in an emissions trading scheme: Lessons from New Zealand

The forestry sector has a crucial role to play in mitigating climate change. Given the share of global emissions covered by emissions trading is expected to rise, there is a need to understand how emissions trading might drive behavior change in the forestry sector. To explore this, we analyze the New Zealand Emissions Trading Scheme (NZ ETS) − the only system in the world with symmetrical incentives that reward forest owners who afforest and make liable those who deforest. In theory, these incentives should drive net carbon dioxide removals in the forestry sector, but the sectoral response has proven complex. We evaluate the NZ ETS policies that directly affect forestry and the sectoral response to these policies by analyzing trends in deforestation, afforestation, and participation over 2008 to 2022. Our findings indicate that the forestry sector, and the NZ ETS participants within it, have responded rationally to emissions pricing over time. However, multiple factors such as complex participation requirements, extended periods of policy uncertainty, and weak emissions price signals (particularly over 2011–2016) have likely restricted the effectiveness of the NZ ETS in changing forestry outcomes over much of its operating life. The Climate Change Response (Emissions Trading Reform) Amendment Act, 2020 reformed forestry and other provisions in the NZ ETS to address demonstrated shortcomings, improve policy predictability, and incentivize more ambitious mitigation action in line with Aotearoa New Zealand’s targets. However, the signaling of further changes to NZ ETS forestry policy in 2022 has created new uncertainty for market participants. Despite past challenges, the sector’s dramatic response to rising emissions prices in recent years demonstrates the NZ ETS is changing landowner behavior to produce net forestry removals. The NZ ETS remains a unique and strong model from which other nations can gain insights in how to design and operate emissions trading systems to harness mitigation potential from the forestry sector and help meet their emission reduction targets.

Political construction of carbon pricing: Experience from New Zealand emissions trading scheme

Emissions Trading Systems (ETS) are the political scheme that most of the industrial world adopted to control GHG emissions. Currently, many jurisdictions are implementing ETS, and countries where they already enforced are improving their schemes. This paper examines the political construction of the New Zealand Emissions Trading Scheme (NZ ETS) using official policy documentation and analysis from the New Zealand government and domestic researchers. New Zealand has the second oldest ETS in the world. The NZ ETS is quite distinctive because it covers the largest number of activity sectors. The points of obligation are based on an upstream selection, and there is no cap on emissions at a national scale. Three key features are explored. The NZ ETS is the result of a long and democratic process that involved the participation of different sectors. Secondly, the NZ ETS deals with the transition to a low emissions economy by managing free allocation. Thirdly, it is hard to meet the theoretical functional goals of the ETS in reality. Setting a cap on emissions is the milestone to guaranteeing environmental efficiency, but the NZ ETS has failed in this regard so far. The weak incentive effect of the low price and the generous allocation scheme affected the environmental efficiency of the NZ ETS. Countries with new or forthcoming ETS would be well advised to consider these factors when implementing their schemes.

Anchoring Policies, Alignment Tensions: Reconciling New Zealand’s Climate Change Act and Emissions Trading Scheme

Climate Change Acts (CCAs) seek to anchor national climate policy by establishing long-term targets and lines of accountability that guide the development of other climate policy instruments. However, counter-pressures to modify CCAs can occur where tensions exist with the provisions of already-established policies that enjoy substantial political and stakeholder support. Such tensions can be especially pronounced where CCAs necessitate major changes to emissions trading schemes (ETSs) that have formed the mainstay of efforts to reduce national emissions. This article employs a novel anchoring policy framework to examine the dynamics of aligning ETSs with CCAs. We investigate debates on reforms to the New Zealand Emissions Trading Scheme following the introduction of the Zero Carbon Act in 2019 to examine how alignment pressures between anchoring and subordinate policies are negotiated. The analysis reveals several tactics used to increase the acceptability of reforms to the New Zealand Emissions Trading Scheme and protect the Zero Carbon Act’s integrity. The article concludes by arguing that a greater understanding of alignment pressures between anchoring and subordinate policies is essential in enabling both CCAs and ETSs to contribute to achieving decarbonisation goals.

Delinking the New Zealand Emissions Trading Scheme from the Kyoto Protocol: comparing theory with practice

ABSTRACT The New Zealand Emissions Trading Scheme (NZ ETS) presents an opportunity to compare the theory of linked emissions trading with practice. From 2009 until October 2012 New Zealand was linked to the market under the 1997 Kyoto Protocol and there was no indication that this link would be broken. A series of events starting in late 2012 cast doubt on the future eligibility of Kyoto units in the NZ ETS, made the future of linking in New Zealand uncertain, and may have contributed to price divergence between offshore and domestic units. Delinking was officially confirmed by the New Zealand government in December 2013 to take effect from 31 May 2015. This raises the question of what the effect of delinking and announcements had on the carbon market. To study this effect, we used daily price data in a difference-in-differences model over the period 1 January 2011 to 1 January 2016. From this model, we found evidence that, even with differing pre- and post-time specifications, the government announcements in 2012 caused prices in the two markets – for New Zealand units (NZUs) and Kyoto units – to decouple and NZUs traded at a premium based on their projected scarcity. This is further backed up by the behaviour of the raw price data and the change in the types of units surrendered over this time period. The NZU price reaction to the government announcements (rather than delinking itself) shows strong evidence of a well-functioning market. Key policy insights The NZU price reaction to the delinking announcement shows strong evidence of the New Zealand carbon market reacting in the present to news about the future: a property of any well-functioning market. The long period of price divergence between the New Zealand and Kyoto markets has led to a large privately held bank that is a liability to the New Zealand Government and reduces the government's ability to auction NZUs. If the NZ ETS had delinked earlier from the Kyoto market it could have avoided a protracted period of arbitrage which significantly inflated the NZU bank.

Future Options for Industrial Free Allocation in the NZ ETS

The provision of industrial free allocation can be one of the most technically challenging and politically fraught elements of designing an emissions trading system (ETS). In the New Zealand Emissions Trading Scheme (NZ ETS), the primary rationales for industrial free allocation have been to mitigate the risk of emissions leakage to other jurisdictions and avoid economic regrets from losing domestic production that would be viable if other jurisdictions adopted more ambitious climate change policies. Since 2010, emissions-intensive and trade-exposed (EITE) industrial producers have received free allocation on an output basis at two levels of assistance (90 per cent and 60 per cent) without an absolute limit. In 2020, major reform legislation introduced default phase-out pathways over 2021–2050 for industrial free allocation, with the potential for future activity-specific adjustment. The government has signalled it will consider broader changes post-2021 to avoid overallocation while still mitigating the risk of emissions leakage overseas. To help inform future policy making on these issues, this paper examines conceptual design issues for free allocation in an ETS, describes the regime for industrial free allocation in the NZ ETS, and provides comparative analysis with three other systems. It then identifies a range of options for further reform: changing the eligibility criteria, changing the calculation methodology, substituting alternative measures, or accepting and managing emissions leakage. Further research will be needed to evaluate the merits of these options. More fundamentally, the government should consider whether the public and private benefits of maintaining and improving industrial free allocation are worth the cost and complexity in the evolving international and domestic contexts. Ultimately, any future provision of industrial free allocation should be used to assist – and not block – the transition to an economy that rewards low-emission innovation.

Challenges and Opportunities With Native Forestry on Māori Land

Domestically and abroad, government policies aim to increase afforestation and provide the many environmental and social benefits that afforestation can deliver. For multiply-owned Māori land in Aotearoa New Zealand, decision-makers often face extra challenges that may hinder their ability to meet aspirations for afforesting their land, despite the availability of various support programmes. We explore the decision-making processes of a sample of Māori landowners in Te Tairāwhiti to understand the extent to which funding programmes and afforestation incentives from the New Zealand Emissions Trading Scheme enable them to meet their own aspirations for their land. We conducted semi-structured interviews with 13 Māori land-use decision-makers that represent a range of Māori landowner entity types, including Māori incorporations, ahuwhenua trusts, ahuwhenua trusts administered by Te Tumu Paeroa and family trusts. Several key challenges emerged that are faced by our sample of Māori land decision-makers. These relate to: the historical context of Māori land use and development; governance; accessing expertise and resourcing; communication; the logistics of native forestry establishment; and challenges specific to the NZ ETS. We also identified key areas where additional support could yield substantial gains for Māori land decision-makers. These include increasing access to understandable and context-specific expert advice; investing in lasting working relationships; providing support to develop robust business cases and planting plans for native forestry; tailoring policy to be flexible to individual land blocks’ starting lines; and tailoring policy to acknowledge the ways in which Māori traditionally engaged with native forestry.

Impact on profitability, risk, optimum rotation age and afforestation of changing the New Zealand emissions trading scheme to an averaging approach

The current New Zealand Emissions Trading Scheme (ETS) allows forest growers to earn units under the stock change approach. Carbon price risk means that most participants are only trading safe units that they do not need to surrender after harvest provided that they replant. Consequently, the ETS has provided less incentive for afforestation than had been envisaged.This paper evaluates averaging as an alternative approach to carbon accounting. Two variations are considered: averaging based on nominated rotation age and averaging based on realised rotation age (i.e. carbon units are earned and sold up to the average for a base age of 28 years but carbon is only received up to the average for older ages after that age is attained). Both variations produce a higher Land Expectation Value (LEV) than that for the safe approach. Averaging with nominated rotation age has LEV within 90% of the carbon-stock change (i.e. sawtooth) approach but with much less risk. Averaging with realised rotation age has lower LEVs than averaging with nominated rotation age but has much less impact on optimum rotation age.Averaging provides the opportunity for all forest growers, regardless of area, to benefit from improved profitability under the ETS without taking on carbon price risk. Implementing the averaging approach in the ETS is forecast to lead to higher rates of afforestation than under the current ETS.

The New Zealand Emissions Trading Scheme: critical review and future outlook for three design innovations

ABSTRACTThe New Zealand Emissions Trading Scheme (NZ ETS) broke new ground in ETS design. Drawing from analysis of core policy documentation, this paper examines the rationale, outcomes, and outlook for three key innovations – broad sectoral coverage with some upstream points of obligation, the absence of a hard limit on system emissions, and a two-part cost containment mechanism – following the first decade of operation. It also provides comparative assessment with the European Union Emissions Trading System and California Cap-and-Trade Program. The NZ ETS was designed around the principle of least-cost compliance with international responsibility targets and a core assumption that the Kyoto Protocol emissions market would converge toward an efficient emission price aligned with rising global mitigation ambition. This assumption did not become a reality. As a result, the NZ ETS has produced a functional cross-sector trading market but little incentive for domestic mitigation to date. In late 2019, amendments were introduced to reform sectoral coverage, unit supply, and price management features so the system will better support New Zealand's targets under the 2015 Paris Agreement and 2019 Zero Carbon Act. However, substantial technical and political challenges remain to set near-term domestic mitigation ambition, phase out industrial free allocation, determine the mitigation contribution from the land sector, and design the agricultural emissions pricing regime. The evolution of the NZ ETS, relative to other systems and in response to national circumstances, offers insights that can inform the future development of emissions trading globally.Key policy insightsSince 2008, the NZ ETS has successfully pioneered broad cross-sector emissions trading with upstream energy-sector obligations and deforestation obligations with afforestation crediting. Pricing of biogenic agricultural emissions is anticipated from 2025.The government's failure to adapt unit supply and cost containment mechanisms to changing market conditions has undermined incentives for domestic mitigation, resulted in a large bank of participant-held emission units, and subjected the market to long-term policy uncertainty.A cap on auctioning and new price management features will better equip the NZ ETS to support New Zealand's domestic emission reduction targets, but strategic questions remain about the future role of the land sector.

Changing the record: Narrative policy analysis and the politics of emissions trading in New Zealand

AbstractDespite extensive debate on the influence of discourse on environmental politics, research has yet fully to reveal how discursive processes affect policy change on issues like climate change. Discourse‐related approaches are also often criticised for critiquing current policy situations but paying limited attention to utilising communication studies to enable policy change. This article explores how narrative policy analysis—a linguistic technique for analysing policy issues where uncertainty and complexity have bred polarisation—can be utilised to recast disputes over climate policy in ways that facilitate compromise and policy change. As a focus, we examine disputes surrounding the New Zealand Emissions Trading Scheme, drawing on elite interviews and documentary analysis to analyse contrasting narratives about the scheme's effectiveness in reducing greenhouse‐gas emissions. The first portrays New Zealand as a trade‐exposed country that makes only minor contributions to global emissions to defend cautious and low‐cost policy. Its rival advocates stronger domestic action even if this entails higher costs. Mapping the contentions, assumptions, and characterisations in these narratives, combined with analysis of recent policy developments, reveal important insights on how narrative policy analysis can be used to enhance understandings of policy change, particularly, the difficulties of attacking opponents' “anchoring narratives”; how analysing minor narratives and differences in narrative alliances can assist in overcoming barriers to policy change; how narrative changes and “narrative diplomacy” prepare the ground for policy change; and the importance of examining issues neglected in polarised debates on climate policy.

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).

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).

Technically political: The post-politics(?) of the New Zealand Emissions Trading Scheme

Globally, the creation and implementation of climate change policies continues to be contested amongst politicians, international institutions, and civil society. Carbon markets, designed to incentivize greenhouse gas emission reductions, are one of the main climate mitigation approaches worldwide. Existing scholarship highlights how carbon markets provide fertile ground for research into the changing nature of environmental governance and political contestation. Swyngedouw locates carbon markets as part of broader “post-political” changes, which reduce alternative pathways through “depoliticisation”. MacKenzie, in contrast, argues that carbon markets are a form of “techno-politics” that provide new avenues for politically designed markets. This paper engages with and contributes to these scholarly debates by exploring the creation and operations of the New Zealand Emissions Trading Scheme between 2003 and 2016. We demonstrate how New Zealand policy-makers employed various discursive constructs that emphasized uncertainties (in climate science, in international climate policies, in markets) as a means to justify “urgent” and “exceptional” state interventions into the emissions trading scheme. These interventions emphasized the role of experts and the experimental nature of New Zealand's carbon market, and employed parliamentary processes that limited public participation. Such moments of state intervention in a nation with a strong history of neoliberal governance both reinforces and complicates existing scholarship about the “depoliticisation” of climate change and the role of the state in post-political neoliberal governance. It highlights the ways in which rendering climate change a technical challenge can translate into democratically-worrying moments of state-initiated but expert-led approaches to environmental governance.

Carbon pricing and system linking: Lessons from the New Zealand Emissions Trading Scheme

Textbook theory of linking carbon systems suggests linking reduces marginal abatement costs. Contrasting theoretical work and policy analyses suggests that linking, or at least unfettered linking, may not always be beneficial. The New Zealand Emissions Trading Scheme (NZ ETS) is unique in that, until 2013, it allowed unlimited use of Kyoto allowances. NZ ETS, thus provides an ideal context to explore the effect of linking and linking restrictions on carbon pricing of small systems. Using data on importation and exportation of allowances, we provide the first empirical analysis of the determinants of allowance prices in the early phase of the NZ ETS. Our results indicate that imports of offsets rather than fundamentals have been the major price determinant. Moreover, the pricing of New Zealand units (NZUs) can be placed into three distinct periods, delineated by two structural breaks. In the first period, the system is largely autarkic; in the second period, as international offset prices drop below the NZU price, the system becomes a “price taker”; in the final period, following policy interventions, the system regains some independence. The case of the NZ ETS shows that small trading systems need to impose, or have the option to impose, quantitative import restriction so as to reap the benefits (lower abatement cost), but not the drawbacks (“importation” of distortions and market integrity issues), of linking.

Drivers of tight carbon control in the context of climate change regulation

AbstractOur study examines the drivers of tight budgetary control in carbon management in the context of climate change regulation. Using the setting of New Zealand Emissions Trading Scheme (ETS), our study explores how firms manage their carbon performance using carbon‐focused budgetary control. Based on a survey data from New Zealand firms, including both those with and those without an ETS compliance obligations, our results suggest that economic and regulatory environmental pressures, the level of proactiveness of emissions management strategy, the level of integration of carbon issues in strategic and operational processes and the perceived importance of carbon issues are the significant drivers of tight carbon‐focused budgetary control.

The New Zealand forestry sector's experience in providing carbon sequestration services under the New Zealand Emissions Trading Scheme, 2008 to 2012

The New Zealand government established the New Zealand Emissions Trading scheme (NZ ETS) as the primary mechanism for achieving New Zealand's Kyoto obligations between 2008 and 2012. The legislation made planted forests the first sector to participate in the NZ ETS, starting in 2008. At the same time, other schemes to encourage carbon sequestration through forestry were also implemented.The implementation of the NZ ETS has focussed on meeting New Zealand's international obligations between 2008 and 2012 at minimum cost, and there is little evidence it has led to any reduction in greenhouse gas emissions or investment in new planted forests in New Zealand. The NZ ETS has been most effective at facilitating the transfer of international (Kyoto compliant) carbon credits from emitters to the New Zealand government. These credits have been used to partially meet New Zealand's obligations for the first Kyoto commitment period, allowing other units to be carried over to meet obligations from 2013 to 2020.The paper shows that participation in the NZ ETS is unlikely to contribute a long-term positive impact on profitability of commercial forestry, and that the liabilities created through participation in the NZ ETS do not assist the development of the forestry sector in New Zealand. The paper suggests that the NZ ETS is not the correct policy instrument to encourage carbon sequestration by planted forests.

Emissions Trading Schemes and Carbon Taxes: Reinvestigating the Policy Tools New Zealand Uses to Address Climate Change

In 2016 there is scientific consensus that the climate is changing and humans are responsible. If significant action to reduce global greenhouse gas emissions does not occur, the consequences of climate change may be catastrophic. This paper analyses the use of market based policy tools to reduce greenhouse gas emissions in New Zealand. In particular, it considers whether the New Zealand Emissions Trading Scheme should be replaced with a carbon tax. This is done by weighing the difficulties involved in implementing a carbon tax against the benefits that it could bring. Key difficulties discussed include the treatment of stockpiled emissions credits that exist within the New Emissions Trading Scheme and the changing treatment of agriculture and forestry. Potential benefits of a carbon tax include reduced administrative and transactional costs, revenue generation and insulation from vested interests. This paper concludes that the difficulties involved in implementing a carbon tax as New Zealand’s main response to climate change are exceeded by the benefits.

The Paris Agreement and its impact on cattle and food sectors of New Zealand

ABSTRACTThe Paris Agreement asserts that greenhouse gas emission pathways should be consistent with holding the increase in global temperature below 1.5 °C, or 2 °C above pre-industrial levels. The purpose of this paper is to assess the economic impact of this agreement on the cattle and food product sectors of New Zealand. We used a general equilibrium approach to evaluate the economic impacts, and the Global Timber Model to estimate forestry carbon sequestration. We simulated eight scenarios where we allow accounting/not accounting for sequestration, pricing/not pricing agricultural emissions, and linking/not linking the New Zealand Emissions Trading Scheme (ETS) with the European Union ETS. We found that significant negative impacts occur if sequestration is not accounted, the ETS remains unlinked and agriculture is priced. Competitiveness, in turn, is not significantly affected if sequestration is accounted, regardless of the linking scheme of the ETS.

Carbon Pricing in New Zealand's Emissions Trading Scheme

The New Zealand Emissions Trading Scheme (NZ ETS) is an intensity-based system and the second oldest national ETS. It is unique in that it is highly international (with unlimited use of Kyoto allowances) and it incorporates forestry. We provide the first empirical analysis of the determinants of allowance prices on the NZ ETS. Our results indicate that imports of offsets rather than fundamentals have been the major price determinant. Moreover, the pricing of New Zealand units (NZUs) can be placed into three distinct periods, delineated by two structural breaks. In the first period, the system is largely autarkic; in the second period, as international offset prices drop below the NZU price, the system becomes a ‘price taker’; in the final period, following some policy interventions, the system regains some independence. The case of the NZ ETS shows both the power of linking ETSs and the dangers of doing so.