New Report Pushes NZ to Reform ETS and Land-Use Regulations

NZ ETS provides lessons for global forest markets.

Wed 23 Aug 23


A Motu Economic and Public Policy Research and the Environmental Defense Fund report is pushing NZ to establish stronger policy settings as the NZ Government reviews its current Emissions Trading Scheme (ETS).

The report suggests that NZ needs an ETS that balances the needs of gross and net emissions reductions, plantation and permanent forest, and exotic and indigenous species.

It also pushes for further reforms to the NZ land-use policy and regulation.

As reported by Wood Central in June, the NZ government is looking to reform the ETS. 

Public comment for the proposed changes closed earlier this month, with the most significant change, assessed by officials as the most likely to achieve what was wanted, was establishing a whole new additional ETS market

The NZ Government is looking to reform its ETS settings which could see forestry sitting in a new ETS market. (Photo Credit: Getty Images)

One of the contributors to the report, Catherine Leining, said that whilst the ETS has mobilised new forest planting and cut deforestation, “the outcomes have not always supported policymakers’ intentions.” 

Ms Leining, a Policy Fellow at Motu Economic and Public Policy Research, said the ETS “will not remain fit for purpose in coming decades.”

She claims that under the current cap and price settings, “high afforestation levels will depress emissions prices, slowing decarbonisation in non-forestry sectors.”

And she is calling for regulation in other ways…

“As key sectors like stationary energy and transport approach zero emissions, the demand for forestry credits in the ETS will diminish.”

However, she acknowledges “forestry removals will still be required in the long term to offset unavoidable emissions outside the ETS.” 

The NZ ETS Framework

The NZ ETS is the only system in the world designed to cover all sectors and greenhouse gases, although pricing in the agricultural industry has been deferred. 

The NZ ETS incentivises companies, consumers and investors to reduce their climate impact by linking a regulatory limit on total emissions to an emissions price market. 

According to the NZ Ministry of Environment, the Government sets and reduces the number of units supplied into the scheme over time – limiting the quantity emitters can emit, in line with New Zealand’s emission reduction targets.

How the NZ Emissions Trading Scheme currently works. Footage courtesy of @MinistryfortheEnvironment.

However, Ms Leining said New Zealand’s unique economy challenges reaching these ambitious commitments.

In 2021, for example, “over 50% of gross emissions came from agriculture.” 

And despite being powered by 80% renewable electricity, New Zealand’s most significant energy emitters were from transport and industry.

 At the same time, “New Zealand’s growing forests created net emissions removals from the land sector, which offset 21% of its gross emissions,” Ms Leining said.

In an interview with Early Edition’s Newstalk ZB Host, Kate Hawkesby, the NZ Forest Owners Association President Grant Dobson said that forestry “is the only thing on track regarding NZ emission reductions.”

The  NZFOA president Grant Dodson spoke to Michael Laws on the platform. Footage courtesy of @theplatformnz.

Mr Dobson said that more than half of New Zealand’s carbon emissions are reabsorbed by plantation forests.

“They are an essential element in most, if not all, viable projections in carbon accounting; even more so if agricultural emissions are addressed in some way.”

“If gross emission costs are to be completely removed from forest incentives, New Zealand will fail to meet its climate targets.”

NZ relies heavily on forest offsets to meet climate targets

The report said that from 2008 to 2020, New Zealand relied heavily on domestic forestry and offshore mitigation to meet its international targets, whilst gross emissions remained relatively flat.

According to Ms Leining, NZ ETS has proven the feasibility of including forestry in an ETS at a sectoral level.

“With broad coverage and clear liability provisions for landowners, the system has overcome key challenges to project-based forest crediting: by accounting for leakage and permanence.”

Leakage occurs when emissions are displaced instead of reduced – for example, in instances of deforestation. 

The Economist has provided further clarification about leakage and permanence. Footage courtesy of @TheEconomist.

Whilst permanence occurs when sequestration is reversed – for example, a protected forest sheds its stored carbon due to forest fires or illegal logging.

The research found emissions pricing influenced forestry outcomes. 

“Deforestation declined with increasing emissions prices and increased when emissions prices dropped.” 

“Similarly, rising emissions prices have incentivised afforestation.” 

According to Ms Leining, this effect has been most impactful following the NZ ETS reforms in 2020.

“As emissions prices rose from NZD 12.7 to NZD 23.9 between 2016 and 2020, levels of net annual afforestation leapt from 2,692 hectares to 40,145 hectares.”

Policy uncertainty, price, and system shortcomings have dampened its impact.

Despite these successes, Ms Leining said that many factors have limited the effectiveness of the ETS in changing forestry outcomes.

The scheme has driven forestry removals in recent years, “but the focus on forests may have weakened the effect on gross emissions reductions in other sectors.”

Ms Leining referred to the 2009 and 2011 reviews of the NZ ETS, along with international negotiations on the post-2012 forestry rules. 

“Weak emissions price signals (particularly over 2011–2016), along with an expectation that emissions prices would not recover, may have discouraged some landowners from investing in new forests.”

From 2008 until mid-2015, the ETS had an unlimited linkage to the international Kyoto market, “and this markedly depressed emissions prices.” 

For example, Ms Leining said, “Millions of seedlings established while high emissions prices were mulched in 2014 when it became uneconomic to plant them after emissions prices fell due to linkage.” 

When prices began to rise after the ETS was delinked from the international market, it took several years for investors to plant trees in response. 

“And a hard price ceiling from 2010 through 2018 continued to constrain emissions prices after delinking occurred,” Ms Leining said.

Carbon farming has become politically contentious in NZ, with the farming industry concerned that agricultural land is being converted into carbon farms. Footage courtesy of @1NewsNZ.

Until 2020, the NZ ETS resulted in increased afforestation but not costly emissions reductions in other sectors. 

“From 2008 until 2020, national gross emissions (excluding land use, land-use change and forestry) declined only 2.6%; however, this was during a period of growth in population, income and dairy production.”

In part, weak price incentives and policy uncertainty have led to emissions reduction failure across non-forestry-related sectors.

In part, the failure to invest in emissions reductions in other sectors is the same as those that have affected forest investments – weak price incentives and policy uncertainty.

Ms Leining said that the option to rely on forestry to reduce emissions “has also likely reduced political pressure to act in other sectors.”

“Forestry investment involves long time horizons, so market confidence and policy stability are crucial for harnessing the sector’s mitigation potential.”

Relying on blunt emissions price signals alone will not necessarily deliver desirable mitigation outcomes across all sectors.

Emissions pricing for forestry has only sometimes supported broader environmental outcomes. 

According to Ms Leining, the ETS incentives have favoured exotic over indigenous forest species for various reasons.

These include:

  • differences in planting costs and growth rates
  • land use changes that have impacted landowners and communities

Many Māori have strong interests in the system because of their significant land holdings, involvement in forestry businesses, and commitment to kaitiakitanga (guardianship).

Ms Leining points to the high portion of exotic forests registered in the NZ ETS. As of September 2022, 89% of NZ’s total forests registered in the ETS were exotic. 

“Although all forests provide co-benefits, indigenous and mixed-species forests can support higher levels of biodiversity and may offer improved resilience to pests, natural disasters, and climate change impacts.”


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