A push to link up carbon markets
While the OECD urges New Zealand to rely less on international carbon credits, a leading carbon markets lawyer says the nation’s businesses should be pushing in the opposite direction
Bell Gully’s Simon Watt – who two decades ago helped construct the legal foundations for what would become the Emissions Trading Scheme – says New Zealand’s recent pact with China on emissions-curbing strategy could be a good first step to creating a joint carbon market, possibly also including Japan and South Korea.
Officially, the announcement of New Zealand-China cooperation focused on the nations working together to share technical knowledge and present a united front in international negotiations over the treatment of agricultural emissions.
But Watt would like to see discussions quickly move to building a joint carbon market.
He’ll be suggesting to his clients, which include forestry and oil and gas companies, that they pursue the carbon trading idea. “Perhaps it needs a push from business to make that linkage go faster,” he says.
An Asia-Pacific emissions market would lower the cost of buying units compared with offsetting carbon within New Zealand, says Watt.
Past controversies over New Zealanders buying cheap and largely meaningless Eastern European credits have tarnished the concept of global emissions trading. But Watt believes the nations could devise a credible and verifiable system that would genuinely cut emissions for less cost overall. “There is every reason to be confident a credit generated under the relevant rules in China, Japan or Korea is just as relevant as a carbon credit generated in New Zealand,” he says. “The way it is verified needs to be robust so it doesn’t matter where that carbon is generated.”
“From a New Zealand business perspective, it would be great to see a move at pace toward linkage of carbon markets in the Asia Pacific region. It would increase liquidity of the market and we’d have lower compliance costs,” he says. “Ultimately you might see a China, Japan, Korea, New Zealand and anyone else who is ready to join. But it doesn’t need to be nationwide scheme even within China. The economy there is so vast that just focusing on particular geographic regions or economic sectors could create a completely viable ETS in China that would be capable of linking with New Zealand.”
The proposal highlights a schism between competing visions of how New Zealand should meet its emissions targets. Youth lobbyists Generation Zero want New Zealand’s greenhouse gases to be cut largely from within our borders, or at least offset by forestry or other sinks in New Zealand. International climate tracking organisations tend to focus on each country making a fair domestic effort, rather than outsourcing their obligations to other nations where emissions can be cut more cheaply. Otherwise, these groups argue, rich countries’ national emissions can keep rising in real terms while they still technically meet their promises to cut net greenhouse gases.
The OECD’s recent report on New Zealand’s environment called for several measures to tighten New Zealand’s ETS, saying the current scheme had had “limited effectiveness”, partly because of past “unlimited cheap availability of international credits”. Among the OECD’s suggestions were bringing agriculture into the scheme, limiting use of international credits and phasing out free allocations to big emitters. The overall goal was a higher and more stable price for carbon, so emitters would have an incentive to act.
Watt says the report is “very high quality and comprehensive” and he agrees with many of the recommendations, including bringing in agriculture.
“The report makes very valid comments about the fact that practically speaking [leaving out farming] places the burden on the rest of the economy and doesn’t really help the agriculture sector to adjust, and there are parts of the sector that would be well-placed to offset emissions, through planting for example. There’s not an even sharing of the burden,” he says.
But he disagrees with limits on international credits, saying a ton of CO2 avoided means the same to the climate, wherever it occurs. “That (imposing limits) could be a hindrance and cut across the goal of a least-cost carbon trading market,” he says.
“With any valid emissions reductions that can be verified, it is better that they occurred. It is a global issue and will not be helped if counties retreat into themselves and only act domestically. One thing you have seen is China increasing its global leadership on climate change. At a time when previously there were high hopes for the US and China to co-operate, we see that China is still pushing forwards. It’s valuable for New Zealand to be linked to that.”
As with international trade, Watt sees potential for countries to make bilateral agreements to keep things moving on climate action while international agreements are stalled. “That can create impetus that flows to a multi-lateral level.”
“With the early Eastern European hot air credits, everything got off to a somewhat unsound footing and that did tarnish the credibility of the original international tradability that was intended. [But] That’s probably an aberration,” he says. “It is extremely complex and it’s not surprising some aspects didn’t go well,” he says. Given time, “It seems likely that globally carbon costs will trend upwards and if you eliminate those quite artificial carbon credits from the mix and credits are from genuine emissions reductions that did require genuine effort and cost to achieve, and it’s likely you will get prices in different countries somewhat more in alignment.”
Like business leaders in the UK and elsewhere, Watt argues the price of carbon is less important to business than price certainty and stability, both of which have been lacking.
“The key for business is not so much that it’s particularly cheap or expensive, it’s having a certainty of that price path. Having these New Zealand targets of 30 percent below 2005 by 2030, nobody really knows what that looks like in reality,” he says. “What business needs is a price path and a trajectory towards those dates so they know what the cost is likely to be.”
With that in mind, he cautioned against any moves to lift the price ceiling. “It would be better to have a price ceiling, even if the cost was to accept a cost floor so the cost travelled within a band.”