11. The path forward for longer-term policy development

11.1 Decisions on longer-term measures in New Zealand

• defining the architecture of the measure or combination of measures to be introduced, such as emissions trading, a greenhouse gas charge or a hybrid measure

• defining the stringency of measure(s) (ie, what level of emission reductions should be required, or how much cost should be imposed on a particular sector or the economy as a whole)

• determining when to introduce the measure(s) in the economy generally and/or in particular sectors. The uncertainties for the longer-term international policy environment and New Zealand’s sustainable development goals create a number of challenges for timing and process when developing climate change policy.

A key question is the extent to which these decisions can or should be made now or left for future decision. To the extent that there are uncertainties in future conditions, it will be desirable to allow flexibility in the development of any measure to adapt to those conditions, and/or allow for conditionality in when or how stringently any particular measure might be applied. However, specifying measures clearly now provides greater certainty for investment and business planning and better guidance for the development of transitional measures.

Two possible approaches to this question, for the purpose of discussion, are:

a) To define the architecture of the measure now but leave decisions about the stringency and the scope of the measure (ie, which emitters or sectors would be covered) until key uncertainties, particularly the nature of the international policy framework, are clarified. For instance, a decision could be made to apply an emission trading measure in the future, but to delay deciding on the scope of coverage of this system and the stringency with which it would apply until the international situation was clearer. This would allow development of general design features of the measure to commence now, and allow time for those likely to participate to build capacity. This approach would also provide some clarity of the future path for climate change measures.

b) To outline a set of principles for when a measure would be applied and how stringently, but not to specify either an actual measure or measures until the international situation is clearer. While allowing greater flexibility, this approach would provide less clarity and certainty as to the future path for climate change measures.

A number of different approaches or combinations of approaches can be taken to making the sequence of required decisions to introduce a longer-term measure.

11.2 Indicative proposal for discussion

The following is an indicative proposal for a path forward for climate change policy for the purposes of discussion. This proposal attempts to integrate some of the considerations addressed in this paper. This is not a government policy proposal or preferred approach. It should not be interpreted as a reflection or prediction of government policy.

The following decisions could be taken by the government in 2007 to provide clarity and increased certainty around the future framework for climate change policy, and to guide the selection of transitional measures.

• The government would introduce a broad price-based measure for New Zealand at some date not earlier than 2012 and when international conditions were appropriate.

• The types of conditions that would support the introduction of a broad price-based measure could include, among other things, the following:

  • New Zealand assumes a target, or otherwise participates, in an international climate policy framework, whether on a national or sectoral basis;
  • The measure does not have a significant detrimental impact on the international competitiveness of New Zealand’s key producers because it expressly assumes most of our competitors would be doing something similar;
  • New Zealand can use the measure to access least-cost emission reduction opportunities, both globally and sectorally; and
  • The devolution of emissions liability and costs can be administered efficiently.

• The preferred price-based measure would be emissions trading unless future international conditions preclude the use of emissions trading.

• Mitigation measures for major emitters implemented prior to 2012 should be consistent with a later move to a broad price-based measure.

• More specifically, these measures for major emitters should build their capacity to measure, monitor and report their emissions; build their capacity to trade emissions allowances domestically and internationally; and signal the need to factor the cost of greenhouse gas emissions into future investments.

• Prior to the introduction of a broad price-based measure, mitigation measures for major emitters should encourage low-emitting or carbon neutral investment and avoid perverse incentives to delay emission reduction activities.

Decisions to be made in the future

Decisions on a broad price-based measure

When the international climate change policy framework post-2012 becomes clearer, the government would decide the following:

• when to move to a broad price-based measure, either across the economy or for selected sectors over time;

• what the broad price-based measure would be (emission trading or greenhouse gas charges), noting the preference for emissions trading if conditions were appropriate; and

• how stringent the measure would be (eg, in the case of emissions trading, the allocation methodology, the option to use domestic and international flexibility mechanisms, and/or the level of non-compliance penalties), depending on New Zealand’s strategic climate change goals and the stringency of obligations faced by other nations.

These are unlikely to be simple decisions. The future international situation is currently uncertain and may be complex. It may be appropriate to move to a price-based measure in some sectors sooner than others, although the ultimate goal would be to move to a broad emission trading system that allows access to least-cost emission mitigation opportunities. A mix of price-based and other measures may continue to be appropriate in the longer term.

Conditions for decisions on a future broad price-based measure

The following factors could be considered in making the decisions above:

• The stringency of obligations taken on by other nations or by sectors in other nations.

• The breadth of coverage of international measures, particularly the coverage of nations that compete with New Zealand in international markets.

• The consistency and nature of measures applied internationally. In other words, whether there is a particular measure, such as emissions trading, that is used widely internationally and creates an identifiable and accessible international price for greenhouse gas emissions, or whether a more piecemeal set of measures is applied.

• The availability of access to international emissions trading markets or other international flexibility measures.