Overview of industrial allocation

The Government provides allocations of emission units to industry for activities that are both emission-intensive and trade-exposed (EITE). This is called industrial allocation. It recognises that NZ ETS costs might affect the international competitiveness of some businesses.

Introduction to industrial allocation

Industrial allocation recognises that NZ ETS costs might affect the international competitiveness of some businesses. Those that meet the criteria prescribed in the Climate Change Response Act 2002 [New Zealand Legislation website] may be eligible to receive an industrial allocation of NZUs at no cost.

Industrial allocation is targeted at activities (production processes) that are both emission-intensive and trade-exposed.

An emission-intensive production process has significant fuel and energy use or process emissions, when compared with the overall revenue generated from what is produced.

Trade-exposure and competitiveness

Trade-exposure is when NZ ETS costs are unable to be passed on to consumers.

This happens when the goods produced face competition from those produced in countries that do not have similar emissions costs.

Industrial allocation aims to reduce competitiveness issues for New Zealand businesses impacted by NZ ETS costs in the global marketplace. These trade-exposed businesses are unable to pass on increased costs to consumers because they are competing with businesses in other countries.

Reducing carbon leakage

This competition could lead to businesses relocating to countries which do not have equivalent climate policies that price emissions. Relocation would see a loss in production in New Zealand and may also increase global emissions – this is called carbon leakage.

Reducing emissions with industrial allocation

Businesses receiving industrial allocation are still incentivised to reduce their emissions. Businesses still face NZ ETS costs for a proportion of the emissions stemming from the activity.

  • For example; highly emissions intensive firms face NZ ETS costs of 10% of their emissions, and moderately emissions intensive firms face 40% of NZ ETS costs.

By reducing their emissions they may be able to benefit from selling NZUs allocated to them. The allocation of NZUs is calculated on production levels, so if a business reduces its emissions while maintaining production levels it will have extra NZUs which it can sell.

Those who receive allocated NZUs can use them to meet any NZ ETS obligations they may have. Allocated NZUs can also be sold or traded which helps increase the liquidity of the NZ ETS market.

If you would like further information about how to apply for an industrial allocation, see Industrial allocations [Environmental Protection Authority website].

Other types of allocation

In addition to industrial allocation there are a couple of other types of allocation to be aware of.

One-off allocations

The Government provided one-off free allocations to compensate for the loss of asset value resulting from the NZ ETS for fishing and forestry.

  • Fishing

Fishing quota owners were given some NZUs in a one-off allocation in 2010 to compensate for the effect of increased fuel costs from the NZ ETS on the value of their fishing quota.

  • Forestry

Allocation was provided to owners of pre-1990 forests to help offset the decrease in land value which was caused by less flexibility in terms of how land could be used. This is because owners of pre-1990 forest land face obligations under the NZ ETS if the land use is changed from forestry (deforested).

Scale of industrial allocation in New Zealand

As industrial allocation is targeted at emission-intensive and trade-exposed activities, only a minority of New Zealand emitters receive industrial allocation.

In 2019, 77 firms received industrial allocated units. Fewer than 15 of these firms were NZ ETS participants, compared to about 275 total NZ ETS mandatory participants (excluding the over 2000 voluntary NZ ETS participants from the forestry sector).

Some of these firms received free allocation for only one or two activities out of several emitting activities for which they have to surrender units, because not all their activities meet the eligibility criteria.

The remaining industrial allocation recipients were firms that do not participate directly in the NZ ETS but receive units because they are affected by costs that are passed through from their use of fuel or electricity. Many of these firms are small horticultural producers (growers of cut roses, cucumbers, capsicums and tomatoes).

Industrial allocation contributes to unit supply in the NZ ETS

Industrial allocation is a relatively small proportion of unit supply in the NZ ETS. In 2016, the total number of units provided through industrial allocation in the NZ ETS was 4.3 million.

The total number of units surrendered from sectors other than forestry was 19.5 million (i.e. industrial allocation amounted to about 22 per cent of annual unit demand).

Eligibility criteria for industrial allocation

To be eligible to receive industrial allocation, an activity must meet two tests provided in the Climate Change Response Act 2002 [New Zealand Legislation website].

The tests are:

  • An emissions intensity test, showing that the activity produces a large amount of emissions in relation to the revenue it generates.
  • A trade exposure test, which considers whether there is international trade of the activity’s output and if importing/exporting the output is viable.

There are currently 26 eligible activities. See the full list eligibility list here [Environmental Protection Authority website].

There are two allocation tiers which depend on the emissions intensity of the activity:

  • Highly emissions intensive activities (emissions intensity greater than 1,600 tCO2-e / NZ$ 1 million of revenue) receive industrial allocation that covers 90% of the emissions for the activity.
  • Moderately emissions intensive activities (emissions are greater than 800 tCO2-e / NZ$ 1 million of revenue) receive industrial allocation that covers 60% of the emissions for the activity.

Eligibility for all firms carrying out an activity is based on historical emissions across the sector, generally using emission levels from the 2006-2008 period.

Individual firms must apply to receive industrial allocation

Individual firms must apply to receive industrial allocation. The exact number of NZUs provided each year is adjusted for production. This means when firms increase or decrease their output, the amount of assistance that they receive correspondingly rises or falls. This allows for the allocations to be based on actual, current production.

If you would like information on how to apply for an industrial allocation, see Industrial allocations [Environmental Protection Authority website].

Method for calculating an allocation

Actual allocation = baseline x output x allocation level *Either 0.6 or 0.9