New Zealand Resists High Carbon Price, Plans Australia Link

New Zealand is resisting higher carbon prices as a threat to its economic recovery, even as the government steps up plans to merge its emissions market with the two-week-old program in Australia.

New Zealand will review its climate program in 2015, a year earlier than previously scheduled, to coincide with Australia’s planned transition from a fixed-cost system to market-based pricing, Tim Groser, Minister for Climate Change Issues, said in an interview in Wellington. The country decided against restrictions for now on how many so-called international offsets emitters can use to meet New Zealand’s limits on greenhouse gas linked to climate change.

“We considered the international economic situation is very fragile, and our recovery is actually coming in to play,” Groser, 62, said in the interview. Regarding Australia’s emissions-trading program, “the review is ideally place to allow us to start linking at an operational level, rather than just talking about it.”

New Zealand is trying to balance economic and environmental concerns, delaying measures last week that would have raised its carbon price. The decision came a day after Australia introduced a fixed price that is more than twice what New Zealand emitters pay. The South Pacific nation, which got about 74 percent of its power from renewable sources in 2010, is focusing on economic growth as it seeks to recover from earthquakes last year.

Polluters will still be able to surrender one New Zealand Unit (NZU) for every two metric tons of carbon they emit, according to the Climate Change department’s website. That means emitters can effectively pay a fixed price of NZ$12.50 ($9.88) a metric ton for two permits, or buy NZUs on the open market, where today’s spot prices is NZ$6.10, down from as high as NZ$8.50 on Feb. 28.

Unlimited Offsets

New Zealand firms can also comply with domestic pollution caps by purchasing unlimited amounts of Certified Emission Reductions under the United Nations’ Clean Development Mechanism. These are known as CERs, or offsets, because they let emitters pay for emission reductions in developing nations such as China or India when it’s more cost-effective than domestic abatement.

CERs traded as low as 3.34 euros ($4.10) today on the ICE Futures Exchange in London. That’s near the record low of 3.31 euros on June 12.

New Zealand, which accounts for less than 0.2 percent of the world’s emissions, is missing the chance to protect its “clean, green brand,” the Green Party said last week. The failure to propose tighter measures on polluters is slowing the nation’s ability to tackle climate change, it said.

‘Fair Share’

“We will do our fair share, but there is absolutely no point in ramping it up beyond that,” said Groser. “It will not make a fig of difference if the U.S., China and other countries outside the Kyoto protocol that make up 85 percent of current emissions blowing into the atmosphere, don’t do serious stuff.”

China plans to start pilot programs next year to cap and trade emissions in seven of its largest manufacturing regions. California, the largest U.S. state, also plans to begin emissions trading next year, though a plan to use cap and trade and the federal level has stalled in Congress.

Australia opted to set limits on how many CERs its 300 largest emitters can use, setting the maximum at 50 percent when it moves to market-based pricing in 2015.

Record house prices and rising consumer spending in June signaled that New Zealand’s economy is still growing after gross domestic product rose 1.1 percent in the three months through March. The central bank last month left the official cash rate unchanged at a record-low 2.5 percent and indicated it may not change until next year. The nation’s manufacturing industry almost stalled last month, a report showed yesterday.

The Cheaper Option

It’s currently cheaper for New Zealand polluters to meet their obligations via UN offsets rather than buying New Zealand Units. Unlimited offsets effectively set a ceiling on domestic prices. An oversupply of permits in the European market, triggered by the global financial crisis, has created a surplus in both the EU and UN markets, spilling over to the price paid in New Zealand.

The country, one of the first outside the EU to use cap and trade to limit emissions, has decided against limiting the use offsets in favor of staying linked to the UN benchmark price. That was a reversal of indications in April that New Zealand would restrict CERs to encourage purchases of domestic permits. The government is wary of volatility driven by European regulation, Groser said.

“As other countries lag behind New Zealand and the EU in establishing carbon markets, it is not surprising that New Zealand isn’t implementing measures that will tighten the market and increase the cost of compliance just yet,” said Andrea Du Rietz, a London-based analyst with Bloomberg New Energy Finance.

Political Future

Australian Prime Minister Julia Gillard risked her political future on a carbon price that started at more than double the cost of permits in Europe and New Zealand. Australia’s biggest polluters will pay an initial fixed price of A$23 ($23.32) a ton, which will gradually rise until a cap-and-trade system with price floors and ceilings begins in 2015.

The decision to merge New Zealand’s program with the one in Australia, with five times as many people, will depend on how the systems evolve, said Groser.

“It’s a good idea because the process of linkage necessarily involves trying to even out any misalignment between the two schemes,” said Chris Bougen, a Wellington-based lawyer at Chapman Tripp who advises on emissions trading, in an interview. “In addition to that, you will get greater liquidity in your market.”

Reconsidering Agriculture

New Zealand’s 2015 review will also reconsider whether agriculture should be introduced into its emissions program, started in 2008. While the industry accounts for half of New Zealand’s emissions, no country has priced agricultural emissions and farmers are actively seeking to curb them, Groser said. Exports account for a third of the nation’s economy.

“Applying additional carbon costs on agriculture here, when they are still not faced by the majority of producers elsewhere in the world, simply undermine the competitiveness of the New Zealand agricultural sector, our most important export sector,” Bruce Donnison, head of global sustainability at Fonterra Cooperative Group Ltd., the world’s biggest dairy exporter, said in a statement.

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