Emissions trading is a tool for sending price signals to producers, consumers and investors to reduce the greenhouse gas (GHG) emissions that contribute to climate change. Globally, 23 emissions trading systems have been implemented or scheduled as of 2017.
The New Zealand Emissions Trading Scheme (NZ ETS) began operation in 2008 and continues to serve as a principal element of New Zealand’s policy response to climate change. Motu researchers have written a concise and practical guide to how the ETS works today and how it has evolved over time.
We have also released seven short videos answering questions asked by students relating to climate change and the ETS. Below is a compilation video.
How emissions trading works
An ETS sets a regulatory limit on emissions by covered sectors and translates that limit into a market price which changes behaviour. Obligated parties are required to surrender to the government a tradable emission unit for each tonne of emissions for which they are liable. The government limits the supply of emission units into a trading market which then sets the price based on unit supply and demand. Each tonne of emissions carries the price to obligated parties of surrendering an emission unit to the government. The price of emissions is passed on across the supply chain, raising the relative cost of higher-emission goods and services, making lower-emission behaviour more competitive, and creating an incentive to reduce or avoid emissions.
An ETS allows the market to discover where emissions can be reduced at the lowest cost across the participating sectors. Reducing the number of units available to the market provides for a gradual transition to a low-emission economy.
Emissions trading can be an important part, but not the only part, of an effective strategy for reducing emissions. Other policies can enable the market to respond more effectively to price signals, assist those disproportionately impacted by emission pricing, and address emission reductions by sectors outside of the ETS.
Clear Price Signals: This presentation details an integrated proposal for managing unit supply and prices in the NZ ETS in a way that generates more predictable price signals to guide domestic decarbonisation. There is also a Motu Note that presents the proposal that emerged from the group’s work in more depth.
Design Issues: The design of an ETS has been honed over more than ten years and Motu has several research papers that may be of interest in this area:
Emissions Pricing: New Zealand is not yet on a pathway toward net zero domestic emissions. Decision makers will need to weigh carefully the balance of investment between overseas mitigation which may cost less per tonne in the near term, and domestic mitigation which offers a longer-term payback and domestic co-benefits as New Zealand moves toward net zero domestic emissions. This paper considers how New Zealand might achieve more effective emission pricing by either reforming the New Zealand Emissions Trading Scheme (NZ ETS), replacing the NZ ETS with a carbon tax, or complementing the NZ ETS with a carbon tax.
Timeline: This interactive timeline tracks the evolution of the ground-breaking New Zealand Emissions Trading Scheme (NZ ETS) from 2005 to 2015. Timeline entries include links to key documents, which provide a way to navigate through the government’s public archive on the NZ ETS. A 3D button enables the user to zip down the NZ ETS Superhighway in three lanes: international climate policy development, NZ ETS policy development and NZ ETS legislation and implementation.
Tackling Agricultural Emissions Film: New Zealand can potentially make a significant contribution to the global climate effort through research and policy innovation to mitigate agricultural emissions. This film covers a wide range of topics, and many of the ideas in it come directly from what we learnt through the AgDialogue process. Importantly, we cover how we might be able to achieve some real reductions in New Zealand’s agricultural GHGs (greenhouse gases).
Further Research: Motu has compiled downloadable handouts detailing the in-depth research in the following areas: