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Late last night by video conference from the basement of Shell Centre in London, with colleagues in New Zealand on hand locally, I spoke before the Parliamentary Select Committee that is currently reviewing the New Zealand Emissions Trading System. This review comes following the passage of the legislation, but with a new government now in power. I am hopeful that this will be seen as an opportunity to tidy up a few issues, rather than start again – now is not the time for that to happen.
You may be interested in reading my speaking notes – it is pretty much what I said, although not word for word:
- As a signatory of the UNFCCC and the Kyoto Protocol New Zealand has effectively made a long-term commitment to reduce emissions. This changes the operation of the economy and the investment opportunities available in New Zealand.
- This change is real – technologies such as carbon capture and storage will feature in New Zealand’s energy future and must be considered by business, but today the tools to manage that change are not available to business in New Zealand.
- The principal economic tool is a price for carbon dioxide emissions. Without a price on carbon, the targets that New Zealand now faces cannot be economically delivered.
- A price for carbon is best delivered through the implementation of an emissions trading system, such as the one under review by this committee. Shell believes that emissions trading is the most efficient and effective tool for cascading the obligation of the New Zealand government into the broader economy.
- Emissions trading is a policy instrument specifically designed to deliver the environmental objective that the government is seeking. Business prefers this approach because it delivers the outcome at lowest cost to the economy, with flexibility for business and offers the necessary regulatory certainty within which future investments can be made.
- Today in the EU, where emissions trading is a reality and targets have been set through to 2020, business is responding to the new economic reality of a CO2 price. Let me give you some real examples:
- In Shell we have developed a CO2 abatement curve for every installation in the EU and we are actively progressing a CCS project pipeline, screening potential projects and undertaking feasibility studies.
- The electricity market is now CO2 optimised on a daily basis through fuel switching.
- The proposed design of the NZ ETS is right for an economy the size of New Zealand in that it draws on the trading flexibility offered by the Kyoto Protocol and effectively transfers this to the business participants. Any other design would probably be overly restrictive for this economy. In utilising the Kyoto design, the ETS will allow NZ to fully link with other systems, such as the CPRS that is being designed in Australia and the EU ETS already in operation in the European Union.
- One of the key design aspects of an ETS is the mechanism for the distribution of allowances into the economy. Shell supports a transition from free allocation of allowances to 100% auctioning in line with the progressive pass through of the carbon price into the goods and services provided to the consumer. This transition may be more rapid for some sectors than others. Any distribution of allowances that does not follow this approach results in an inequitable distribution of allowance value (capital) within the economy.
- New Zealand is very dependent on both import and export markets, often with economies that do not currently have a price for carbon. This means that when exporting into an international market it is not possible to pass through the CO2 price. Similarly, when importing goods from such markets, New Zealand business may be at a competitive disadvantage due to the need to buy allowances for emissions associated with the manufacture of such goods. These imbalances can be corrected by continued free allocation of allowances until the imbalance no longer exists.
- The ETS should not be the only element of the necessary policy framework to address climate change. There is another important dimension to this issue, that being the development of technology. As an example, CCS, although understood and well researched, has not been demonstrated at scale anywhere in the world. The EU has recognised this and in addition to the ETS, has put significant stimulus into the demonstration phase of this technology – the amount could be as high as €10 billion for 12 big projects. New Zealand also needs to support the large-scale demonstration of key low carbon technologies.
- Secondly, an ETS may still fail to deliver reductions in some sectors. Shell believes this instrument is best suited for the power generation and industrial sectors, with a more standards based approach in the transport and buildings sectors – for example the use of stringent building codes and energy efficiency targets for vehicles.
- Shell supports the proposed emissions trading scheme. But there is room for improvement – it is of particular importance to address the issue of free allocation of allowances. The current proposal makes certain assumption about trade exposure and reduction opportunities. A more quantitative approach should be implemented.