Motu Economic and Public Policy Research, New Zealand’s leading independent economic research institute, is leading a Foundation for Research, Science and Technology-funded research programme that looks at climate change and ways to lessen its environmental and economic impact. Part of this research involves designing an effective emissions trading system for New Zealand and involves internationally recognised experts in emissions trading.

Motu is a charitable trust that makes all its findings readily available for the New Zealand public. We have put together some information here to be used as an aid for those interested in the use of emissions trading to address climate change. We hope that this technical information can help make the public debate on emissions trading better informed and hence more constructive.

Essential information about emissions trading systems

Part 3 – Choice of ‘point of obligation’.

In any industry, there is a vertical chain of production and consumption, with several ‘layers’ from initial production to final consumption. For example, in the electricity sector fuel is imported and sold to generators; generators use fuel to create electricity which is sold to retailers; retailers sell the electricity to businesses who use it to create products that they sell, and to households who use the electricity directly.

The ‘points of obligation’ in an emissions trading system are the entities in each industry that are required to report a defined set of information. This information is used to model the GHG emissions relating to each chain of production and consumption. The points of obligation must then surrender sufficient emission units to match those GHG emissions.

Three considerations affect the choice of point of obligation. First, we want to obtain comprehensive coverage so that all emissions in the economy are included in the emissions trading system and hence controlled under the cap. Second, we want to minimise transaction costs for both the private sector and the government. Transactions costs do not help mitigate climate change. Third, we want to provide the most clearly targeted incentives to reduce emissions. For agriculture not all activities that affect emissions can be easily measured at a small number of points – e.g. processing plants. There is a tradeoff between transactions costs and accuracy of targeting. Only mitigation activities that affect emissions as assessed at a point of obligation will be encouraged by the system.
One key consideration that does not affect the choice of point of obligation is equity. The point in the chain at which emissions are assessed and the point at which any free allocation is provided are completely separate decisions. The first is a technical decision; the second is a political one.
The point of obligation does not affect incentives to abate (except if the assessment of emissions must be inaccurate such as in agriculture) or how the economic burden is borne through the economy. Wherever obligations are placed, prices will change throughout the value chain. Since economic burdens are shared through the vertical chain of production and consumption, parties with no legal obligation also have incentives to respond.

For more information on New Zealand emissions trading go to www.ecoclimate.org.nz

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