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PCE Simon Upton Argues NZU Free Allocation Is A Sham

First published in Energy and Environment on January 30, 2020.

Parliament’s Environment Committee resumed sitting this week hearing submissions on the Resource Management Amendment Bill and the Climate Change Response (Emissions Trading Reform) Amendment Bill.

On the ETS reforms debate centred around the inclusion of bringing agricultural biological emissions in a backstop arrangements and treatment of ‘emissions-intensive trade-exposed eligible industrial activities’

The treatment of EITE activities is being intensified because of Climate Change Minister James Shaw desire to rethink the electricity allocation factor and in the longer term the baseline allocation.

This is outside the consideration of the committee, but is hearing submissions on the planned phase down of the free allocation of NZ units for EITE. The Parliamentary Commissioner for the Environment Simon Upton told MPs the Bill should be changed so free allocation is only provided to EITE activities where there is a demonstrable risk of relocation of the activity overseas, and the relocation would result in an increase in global emissions.

He also took issue with the free allocation provided for agricultural activities of 95% saying instead it should be based on a clear rationale that is consistent with the 2050 target and NZ’s obligations under the Paris Agreement, and is reviewed as necessary.

The submission also recommends the Government explore alternative ways of mitigating risks of emission leakage, such as the use of a border emissions adjustment. Upton said “Notably, that mechanism is being actively considered by the European Union and could be more effective and efficient than the provision of free allocation going forward”. This EU proposal is receiving considerable push back, particularly from the US, which argues it is just a tariff by another name and threatened reprisals if enacted.

Upton said the free allocation was an overused subsidy with a “particularly lax” regime, which provides subsidies to activities that have no demonstrable risk of emissions leakage.

It both failed to incentivise the adoption of less emissions intensive production methods and potentially awards windfall gains to those who did reduce emissions.

“Unfortunately, the proposals in this Bill do not adequately address these defects and would not ensure that EITE activities undertake their fair share of the burden of meeting the 2050 target and NZ’s obligations under the Paris Agreement,” the submission said.

“If the free allocation regime is not tightened, agriculture and EITE activities will eventually consume most, if not all, of NZ’s entire emissions budget, placing considerable pressure on the rest of the economy. If the necessary emissions reductions cannot be achieved by the rest of the economy, the NZ government will need to address the shortfall through the purchase of international units”.

He said there was no analysis to establish there is a risk of emissions leakage, let alone that the leakage could result in an increase in global emissions.

“A cynic might well conclude that the regime is partly driven by unacknowledged considerations, such as the employment opportunities EITE activities create. It is, of course, open to Parliament to decide that such considerations should be taken into account. In that case, their inclusion should be transparently provided for. In my view, such an approach would amount to being blatantly protectionist at the expense of the world’s environment which NZ professes to be concerned about. As such it is not an amendment I could support.”

Upton said while the Bill does not specifically deal with allocative baselines, the Minister will be able to increase the phase out rates of the level of assistance for specific EITE activities in a range of circumstances, including a situation in which there is a ‘risk that the value of the allocation for the activity will exceed the cost of meeting the emissions trading scheme obligations in relation to the activity’.

However, the Minister should be required, rather than being merely permitted, to make appropriate adjustments, particularly given that we are being overly generous already,” Upton said.

In order to do this the Bill recommends the minister being given more powers to require information from those receiving a free allocation.

Upton said it has been originally intended to phase out the free allocation altogether by 2025.

“With just five years to go, no progress has been made. The Bill’s default phase out rates will not be sufficient to reduce free allocation to zero by 2050, despite the 2050 target in the same piece of legislation envisaging a level of emissions equivalent to net zero long-lived gases in that year.”

In regard to biological emissions, Upton said his preference was for them to be priced via a levy, rather than the ETS. However, if the Government pursues the option of having these emissions enter the ETS then it should explain the rationale for 95% free allocation as it would create little incentive to reduce emissions and the current proposed rate of phase out would continue free allocation for 95 years once it was triggered.

First published in Energy and Environment on January 30, 2020.

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