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Parker: Building the global carbon market

Hon David Parker
Minister responsible for Climate Change issues

12 December 2007

Speech notes

Building the global carbon market - the International Carbon Action Partnership

Climate Change Minister David Parker’s speech notes for the ICAP side event, at the EC Pavilion, 12 December 2007,
Bali, Indonesia

It is a pleasure to be here this evening to speak at the ICAP side event. I would like to thank the European Commission for hosting this event and for the opportunity to speak today.

I would like to focus on three key messages:

* First, New Zealand remains committed to playing its part in the global solution to this unprecedented challenge; responding to climate change and becoming more sustainable is a high priority for New Zealand

* Second, New Zealand believes that emissions trading plays an important role in the international response to climate change. We have introduced legislation for a domestic emissions trading scheme linked to international Kyoto markets, which is ground-breaking in its breadth of coverage of all Kyoto gases in every sector of the economy

* Third, New Zealand looks forward to working with its ICAP partners and other countries to help shape a durable and effective international carbon market that promotes cost-effective emission reductions, economic opportunity, and innovation. I will set out areas where I think special focus is needed by ICAP to help shape action to reduce emissions in the future.

I will start with why climate change is a priority for New Zealand, and how we are playing our role in responding to the challenge.

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New Zealand's biologically-based economy relies on a benign and stable climate for production. Our natural ecosystems, water supplies and agricultural production are all vulnerable to the effects of climate change. We will feel the impacts of climate change on our trading partners and the global economy. We are also concerned for the welfare of other countries, particularly our Pacific neighbours who are very vulnerable to climate change impacts.

By acting sustainably New Zealand will enhance our ability to prosper and live happy lives in a world where environmental degradation is getting worse, sustainability is increasingly valued, and where environmental costs are increasingly being internalised to the economic transactions that cause them. People in New Zealand want to be a part of the solution.

We have set specific objectives and targets to move New Zealand towards greater sustainability and carbon neutrality:
* By 2025, 90 per cent of electricity will be generated from renewable sources. In pursuit of this, we have restricted the construction of new baseload fossil fuel generation for the next decade. We will achieve carbon neutrality in electricity generation by 2030
* We aim to cut our per capita emissions from transport in half by 2040
* In support of this we are setting out to be one of the first countries to introduce electric vehicles widely, powered by our renewable electricity
* By 2020 we aim to achieve a net increase in forest area of 250,000 hectares
* By 2040 we aim to be carbon neutral in the total energy sector – including not just stationary electricity production, but also industrial process emissions and transport energy
* We aim to remain a world leader in agricultural livestock emissions reduction research, and in the early adoption and application of new technologies that reduce agricultural greenhouse gas emissions.

Many other concrete measures are in place to support these objectives. These include the implementation of a New Zealand Energy Strategy strongly focused on renewables and efficiency; major government investments in public transport and sustainable land management; a mandatory biofuels sales obligation; and a programme to make the public service carbon neutral.

Our current drivers of economic growth and quality of life, are emissions intensive. New Zealand needs to manage the transition to a low-emissions future. This necessitates introducing a price on greenhouse gas emissions to incentivise our businesses and producers to find ways to reduce those emissions.

This brings me to the New Zealand Emissions Trading Scheme. Here are some of the main features:

The scheme includes all six of the greenhouse gases covered in the Kyoto Protocol. By the beginning of 2013, every sector of the economy will be included. This makes it unique in the world. The scheme includes the forestry and agriculture sectors as direct points of obligation under the scheme. This reflects New Zealand’s economy and emissions profile.

The scheme will be internationally linked to markets for Kyoto Protocol units. Each “New Zealand Unit” in the scheme will be backed by a Kyoto emission unit, which will be tradable on international markets. It operates within a capped allocation rather than on an intensity basis. It has no price cap or price floor, although there is the power for the government to intervene should, for example, the market collapse in the case of any gap between the first Kyoto commitment period and its successor. We hope this won’t be needed.

The scheme is intended to be durable and contribute to long-term climate change efforts well beyond the Kyoto Protocol’s first commitment period. Accordingly, it is designed with flexibility to adapt to future international commitments and agreements.

Free allocations of units in the scheme will be limited to trade-exposed industries that are unable to pass on costs. There will be no free allocation to electricity generators or transport fuel suppliers, as these parties are able to pass on cost increases to consumers. All their units have to be purchased at auction in New Zealand, or internationally. Importantly, the decision on which parties receive a free allocation of units is separate from the decision on which parties have obligations for emissions under the scheme. This reduces administrative complexity and ensures broad coverage of emissions across the economy.

In every sector, allocation is for less than current emissions, creating a full cost for increases in emissions, and a full financial benefit for emission reductions across the whole economy.

The New Zealand government recognises that continuing engagement with stakeholders will be vital to ensure that we get the details right, and to maintain the widespread domestic acceptance necessary for durable long- term policy.

This brings me to the subject of ICAP. New Zealand is delighted to be a founding member of this partnership to promote collaboration on effective design, compatibility and linking of emissions trading schemes.

New Zealand views emissions trading as an important element of the policy framework for the global response to climate change. The fundamental economic principle which underlies emissions trading can be found in every economy. The New Zealand government’s commitment to a domestic emissions trading scheme reflects the ability of emissions trading schemes to be efficient, fair, flexible, and adaptable to national circumstance. An emissions trading scheme enables any country with adequate measurement of emissions to incentivise emissions reductions at the lowest cost. It does not avoid the need for complementary regulation of minimum standards, but it does avoid the need to over-regulate the economy.

Clearly many other countries have reached or are coming to a similar conclusion. There is growing momentum for the use of regional and national emissions trading schemes.

Most, if not all, of these emissions trading schemes will link via Kyoto mechanisms, like the Clean Development Mechanism or trade in AAUs, to other countries. This makes it almost inevitable that these schemes will be linked, to a greater or lesser degree, in an international market.

Working together now to maximise prospects for effective linking promises substantial benefits; not doing so would be a substantial lost opportunity.

The benefits of linking and expanding carbon markets are many and often cited. Wider carbon markets will reduce costs for participants and create further incentives for innovation and technology transfer. They can provide positive incentives for wider participation in global agreements. By increasing coverage and compatibility of trading schemes we can also work to level the playing field in different countries or regions, and thereby minimise trade and competition risks to all of our economies.

Through the Kyoto mechanisms, substantial benefits will also accrue for developing countries. The flow of capital to finance technology will be important to help developing countries to contribute to emission reduction efforts in the future. It will also help recipient countries address their other pressing environmental issues like clean air and water.

It is therefore pleasing to see the diverse range of membership within the ICAP partnership. I believe that ICAP will have an important role to play in the development of a durable, truly global, carbon market.

The ICAP should in my view play an important role in making necessary improvements to the rules relating to the use of Kyoto mechanisms like the Clean Development Mechanism and trade in AAUs. It is not yet clear how the capital transfer rules under the protocol should be adjusted for the future. There are some areas where I would recommend in depth attention:

* We need to ensure these precious capital flows are focussed on ensuring the widespread adoption of the most crucial low-carbon technologies. We already know that to beat climate change, we need to deploy low-carbon electricity generation, and new low-carbon transport technologies, and make progress in emissions-intensive sectors like aluminium, steel and cement. In my opinion we need to consider linking generous capital flows with agreements with recipient country governments to introduce and enforce regulated minimums. For instance, to be eligible to obtain money generated by emissions trading schemes for clean stationary energy, such as for carbon capture and storage, then we should consider whether this should be linked to adoption of a broader regulatory rule against high-carbon electricity generation such as new coal fired power stations without carbon capture and storage.

* Issues around AAUs are complex. Nevertheless, it is not in the interests of sellers of AAUs, nor of countries like New Zealand that want carbon markets to flourish, for the price of carbon to collapse or to spike to unduly high levels. ICAP participants need to work together to seek a fair solution to this issue.

* We need to protect the integrity of carbon markets. Two further areas spring to mind. Firstly, corrupt or negligent practices, including poor audits of savings or additionality, must be stamped out. Secondly, we must take care not to pay for what ought to happen anyway. We should not undermine or pay for regulatory standards that ought to be applied anyway.

Issues like these will need to be resolved to maintain the reputation of international linkages and Kyoto mechanisms in the developed countries which CDM recipients in developing countries and sellers of AAUs rely upon.

The integrity and effectiveness of this emerging market will be fundamental to its longevity. Get it right and it will grow and be a powerful force for emissions reductions and capital flows worldwide. Get it wrong and it risks coming to an abrupt end because developed countries will lose the political mandate in their home countries, and the flow of capital desired by developing countries will dry up – to the detriment of sustainable development, especially in developing country economies and, of course, to the detriment of the environment.

I expect that the ICAP process will also play a useful role domestically in New Zealand as we develop and refine the details of the New Zealand scheme. There are clearly many areas where common issues will arise to be solved between schemes.

In conclusion, I commend the ICAP initiative. New Zealand looks forward to working with the other ICAP members to maximise the potential of the global carbon market and combat climate change.


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