New Zealand can fund mitigation overseas and progress at home.
Purchasing international emission reductions (IERs) can help New Zealand make a more ambitious and cost-effective contribution toward global mitigation and accelerate developing countries’ low-emission transition. However, international purchasing should not divert New Zealand from its domestic decarbonisation pathway and emission price trajectory. Furthermore, the government will need to ensure that all IERs accepted in the NZ ETS and counted toward its targets have environmental integrity, are not double counted by the seller, and have government approval by the seller and New Zealand. IERs should have the same value to the climate as reductions “Made in New Zealand.” Furthermore, New Zealand should financially support mitigation only in countries less economically advanced than our own.[i]
The Paris Agreement has fundamentally changed how countries will trade IERs over 2021–30. Direct international purchasing by NZ ETS participants under a new UN market mechanism (Article 6.4) may not become possible for a considerable period of time. Government-to-government mitigation transfers are enabled under Article 6.2 and could take many possible forms. One is ETS linking, which is complex and requires harmonisation of features affecting unit integrity, supply and price. Full buy-and-sell ETS linking appears undesirable and unlikely for the NZ ETS in the foreseeable future given the loss of sovereignty and other risks this would involve. Buy-only linking could become possible under appropriate constraints but suitable systems in developing countries that would produce gains from trade are under development.
In our preferred approach,[ii] New Zealand’s purchasing of IERs should be managed by the government. For the foreseeable future, all purchasing will need to occur through government-to-government agreements. However, options can be identified enabling private entities to play a role in those agreements and receive international emission reductions in return. Motu and international researchers are collaborating to develop a “climate team” mechanism for international climate change cooperation which could facilitate government purchasing.[iii]
The government has signalled it will limit the quantity of international emission reductions (IERs) if the system reopens to such units in the future.[iv] Questions remain about how the limit will be defined, whether it will apply to purchasing by the government as well as NZ ETS participants, how it will affect overall unit supply, what quality criteria will apply, and where such units might come from in the near future.
We suggest that if it becomes possible for NZ ETS participants to buy IERs in the future, a quantity limit should apply as a percentage of the surrender obligation and participants’ international purchasing should offset other supply under the cap so that New Zealand retains its ability to make deliberate decisions about its decarbonisation pathway and emission prices. There may be a case for the government not to devolve future purchasing to NZ ETS participants so that taxpayers, rather than participants, can continue to receive any gains from trade.
[i] Equal or more advanced economies should have targets that make their mitigation costs at least as high as ours. If they do not, we should apply pressure to them to increase their ambition rather than paying them to do so.