20 March 2006

Investors with high-energy-usage businesses will be interested in the New Zealand Government’s decision to renew a proposed carbon tax in the first commitment period of the Kyoto Protocol.

A report released in December 2005 advised that a carbon tax would not result in enough emission cuts to justify its introduction. 

The decision was based on a review of New Zealand’s climate change policies. The objective of New Zealand’s climate change response is to reduce greenhouse gas emissions to 1990 levels. New Zealand’s present policies include:

• incentives for emission reduction projects; 
• Negotiated Greenhouse Agreements to provide some flexibility for businesses whose competitiveness might be put at risk by emission controls/emission charges; 
• initial exemptions for the agricultural sector conditional on sufficient research being undertaken by the sector; and
• sink credit assets and liabilities to be retained by the Government.

The Minister responsible for Climate Change Issues, David Parker, has requested a further report recommending alternative measures to reduce greenhouse gas emissions and meet New Zealand’s commitments under the Kyoto Protocol. This report is due in March 2006 and will consider:

• incentivising investment in renewable energy;
• encouraging new tree planting and reducing deforestation;
• improving the fuel efficiency of the transport fleet;
• options for a narrowly based carbon tax on major energy users and emitters who do not meet world best practice; and
• improving energy efficiency and conservation.

Businesses should, however, be assessing the potential impact of a carbon tax on any new contractual arrangements to ensure that they have appropriate contractual provisions in place to respond to the introduction of a carbon tax should this occur during a subsequent commitment period.

Businesses should also be considering the possibility of engaging in climate change projects, known as Projects to Reduce Emissions (PREs), as a way of reducing their future liability for greenhouse gas emissions.

The Government identified a number of eligibility and assessment criteria for selecting projects. A contestable bid-in approach was adopted to determine which projects receive incentives under the project mechanism framework. The framework offers incentives for initiatives that deliver defined reductions in greenhouse gas emissions in any sector of the economy and that go beyond ‘business-as-usual’.

Incentives take the form of promissory notes for Kyoto Protocol emission units, e.g. ‘carbon credits’. Transfer of carbon credits to a note holder will be conditional on the delivery of emission reductions during the first commitment period (2008-2012). Because a promissory note is a financial instrument, it can be used by the recipient to generate cash by either trading or borrowing against it.

The project mechanism provides a number of potential business opportunities for investors. PREs have been successful in delivering New Zealand the lowest-cost wind generation in the world.

For further information visit http://www.climatechange.govt.nz.