The New Zealand Emissions Trading Scheme De-Link from Kyoto: Impacts on Banking and Prices

Motu Working Paper 16 -13

25 Pages Posted: 22 Sep 2016

See all articles by Suzi Kerr

Suzi Kerr

Motu Economic and Public Policy Research Trust

Judd Ormsby

Motu Economic and Public Policy Research Trust

Date Written: August 16, 2016

Abstract

The New Zealand Emissions Trading Scheme (NZ ETS) presents an opportunity to compare the theory of linked emissions trading with practice. From 2009 until late 2012 New Zealand was linked to the Kyoto market and there was no indication that this link would be broken. In November 2012 the New Zealand government announced that it would not proceed with the second commitment period of the Kyoto Protocol and future linking became uncertain. This de-link was confirmed by the government in December 2013 and it was announced that it would take effect from 31 May 2015. After this date overseas Kyoto units were no longer acceptable for surrender within the NZ ETS. We find that prices within the NZ ETS behaved as theory would predict. In a climate of certain linking, from 2011 when New Zealand began buying overseas units to surrender, New Zealand Unit (NZU) prices were roughly equal to Kyoto prices. Once the possibility of a future de-link emerged, NZU and Kyoto prices decoupled. NZU prices traded at a price reflecting their anticipated future scarcity – for New Zealand as a buyer of units this implies that NZUs traded at a higher price. In anticipation of the coming de-link NZ ETS participants banked (almost) all of their NZUs for future use and used cheap Kyoto units to meet (almost) all of their current obligations. The long delay between the announcement and implementation of de-linking led to a large bank of NZUs.

Keywords: New Zealand Emissions Trading Scheme (NZ ETS), climate change, mitigation, emissions trading, linked tradable permit market, Kyoto units, Certified Emission Reductions (CERs), Emission Reduction Units (ERUs), greenhouse gas, carbon markets

JEL Classification: Q54, Q58

Suggested Citation

Kerr, Suzi and Ormsby, Judd, The New Zealand Emissions Trading Scheme De-Link from Kyoto: Impacts on Banking and Prices (August 16, 2016). Motu Working Paper 16 -13. Available at SSRN: https://ssrn.com/abstract=2824884 or http://dx.doi.org/10.2139/ssrn.2824884

Suzi Kerr (Contact Author)

Motu Economic and Public Policy Research Trust ( email )

Level 1, 93 Cuba Street
P.O. Box 24390
Wellington, 6142
New Zealand
+64 4 383 4250 (Phone)
+64 4 383 4270 (Fax)

Judd Ormsby

Motu Economic and Public Policy Research Trust ( email )

Level 1, 93 Cuba Street
P.O. Box 24390
Wellington, 6142
New Zealand

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