Emission trading schemes are policies developed by authorities to combat climate change and to help reduce industrial pollution or greenhouse gases. It is an approach that is considered to reduce greenhouse effects in a cost-effective way. In the recent years, a couple of emissions trading systems such as EU emission trading systems, New Zealand scheme, and the Australian scheme have come to existence with systems for trading gas emission allowances. Emissions trading could be referred to as cap and trade. The word ‘cap’ meaning the limits on the quantity of greenhouse gases a factory or manufacturing company should emit per year.
There are two different schemes that were developed to reduce the pollution and climate change: emission trading schemes and emission tax. The two schemes have two significant differences. An emission tax scheme sets the price tag on the amount of greenhouse gases produced by a firm. On the other hand, the emission trading system sets the limit level of emissions. Firms under the ETS decide or determine the price of an emission unit.
The government or international agreements have set the limits of radiation from a particular market. Participants in the emission trade should acquire emission units based on the number of emissions that should be released by the company (Terry & Bartram, 2010). However, when the company overshoots the indicated units, then they are required to purchase additional units from other participants. In this case, the firm that sells the extra units may have reduced their emissions lower than the allocated units.
In economics, emission trading schemes are a market-based approach used to control pollution through taxation. The systems create laws used by greenhouse gas emitting companies by providing tax or economic incentives for abatement of effects and achieving reductions in the impact of the emissions. Many businesses have adopted the trading systems so as to minimize climate change that is as a result of greenhouse-gas emission.
Usually, a central body such as governments set the cap conditions to limit the number of pollutants that a given company could emit. The most common form of emission trade is the cap model. The idea of cap or limits has come into play as emission permits sold to companies and firms. A cap is usually fixed in emissions in the scheme that indicate and report the amount of radiationmeasured in emission units (Cullen, Yan, &Vanderwolk, 2011). The emission permits present the companies with permission to discharge a particular volume of pollutants. The schemes provide the need to acquire several licenses depending on the emission rate of a firm. However, the total number of permits cannot exceed the limits or the cap.
In this article, we primarily focus on the New Zealand Emission Trading Scheme. New Zealand Emission Trading Scheme (ETS) has set limits on pollutants emitted by firms in New Zealand. The ETS was established as a way of obligations on climate change. Also, the ETS puts practices the act of taxing companies for the amount of pollutants released per year. The ETS puts put a price greenhouse gases as taxes to reduce the effects of pollutants on climate change. The ETS sets prices on the emission units, and every pollutant-emitting firms should purchase these units. Under the NZ ETS, emission units, usually distributed to companies through a process called gifting, should be legalized by the NZ government.
The EITE (Emission-intensive and trade exposed) are activities that regulate the level of emission depending on the unit of production. For example, a certain amount of Sulphur dioxide equivalent emission per unit production. The NZ EST provide firms with allocations based on their production limits of emission-intensive goods. The allocation of emission units was done as an intensity based process. Power based process refer to an allocation design that are based on the production volume of a firm.
An economic model of the New Zealand Emission Trading System was released in June 2009 by Nick Smith. The economic model stated the government’s need to modify the emission scheme in future. Nick Smith published a report that identified the limitations in the CGE (Computable General Equilibrium) that was created by the economic model of the climate change policy. Smith’s report concluded that the carbon taxing or an emission trading system was a solution for the short-term results.
The emission units ensure thatmanufacturing companies do not exceed the acceptable volume of pollutants. Also, the ETS system provides that producers provide incentives to reduce the company’s emission. On the other hand, the ETS system is well designed to discourage customers from purchasing emission-intensive products. For example, the implementation of these emission trading systems will encourage investments in the non-pollution process or energy-efficient technology.
New Zealand Emission Trading Scheme has listed different sectors in the country that participate in the ETS. The following areas were listed under the New Zealand Emission Trading Scheme:
- Synthetic gases
Forestry in New Zealand is considered as the heart of environmental cleaning system. For these reasons, the New Zealand Emission Trading Scheme has developed an emission trading system on timber processors for the abatement of pollution. In the greenhouse emission process, the trees and plants as a whole absorb excessive carbon in the air. Therefore, plants should be preserved and protected from uncontrolled timber processing. The government of New Zealand passed a policy to protect the forest around Lake Taupo. The amount of carbon dioxide stored in plants primarily depends on the number of species and density of wood in a particular area.
Forestry entered the ETS in early 2008. Because the plant kingdom plays a significant role in maintaining and cleaning the environment, the forest sector was the first to enter the ETS. The New Zealand noticed the importance of trees and forest in meeting its international obligations for the pollutant (greenhouse gas emission). Timber processing at Lake Taupo will pose an environmental threat whereby trees and another useful plant in Lake Taupo will be destroyed. Therefore, strict measures should follow so as to prevent or reduce the destruction of trees and forests (Tuerk, 2009). Emission trading in New Zealand directly affects the activities around Lake Taupo. All the timber processing firms at Lake Taupo should possess a permit from the New Zealand Emission Trading Scheme to legalize the cutting of trees.
The concept of the New Zealand Emission Trading Scheme (ETS) tend to reach an objective that will see timber processing at Lake Taupo create less threat to the forest and trees in the region. The ETS has created a path that forest owners should use to choose the right species to plant and cut down. The investment objective was focused on long-term carbon sequestration, there could be a shift from pine to long-living species such as redwoods, eucalyptus, and Douglas-fir. The introduction and practice of New Zealand Emission Trading Scheme will ensure that the economics of established indigenous forests improves. Also, the returns from carbon provide a much earlier income stream compared with a timber-only investment.
The introduction of New Zealand Emission Trading Scheme shows it is unlikely that a significant shift in stocking rates will reduce to facilitate a regime that will maximize carbon profitability and minimize tending cost. Alongside the New Zealand Emission Trading Scheme, there exist other climate change policies such as the Afforestation Grant Scheme (AGS). The AGS was established in the year 2006. The first idea of the AGS came into existence in the discussion document Sustainable Land Management and Climate Change released in late 2006.
The New Zealand government went forward to implement other programs that could see the reduction of environmental pollution and greenhouse gases. The Permanent Forest Sink Initiative enabled private landowners to receive Kyoto-complaint carbon credits (AAUs). The Kyoto-complaint carbon credits were obtained when private landowners established new permanent forests. Private forest mainly comprised of exotic or indigenous species. However, the Permanent Forest Sink Initiative operates through a covenant mechanism.
As noted before, the New Zealand government has already developed a variety of emission trading schemes that will help control the rapid change in climate change and environmental pollution. The emission trading systems are designedabout the business-as-usual projections. The Permanent Forest Sink Initiative has acted as the remaining option for forest landowners who would wish to separate their forestry practices from regular forestry. Numerous analysis and research indicate that the New Zealand Emission Trading System will contribute positively to the rate of return for a forest owner under its conditions and regulations.
Despite the establishment of resources such as emission systems, significant progress will reflect when the economic system mirrors the cost of pollutants or emissions. However, it is important to add more price-based systems that regulate the rate of emissions. The rationale for emission trading primarily focus on reduction in greenhouse gas emission, helping firms to manage emissions obligations, reducing the climate change effects, and helping nations around the world to protect the economy during the transition.
The price-based measures or emission trading systems have a different economic rationale for a particular reason. The logic behind the price-based steps in reducing emissions has played as the primary objective of these trading systems. For many reasons, a poorly designed price-based system may affect the goals and turn it into a business for tax collectors. Under the ETS, New Zealand will become responsible for its emission in quotas. However, primary sources of emissions will fall under systems that are yet to be developed. An effective trading system should create market incentives to reduce emissions at a low cost. The reduction in emissions could obtain through economic activities.
On the other hand, the price-based systems ensure that the financial returns from legal, environmental practices will improve. These emission trading systems also ensure that emitters will invest in personal operations by improving their effectiveness and efficiency to reduce the rate of pollutant emissions before incorporating other methods of reducing pollutants. There exist two options for emission trading systems: carbon taxing and emission trading scheme. Both are price-based and share unique fundamental features. The key features include the cap or limits and points of obligations.
In both cases, there are ways in which the emission system will determine which companies or firms should pay what amount of tax. The point in which a company should pay tax for emissions is also called the point of obligation. The point of obligation determines which companies are required to trade emission units or pay tax to the government. An active and successful ETS possess five key characteristics: comprehensiveness, tradability, assurance, compliance, and flexibility. The scheme intends to maintain and control a supply of emissions reduction chances or opportunities. Maintaining these opportunities will help fewer charges for emission units in a particular market. Despite the commitment of the emission trading system, there is still a lot to cover so that public emitters, political leaders, and policymakers should engage in the EST.
Flexibility refers to the ability to modify or adopt a gradual change in the in the New Zealand’s emission trading scheme. The ETS could change with respect to the country’s obligation under the international pollution policy. On the other hand, the emission trading system flexible characteristic provide the opportunity to reform, restructure, and adopt a new international climate change policy.
Tradability is another essentialfeatureof a well-structured trading system. Tradability refers to the property of a good that can be sold in a different place. The emission trading should be tradable to various locations outside New Zealand or marketable to other firms. The marketable characteristic of trading systems acts as international linkage that ensures an integrated market or liquid market. Tradability ensures that New Zealand companies under the trading system take advantage of the pollutant reduction opportunities from other countries. Other countries could have a different emission trading schemes that firms in New Zealand could prefer to use. Therefore, trading the emission units with other companies or other countries make the adaptable and tradable situation for firms.
Assurance is the confidence for achieving a goal or set of objectives. A well-planned emission trading system should have the characteristic of confidence. In the case of the New Zealand Emission Trading System, the degree of creditability ensures that the companies can purchase the emission units on credit. Also, the ETS set high standards and assurance for verification, monitoring, and reporting.
The ETS possess the compliance characteristic. As defined by the Ministry of Environment of New Zealand, the conformity of the system refers to “a credible penalty regime for non-compliance, including financial penalties, together with make-good provisions that ensure environmental integrity.” On a brief note, compliance policy requires that all the firms under the New Zealand emission trading system should follow and accept policies and rules in the pollution system.
The trading scheme does not address the global warming issue. Despite establishing the Emission Trading System, greenhouse gases still find their way to the atmosphere. Solving global warming means that all the greenhouse gases should not come to contact with the environment. Also, finding a way that households will not use oil, coal, and gas is a way that directly addresses the issue of global warming. Emission trading systems are numeric because they are price-based. Pollution continues even after establishing the trading schemes.
Carbon trading aims at reducing the effects of greenhouse gases on the environment. However, the goal or objectives of the emission schemes do not solve the environmental problem directly. Manipulation of the systemshas seen firms acquire units and permits in the cheapest way possible. The system acts as an assurance for fossil fuel industries to operate as long as possible (Faure &Peeters, 2008)..
The emission trading system does not care for the climate change, and however, it cares for the amount of money traded for the emission units. The price of emission units does not provide a cap that is climatically active. Buyers of the emission unit snap up cheap pollution rights which create a threat to the climate change. Most firms populate carbon market regulators that have conflicts of interest.
Carbon trading systems have proven to interfere with the active problem-solving methods to global warming. The emission trading systems support the hydropower company that result in significant carbon emissions compared to small scale businesses that practice natural methods of farming. Also, emission trading system squanders resources and ingenuity on a wrong objective. Emission trading tend to keep its traders happy, blindfolding them from the long-term effects of the scheme. The system helps the buyers, consultants, and sellers to use cunning means of producing permits for personal profits.
Finally, the EST or emission trading system is not based on experience but faith. The trading scheme favors slogans rather than the experience. For this reason, failures have occurred because the response to the crisis cannot be tackled by economists. Auctioning pollution rights does not prevent firms from polluting the environment.
Cullen R., Yan, X.,&Vanderwolk, J. (2011). Green Taxation in East Asia. Cheltenham: Edward Elgar Publishing Limited.
Terry, S. & Bartram, G. (2010). The Carbon Challenge. Wellington: Bridget Williams Books Limited.
Tuerk, A. (2009). Linking Emissions Trading Schemes. London: Earthscan Publishing Company.
Faure, M. G., &Peeters, M. (2008).Climate Change and European Emissions Trading: Lessons for Theory and Practice. . Cheltenham: Edward Elgar Publishing Limited.