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Future Options for Industrial Free Allocation in the NZ ETS

Author

Listed:
  • Benjamin Rontard

    (Autonomous University of San Luis Potosí)

  • Catherine Leining

    (Motu Economic and Public Policy Research)

Abstract

The provision of industrial free allocation can be one of the most technically challenging and politically fraught elements of designing an emissions trading system (ETS). In the New Zealand Emissions Trading Scheme (NZ ETS), the primary rationales for industrial free allocation have been to mitigate the risk of emissions leakage to other jurisdictions and avoid economic regrets from losing domestic production that would be viable if other jurisdictions adopted more ambitious climate change policies. Since 2010, emissions-intensive and trade-exposed (EITE) industrial producers have received free allocation on an output basis at two levels of assistance (90 per cent and 60 per cent) without an absolute limit. In 2020, major reform legislation introduced default phase-out pathways over 2021–2050 for industrial free allocation, with the potential for future activity-specific adjustment. The government has signalled it will consider broader changes post-2021 to avoid overallocation while still mitigating the risk of emissions leakage overseas. To help inform future policy making on these issues, this paper examines conceptual design issues for free allocation in an ETS, describes the regime for industrial free allocation in the NZ ETS, and provides comparative analysis with three other systems. It then identifies a range of options for further reform: changing the eligibility criteria, changing the calculation methodology, substituting alternative measures, or accepting and managing emissions leakage. Further research will be needed to evaluate the merits of these options. More fundamentally, the government should consider whether the public and private benefits of maintaining and improving industrial free allocation are worth the cost and complexity in the evolving international and domestic contexts. Ultimately, any future provision of industrial free allocation should be used to assist – and not block – the transition to an economy that rewards low-emission innovation.

Suggested Citation

  • Benjamin Rontard & Catherine Leining, 2021. "Future Options for Industrial Free Allocation in the NZ ETS," Working Papers 21_13, Motu Economic and Public Policy Research.
    • Handle: RePEc:mtu:wpaper:21_13
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    File URL: https://motu-www.motu.org.nz/wpapers/21_13.pdf
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    References listed on IDEAS

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    1. Bin Fan & Yun Zhang & Xiuzhen Li & Xiao Miao, 2019. "Trade Openness and Carbon Leakage: Empirical Evidence from China’s Industrial Sector," Energies, MDPI, vol. 12(6), pages 1-16, March.
    2. Koch, Nicolas & Basse Mama, Houdou, 2019. "Does the EU Emissions Trading System induce investment leakage? Evidence from German multinational firms," Energy Economics, Elsevier, vol. 81(C), pages 479-492.
    3. Easwaran Narassimhan & Kelly S. Gallagher & Stefan Koester & Julio Rivera Alejo, 2018. "Carbon pricing in practice: a review of existing emissions trading systems," Climate Policy, Taylor & Francis Journals, vol. 18(8), pages 967-991, September.
    4. Catherine Leining & Suzi Kerr & Bronwyn Bruce-Brand, 2020. "The New Zealand Emissions Trading Scheme: critical review and future outlook for three design innovations," Climate Policy, Taylor & Francis Journals, vol. 20(2), pages 246-264, February.
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    More about this item

    Keywords

    Emissions trading; free allocation; industry; climate change mitigation;
    All these keywords.

    JEL classification:

    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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