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New Zealand Emissions Trading Scheme: Insights and Future Directions

New Zealand is currently reevaluating the role of its forestry sector in achieving its long-term climate change goals and its implications for the New Zealand Emissions Trading Scheme (NZ ETS). Recent research conducted by Motu Economic and Public Policy Research and the Environmental Defense Fund sheds light on New Zealand’s innovative approach to forestry within the NZ ETS, its outcomes, and the questions it raises for the future. To guide future policy decisions not only in New Zealand but also in other nations, researchers have analyzed the behavior patterns within New Zealand’s forestry sector under emissions pricing. While the NZ ETS has stimulated afforestation and reduced deforestation, the results have not always aligned with policymakers’ intentions. Further policy adjustments will be necessary to help New Zealand meet its climate objectives well into 2050 and beyond.


What is the Emissions Trading Scheme?

New Zealand has set both international and domestic emissions reduction targets to transition to a low-emissions economy. These targets encompass a 50% reduction in net emissions (including forestry) by 2030, reductions in methane emissions, and net-zero greenhouse gas emissions by 2050. However, New Zealand’s unique economic structure poses challenges in achieving these ambitious commitments. The NZ ETS, in operation since 2008, has been a cornerstone of New Zealand’s climate change policy. By linking emissions limits to market-based emissions pricing, the NZ ETS incentivizes various stakeholders to reduce their carbon footprint. Despite covering all sectors and greenhouse gases worldwide, the system has deferred pricing for agriculture.

Research shows that emissions pricing has indeed influenced the forestry sector in New Zealand. The New Zealand ETS has fostered a cross-sector carbon market, registering a substantial afforestation portion and surmounting issues such as leakage and permanence. Emissions pricing has notably affected deforestation and afforestation patterns, especially following reforms in 2020. Despite its impact, the NZ ETS faced limitations in its initial decade. Factors such as policy uncertainty and weak emissions price signals affected afforestation and deforestation decisions. The scheme primarily drove forestry removals, potentially diluting its effectiveness in reducing gross emissions in other sectors. Forestry investments require long-term confidence and policy stability. The NZ ETS has had implications for the types of forests planted, favoring exotic species over indigenous ones due to cost considerations. This has raised concerns about biodiversity and resilience. Recent events, like Cyclone Gabrielle in 2023, have further highlighted environmental challenges associated with forestry practices.


The Road Ahead: The NZ ETS is expected to evolve in the coming decades. Policy reforms are already being discussed to strike a balance between gross and net emissions reductions, plantation and permanent forests and indigenous species. New Zealand’s experience with emissions pricing has demonstrated its effectiveness in driving afforestation and discouraging deforestation. However, achieving a sustainable balance in the long term will require continued reforms and in land-use policies and regulations.



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