Emissions Trading in New Zealand: Managing Economic Risk in the New Zealand Emissions Trading System

Key messages

• Some economic risks cannot be reduced at the NZ Inc. level – they can only be reallocated. Other risks can be reduced by careful design.
• Consider temporarily limiting international sales to avoid extreme international prices being transmitted into the NZ economy.
• Move risk of extremely high prices to government: Include a ‘safety valve’ where the government will sell units at a fixed price – to avoid risk of extremely high prices or domestic illiquidity.
• Address ‘leakage’ issues – discussed in a separate paper in this series (Greenhalgh et al).
• Define units that are issued in advance as a share of the domestic target to spread the risk of changes in targets and reduce uncertainty about how they will be allocated.
• Make the emissions trading system as broad as possible by including as many gases and sources as is feasible.
• Encourage development of the secondary market.
• Do not revisit rules for free allocation once they are agreed.