Emissions trading in New Zealand: Options for Addressing Trade Exposure and Emissions Leakage

Key messages:

1. Some products or processes in New Zealand may be disadvantaged in international markets because they face a carbon price, whereas competing suppliers of the same or similar products do not. This may result in emissions leakage, which arises when a product’s manufacture is re-located to countries without a carbon cap, leading to no (or a smaller) net decrease in global greenhouse gas (GHG) emissions and potential economic and social disruption from the re-location of that production.

2. Policy design should:

• Protect only trade exposed emissions intensive products or processes (exported or competing with imports) that would otherwise contribute to significant emissions leakage.
• Prevent emissions leakage only where it is cost effective; address firm/production relocation not financial losses resulting from higher costs.
• Ensure there are sufficient incentives to reduce GHG emissions intensity in the manufacture of trade exposed emissions intensive products.
• Establish thresholds for identifying those trade exposed emissions intensive products or processes with significant potential for emissions leakage. Clearly defining trade exposed emissions intensive products or processes is complex and as some policies will be implemented through firms, they will be blunt instruments.
• Be flexible. As more countries implement climate policies, adjust the list of trade exposed emissions intensive products and the extent of protection in response to any changes in price and trade signals.

3. Two options that reduce or avoid emissions leakage are output-based free allocation or border tax adjustments for trade exposed emissions-intensive products or processes.

4. There will be no perfect option for addressing trade exposed emissions intensive products or processes and emissions leakage; all involve some form of compromise.