FAQs / How does the emissions trading scheme work?

The NZ Government’s emissions trading scheme can be explained by using a simple example:

  • Firm A is an oil company. It needs to buy emission units to cover the greenhouse gas emissions it is responsible for.
  • Firm B is a large forestry company that receives emission units for land it is planting in forests. It is also undertaking some deforestation, leading to emissions for which it has to surrender emission units. Initially, Firm B has a shortfall of units but, as the new forest matures over time, it will have an overall surplus of units.
  • Firm C is a major industrial user of electricity. Its costs increase with the introduction of the emissions trading scheme. To   help Firm C adapt to these higher costs, the government gives Firm C an allocation of emission units, which Firm C can sell to offset its increased electricity costs.

Under the emissions trading scheme, Firm A and Firm B both buy Firm C’s units in the short term to cover their emissions. Because it now has to pay higher energy prices, Firm C finds it is cheaper to invest in energy efficiency. Alternatively, any firm can import or export eligible units from other countries. Over time, as its forest matures, Firm B has spare units available and sells them to Firm A.

From the Ministry for the Environment

For more information on the government’s climate change work, including information about the emissions trading scheme, visit www.climatechange.govt.nz or call 0800 CLIMATE (0800 254 628).

Posted in: Environmental