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WELLINGTON (Reuters) - New Zealand will ban the use of U.N.-backed industrial gas offsets to stop any distortion to its carbon trading scheme and bring it into line with programs in Europe and Australia, the government said on Thursday.
Climate change minister Nick Smith said offsets from projects that destroy potent greenhouse gases hydrofluorocarbon-23 (HFC-23) and nitrous oxide (N2O) would be banned from Dec 23 unless emitters had already entered into binding forward purchase agreements.
"We are banning international units generated from industrial gas destruction projects involving HFC-23 and N2O because we are concerned that they create perverse incentives that may not benefit the environment," Smith said in a statement.
Banning of the import of the offsets had been recommended by a review of New Zealand's carbon trading scheme in September, and had been widely expected given the European Union and Australia had already banned their use in their programs.
"It's important that New Zealand does the same or we risk becoming a dumping ground for units of questionable environmental benefits," said Smith.
The New Zealand scheme allows polluters and traders to import U.N. offsets called Certified Emissions Reductions from clean energy projects, such as wind farms, in poorer nations.
The CERs can help polluters meet their emissions reduction obligations because the projects help reduce greenhouse gas pollution elsewhere.
But CERs from industrial gas projects have become increasingly controversial because of the large volume of offsets given to just a small number of factories. This has triggered criticism that the owners of these projects, mainly in China and India, are enjoying massive windfall profits.
HFC-23 is a waste product from the production of the refrigerant gas HCFC-22. The waste gas is destroyed because it is nearly 12,000 times more potent at trapping heat in the atmosphere than carbon dioxide, the United Nations says.
More than half the 804 million CERs issued to date have come from projects that destroy HFC-23 and nitrous oxide.
"We see no impact on price here. There's enough units from non-industrial gases and other sources that emitters can get their hands on, but it will remove regulatory uncertainty in the market and overall that's a good thing," said OM Financial analyst Nigel Brunel.
Emitters who have already committed to buy the prohibited units in forward contracts will be able to use them until June 2013.
However, a business lobby group said the ban would be a serious and expensive issue for companies.
"Trade-exposed businesses, already at a disadvantage because their competitors do not face a similar price on carbon, will potentially have their international competitiveness further undermined," said Business NZ chief executive Phil O'Reilly.
He said a ban should only have been considered if the flaws in the U.N.-issued units could not be fixed.
"The government's decision appears to call the future use of all CERs into question, undermining a key fundamental element of the trading scheme."
The price of New Zealand emission permits, called NZUs, has fallen sharply in the past six months in line with the plunge in CER and European permit prices.
New Zealand polluters have bought millions of CERs this year to meet their obligations, pressuring NZU prices and the worry is that allowing offsets from industrial gas destruction projects could depress prices further.
Editing by Lincoln Feast and David Fogarty