The ETS covers approximately 50% of the country’s greenhouse gas emissions and it handles this in part by setting a cap on the amount of emission that can be produced. In this article, we will explore the carbon trading system in New Zealand and its implications for businesses and organisations, including financial benefits, compliance requirements, and potential drawbacks.
How does Carbon Trading work?
The ETS is designed to encourage businesses to reduce their greenhouse gas emissions and in return get financial incentives for doing so. A cap is set on the amount of emission that can be produced and works in favour of those who emit less than their allotted amount and sell their unused credits to others who have exceeded their limit.
Businesses that emit large amounts of greenhouse gases, such as carbon dioxide, are required to buy carbon credits to offset their emissions. These credits are generated through the production of renewable energy sources and the implementation of more energy-efficient measures that are bought and sold on the carbon market.
Financial Benefits of Carbon Trading for Businesses
The carbon trading system in New Zealand has provided several financial benefits to businesses. The system creates an alternate revenue stream for those who produce less than their allotted amount of greenhouse gases by enabling them to sell their unused carbon credits. Although, the carbon credit price can fluctuate depending on the supply and demand, with the cost increasing as the cap on emissions decreases.
This money can then be reinvested into implementing energy efficiency measures, such as upgrading equipment and improving building insulation which can further reduce costs and improve competitiveness.
Additionally, the carbon trading system has led to increased investment in renewable energy, such as wind, solar, and geothermal power, thus creating new economic opportunities.
Compliance Requirements for Businesses
Mandatory reporting for climate-related disclosures is on its way. Certain entities are required to commence such disclosures according to the appropriate accounting standard for the accounting period that starts on or after 1 January 2023. These entities include large listed companies (defined as having a market capitalisation of over $60 million) as well as large registered banks, licensed insurers, credit unions, building societies, managers of investment schemes with more than $1 billion in assets, and Crown financial institutions. It would not be unexpected that a variation of these reporting disclosures flows down to smaller entities in the future.
The reporting disclosure would require businesses on an annual basis to calculate and report their emissions and must purchase carbon credits to offset any emissions that exceed their allotted amount. They are also required to keep accurate records of their emissions and carbon credits, including the number of credits purchased, the source of the credits as well as the date of purchase.
Potential Downsides of Carbon Trading
While the carbon trading system provides several financial benefits for businesses, a few potential drawbacks also need to be considered. The cost of compliance with the aforementioned guidelines can be quite expensive which makes it difficult for smaller businesses to participate. The Carbon Trading system can be quite complex and difficult to navigate, making it more difficult for those who are involved to maintain compliance standards. Furthermore, because of the way the system works, there is definitely more incentive to move toward more sustainable practices. However, it allows more carbon-intensive businesses to continue through credit purchases. This arguably leads to there not being any real emission reductions but more so an adjustment of the frequency and volume of carbon exchanges between businesses. Which in the end does not serve as an effective method of battling climate change.
In summary, the carbon trading system provides an opportunity for businesses and organisations to reduce their carbon footprint and address the impacts of climate change. However, it is important for businesses to carefully consider the financial benefits and drawbacks of the system, as well as their compliance requirements when deciding whether to participate.
Author – Ploy Watthanakun
