New Zealanders always did pride themselves on beating Australia to the punch – and when it comes to getting a national Emissions Trading Scheme (NZETS) up and running, the New Zealanders are a couple of years ahead of their trans-Tasman counterparts.

 

NZETS is expected to officially commence later this year, while the Australian scheme is scheduled to commence in 2010. “Given that the New Zealand scheme will have been in force for a couple of years by the time the Australian scheme starts, we’re hoping that the opportunity will be taken to dovetail the two schemes,” says Buddle Findlay partner Steve Nightingale.

 

NZETS will come into effect over a period of years, with staggered starting points for each industry. Forestry is expected to become the first industry to commence participation in the scheme later this year, with transport, stationary energy among the other industries to follow in the ensuing years. The agriculture and waste industries will be the last to join the scheme in 2013.

 

The NZETS isn’t the first such emissions trading scheme in the world, but Steve Nightingale still describes it as ground-breaking: “It is unprecedented because unlike other schemes such as the EU scheme, which covers only carbon dioxide emissions from certain industries, the NZ scheme covers all Kyoto gases and all industry sectors. The inclusion of the agriculture sector in particular is significant because this sector accounts for about half of NZ’s emissions.”

 

In Australia, a similar approach is widely expected to be taken. “The government has indicated that they will try to make the scheme as broad as possible, but they do seem to be playing their cards quite close to their chests,” saysMartijn Wilder, partner at Baker & McKenzie. Speculation is still rife as to the exact extent of the scheme, but it seems inevitable that the energy and transport sectors would be particularly affected.

 

Nicholas Brunton of Henry Davis York says that the Australian scheme is likely to differ from the NZ scheme by omitting the forestry and agriculture sectors. “At least in the initial stage, we are unlikely to see those two sectors involved,” he says.

 

Wilder sees a strong benefit of a coordinated trans-Tasman approach. “The bigger the market, the more economically efficient it will be,” he says, “There are incredible opportunities associated with creating not just a trans-Tasman trading bloc, but an Asia-wide trading bloc which would be on the same footing as the European and North American blocs. It’s an incredible opportunity for Australia and NZ to take leadership and hopefully bring other major players like China and India on board.”

 

Wilder admits that there will be challenges in designing a system which is compatible for each market – for example, NZ emissions largely derive from the agriculture sector whereas Australian emissions largely derive from the energy sector – but says that it’s worth the effort.

 

Buddle Findlay partner Alastair Hercus says the volume of emissions trading work will peak as NZETS is designed and then taper off to a more steady level once the main implementation has taken place.

 

“There’s a lot of major work yet to be done, and key aspects of the scheme will be designed over the next three years. So there will be a lot of issues to work out such as the point of obligation for agriculture – farmers or upstream processors – and the detail around free allocation of units. Then finally there’s the challenge of ongoing compliance with the scheme – matters like measuring and reporting emissions and trading units.” Hercus describes NZETS as a major piece of compliance legislation with parallels to the introduction of the GST.

 

But while Hercus predicts that NZETS will be a significant source of work in the short to medium term, he says it is unlikely to generate large volumes of work once it is up and running. It’s a common view in the industry and the predicted volume of emissions trading work, in its final form, is sometimes compared to that associated with tax work – a steady stream, but not on par with practices such as banking or corporate.

 

But that’s not the view of Wilder, who sees emissions trading as a growth industry which can only keep expanding. “It’s a new industry, a new market and a new opportunity,” he says. Wilder concedes that the work will taper off for firms only involved in the regulatory side of things, but says that emissions-related work will continue to be strong. “We’ve been doing emissions-related work for over 10 years and expect that it can only get busier,” he says.

 

Louis Chiam, partner at Mallesons, is also optimistic about the future of emissions trading work: “We see our carbon practice growing strongly, both as a stand-alone advisory and trading practice, and as an integrated part of our broader banking, M&A and project practices,” he says.

 

Nicholas Brunton, partner at Henry Davis York, agrees that there will be a large carbon market, but says that he doesn’t see a significant flow of work in the long term. “There is a clear policy objective in the new legislation to keep transaction costs at a minimum,” he says, “So once companies have done one or two transactions, they should be comfortable with proceeding with future transactions with minimal assistance.”

 

Brunton, however, does see a spike of work over the next few years: “We’re talking about design and implementation work and then once the national scheme is introduced, more work resulting from the phasing out of existing State-based emissions schemes,” he says.

 

Emissions-related work comes with its own unique and confusing vernacular (see box opposite), and firms are increasingly finding the field to be a lucrative source of income. Henry Davis York, for example, has seen its emissions practice more than double over the past year. Baker & McKenzie is another firm that has been busy for many years with designing emissions trading schemes and documenting carbon transactions.

 

The phrase ‘carbon transaction’ conjures up images of lawyers swapping boxes of air, but Nicholas Brunton explains that it’s an increasingly common term. “Essentially it refers to any transaction with a carbon component,” he says. “So, if you have a transaction involving a power station, the potential costs associated with the station emitting carbon dioxide would be an issue for both the buyer and the seller – that’s the carbon component which the parties might seek advice on.”

 

Brunton says that a lot of his work comes from clients who see emissions trading as an opportunity to generate income, rather than a compliance liability. He gives the example of a waste disposal company that is exploring the option of generating carbon credits by converting waste into fuel. “In other words, it’s about turning liabilities into assets,” he says.

 

Mallesons is another firm well versed in the vocabulary of carbon finance. “In Australia, we have been involved in a number of CDM and voluntary transactions, as well as advising on carbon issues generally,” says Louis Chiam. “We've advised Chevron Australian on carbon capture and storage issues relating to its A$11bn Gorgon gas project, which represents about a quarter of Australia's total known gas reserves. Through our Hong Kong office we have been involved in numerous Kyoto-backed CDM projects, as well as voluntary offset credits and trading platforms.” The firm’s recent work included advising a major European bank on a power sector carbon offset project in China.

 

The emissions trading scheme represents a very significant recalibration of the Australian economy, and the infusion of a carbon price across a wide base of the economy has broad and long-term implications, says Louis Chiam. The question then follows – is the industry ready for change? Are firms going to see a rush of work as the implementation date approaches?

 

Louis Chiam says that his clients are well advanced in their thinking: “Obviously, everyone is waiting for more detail about the scheme, but overall, interest levels are very high,” he says.

 

Steve Nightingale agrees that the market is preparing for the road ahead. “Clients are familiar with the concept of emissions trading. It has been discussed for years and some firms have international arms that have dealt with it in the EU system. Other firms have experience in carbon pricing from work on an earlier carbon tax proposal in New Zealand. So it’s not new in a macro sense, but designing a carbon trading strategy is where the rubber meets the road. There will be a bit of a rush of work prior to implementation because there’s a lot to achieve in a very short period and the sheer scope of the task at hand is huge. But clients are certainly not sitting on their hands.”

 

It seems that everyone is rushing to hop on the climate change bandwagon. At the ALB offices, press releases arrive daily from firms promoting their new-found expertise in emissions reduction and emissions trading. Martijn Wilder, who is one of the few lawyers who has practiced exclusively in the area and in his case, for nearly ten years, says it is not unexpected. “Even as recently as a couple of years ago, few firms treated climate change as an area of practice seriously. We often heard firms say there were no revenue prospects and no real market,” he says, “But this showed a real misunderstanding of the importance of climate change and how the law would drive carbon markets and their need for very broad legal services.” When he joined Bakers, many of their clients were experienced in emissions trading through the US NOx and SOx trading markets and so a step to greenhouse emissions trading was logical. “Ten years on we have a truly global team of dedicated experts who have helped shape the law and the market, and who are supported by lawyers from a whole range of other practices. But for us the key is really understanding the market in which we advise,” he says.

 

By contrast, Steve Nightingale is quite open about the fact that Buddle Findlay’s climate change team does not spend all of their time on climate change work. “Some of the concepts are new, but it’s not a separate new practice area,” he says. “Our team is cross-disciplinary with lawyers from commercial, public law, banking and tax. It’s not like a traditional specialist team because it encompasses a range of existing areas.”

WHAT ABOUT THE EXISTING EMISSIONS REDUCTION SCHEMES? The expected introduction of the AETS in 2010 raises questions about the future of pre-existing emission reduction schemes, says Johnson Winter & Slattery partner Fiona Melville. Melville, who compiled the table of the main pre-existing schemes below, says that whilst the NSW scheme is likely to be phased out once the AETS is implemented, the MRET Scheme and the 13% Gas Scheme are likely to remain.
Jurisdiction	Australia	Victoria	NSW and ACT	Queensland	Australia
Title	MRET Scheme (Mandatory Renewable Energy Target Scheme)	VRET Scheme (Victorian Renewable Energy Target Scheme)	GGAS Scheme (Greenhouse Gas Emissions (CO2-e) Abatement Scheme)	13% Gas Scheme.	AETS Scheme (Proposed Australian Emission Trading Scheme)
Purpose	To require minimum levels of renewable energy use	To require minimum levels of Victorian renewable energy use	To reduce CO2-e associated with electricity in NSW	To encourage generation of electricity from gas in QLD	To reduce CO2-e emissions by 60% by 2050
Start	01/01/2001	01/01/2007	01/01/ 2003	01/01/2005	01/07/2010 (not yet confirmed)
Termination Date	31/12/2020 (0 if extended)	31/12/2030 (possibly on MRET change)	31/12/2012 (possibly on AETS start)	31/12/2020	2050 (not confirmed)
Cost to economy in 2010	$607 million @$63 per REC	$60 million @$63 per VREC	$212 million @ $8.25 per NGAC	$97 million @ $12 per GEC	$8.4 billion @ $20 per AEU for 70% coverage