At the heart of the policy framework is an elegant solution to the problem of how best to put a price on greenhouse emissions and a revenue recycling mechanism. Basically the policy links the internal price for greenhouse emissions to the price set globally under the Kyoto protocol, which is effectively a global cap and trade system.
Under the policy, if you bring fossil fuels into the economy (whether by importing or mining) then you need to purchase the Kyoto units to cover the emissions from those fuels and then pass those units on to the Government. The electricity generators have to purchase the Kyoto units to cover their operations and pass them on [addendum - ie the carbon credits to cover the emissions from fossil fuels used by electricity generators aren't purchased by the importer but by the electricty generator].
In agriculture, the processors like Fonterra are required to buy the Kyoto units to cover the increase in emissions over 1990 levels resulting from their cows and pass them onto the Government.
In forestry, the Kyoto credits generated from post-1990 forests are distributed amongst the whole sector to encourage the sector to hang onto their forests (and plant more).
The result is that there is a price on carbon in the energy sector, there is a price on carbon at the margins in the agriculture sector, and carbon credits in forestry. The price is set by the international Kyoto market. Plus the Government has Kyoto units in excess of the total greenhouse emissions of NZ as well as saving $600m that has been set aside to pay for Kyoto units to cover our emissions.
Some of these units can be used to provide partial protection for energy intensive sectors that would simply go overseas if they were made to pay full price, because currently some countries still aren’t putting a price on carbon (ie Oz and US) .
Some of the surplus units can be sold and, along with the $600m, the revenue used to invest in measures to reduce emissions and provide relief for those less able to adjust – measures such as public transport, progressive pricing of electricity and retrofitting insulation to old houses.