New Zealand Inland Revenue (IR) has released an Interpretation Statement for public consultation on the tax treatment of non-forestry activities under the Emissions Trading Scheme (ETS) on 16 January 2025.

This interpretation statement applies to industries registered in the Emissions Trading Scheme, other than forestry which is taxed differently. The statement sets out the conceptual framework for the income tax treatment of emission liabilities and emissions units (NZUs) in these sectors. It then explains how to calculate deductions for emission liabilities and it discusses the treatment of NZUs as income. Finally, there is a brief discussion of the GST treatment of NZUs.

Emissions trading is a tool to encourage and enable the reduction of greenhouse gas emissions that contribute to climate change. The ETS is a market the Government manages with the objective of getting long-lived gases linked to climate change to net zero by 2050. The ETS covers about half of all emissions in New Zealand, including those from fossil fuels, industrial processes and waste. Participation in the ETS can either be mandatory or voluntary depending on the type of activity being carried out.

Participants in the ETS that generate greenhouse gases need to surrender one NZU for each whole tonne of carbon emissions from their relevant activities. The number of NZUs available to the market reduces over time, which is expected to cause prices to rise, incentivising participants to find ways to reduce their emissions. Participants can decide whether to cut their own emissions or effectively pay others to reduce emissions by buying NZUs.

NZUs can be bought at government auctions or from other market participants, including from forestry and others who earn NZUs for carbon removal. NZUs may also be provided to certain industries for free under a method known as industrial allocation and to businesses that remove or destroy greenhouse gases.

The emissions measurement year follows the calendar year. If a business’s income year doesn’t align with the emissions year, accrual accounting requires emissions liabilities and NZU allocations from both years to be included in the business’s income year.

For GST purposes, NZUs are considered services, not goods. While supplies of NZUs are generally zero-rated for GST, if unrelated parties agree to provide NZUs in the future as part of a goods or services transaction, the agreed value of the NZUs, which may be zero, is used for GST purposes.

The consultation is set to conclude on 27 February 2025.