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Breaking news - ETS announcements

May 17, 2019


Partners Greg Allen, Matt Conway, Gerald Lanning, Nick Wilson
Senior Associates Victoria Anderson, Joanna Lim

Government reform and public policy Climate change (inc Zero Carbon Act and Emissions Trading Scheme)

Hot on the heels of the Climate Change Response (Zero Carbon) Amendment Bill (Zero Carbon Bill), the Government yesterday announced tranche two decisions on changes to the Emissions Trading Scheme (ETS). 

The changes demonstrate the Government’s intention to use the ETS as a critical part of the machinery to deliver the net-zero target in the Zero Carbon Bill. And both the ETS and the Zero Carbon Bill changes will be working hand in hand in the same legislation, the Climate Change Response Act 2002.

Here is an overview of tranche two:

  1. Penalties
    Participants who fail to surrender or repay emission units on time will automatically be penalised at three times the current market price. Where a participant knowingly reports emissions incorrectly and their return is amended by the enforcement agency, there will be a 100% market price penalty, with provision for adjustment based on behaviour eg if reasonable care was taken as opposed to knowingly making an error.

    At the moment the Environmental Protection Authority (EPA) has to give notice before any penalties apply. The penalty is $30 for each unit not surrendered/repaid plus a further $30 if convicted of knowing failure to comply. EPA can reduce the penalty if a person has voluntarily disclosed a failure. Both the amount of the penalty (considered too low) and the difficulty in consistently applying the regime, have been catalysts for change or the error was reasonable in the circumstances.

    In fact, even the new proposed penalty level may be too low when looking at linking New Zealand’s penalty regime to international carbon markets with higher penalties. In this case, our penalty level may be raised.
  2. Greater transparency
    Emissions and removals will be published at participant level. This decision has been taken, despite recognising concerns in relation to commercially sensitive information. 

    For sectors with not many participants, this decision will be troubling. 

    Publication will start as soon as practicable, beginning with returns submitted in 2021, ie relating to this calendar year. Forestry participant reporting will be net emissions or removals.

    There will also be publication of individual cases of non-compliance where the non-compliance was grossly careless, knowingly made or the result of failure to surrender/repay units by a due date.
  3. Preparing for auctions
    Auctioning of New Zealand Units (NZUs) has been in the planning for some time. The aim of auctioning is to align unit supply with emissions reduction targets including those of the Paris Agreement, and naturally, the Zero Carbon Bill. The new decision relating to auctioning is that an “independent auction monitor” will be appointed via regulations. The monitor will provide independent oversight of auctions for their integrity.
  4. Phase out of fixed price option
    The fixed price option currently available for participants (which effectively caps the cost of NZUs at $25 per unit) will be dropped once auctioning starts. The aim is for auctioning to start at the end of 2020, and when it does, it will include a “cost containment reserve” mechanism to provide a price ceiling. If auctioning is delayed, the fixed price option will nevertheless be gone from the end of 2022 at the latest.

    This will be of great interest to participants in planning their strategy for buying and selling NZUs. It may present some short term challenges in trying to factor in the price uncertainty that this announcement creates, pending regulations to make the new price ceiling known. 

    Many participants will be digging out their contractual provisions that were developed when the ETS first came on the scene, to check provisions that allow them to pass on their actual ETS costs. Their downstream customers may be active in the face of this in pushing participants to be transparent about carbon pricing. Those who are reliant on carbon-based inputs may even want to take another look at whether they should be setting up their own NZU buying strategy.
  5. Price floor
    The changes to the ETS will also enable a price floor. This is clearly to avoid extremely low prices that do nothing to promote investment in non-carbon intensive alternatives, as happened in the early days of the ETS when prices got as low as $1 per unit. Hardly an incentive for change.

Deferred decisions

The tranche one and tranche two decisions will be implemented in a Bill amending the Climate Change Response Act 2002, likely to be coming through in the next month or so.

However, separate decisions yet to come include:

  • Whether proceeds generated through auctions should be earmarked for a particular purpose eg projects supporting the environment or disadvantaged groups

  • Market governance settings, including to prohibit insider trading and market manipulation, and dealing with other market effects, such as inadequate advice, secondary trading issues, money laundering/financing of terrorism, credit and counterparty risks, and conflicts of interest

  • Any changes to allocations of NZUs to those in emissions-intensive trade exposed industries (signalled for later in 2019)

  • Determining the appropriate regulator to oversee the market - currently the regulator is effectively the EPA, but it may be unsuited to oversight of the market governance issues identified above

  • The Government’s response to recommendations from the Interim Climate Change Committee on how agriculture could fully enter the ETS.

Bringing it together

We’ll be in print again soon with more thoughts on the Zero Carbon Bill and the tranche two ETS decisions. In the meantime, we welcome the opportunity to discuss any issues that affect you in particular.