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Proposed ETS changes will introduce NZU auctions and a new accounting system for forest owners

November 14, 2019

Contacts

Partners Greg Allen, Gerald Lanning
Special Counsel Mark Baker-Jones
Senior Associates Victoria Anderson, Joanna Lim

Climate change (inc Zero Carbon Act and Emissions Trading Scheme)

Two important Government proposals affecting participants in the NZ Emissions Trading Scheme (ETS) have been released this week:

  • the introduction of New Zealand Units (NZUs) auctions[1]
  • the introduction of averaging accounting - where participants must account for the long-term changes in carbon in their forest[2]

Introducing auctions for NZUs

What you need to know

In its latest round of reforms to the ETS, the Government will introduce auctioning of New Zealand Units (NZUs). To support the operation of the auctions, regulations are needed on auction design, and rules and processes for pre-bidding, bidding and post-bidding. The Government advises that auctions will be implemented for spot trading only, rather than forward or futures trading.

The auctioning consultation document covers:

  • scheduling and price controls
  • each stage of the auctioning process, from pre-bidding to post-bidding
  • some aspects of the role of an independent auction monitor.

It does not cover how many units will be in the cost containment reserve or what the trigger price will be - this will be in subsequent consultation. What we do now know is that the Government proposes only one trigger price (at least initially) rather than multiple trigger prices.

Key matters to consider - preferred options

The paper covers various options for a number of aspects, but indicates the following key preferences:

  • Volume will be evenly distributed across auctions. NZUs unsold at auction will be rolled into the next auction, with restrictions. Auction dates will avoid certain price sensitive periods, such as when key economic data is released and might also avoid the period close to 31 May so as not to disrupt secondary markets leading up to the surrender date.

  • Successful bidders will pay the lowest successful bid price in the auction.

  • All account holders can participate in auctions (including reserve auctions).

  • A price floor will be implemented as a minimum price at which NZUs may be sold at any auction and each auction may also include a technical reserve price to ensure NZUs are not sold at unacceptably low prices compared to the secondary market.

  • a new soft “price ceiling” in the NZ ETS (cost containment reserve) will replace the $25 fixed price option. Although referred to as a price ceiling, the cost containment reserve does not directly limit the maximum NZU price. Rather, the mechanism seeks to mitigate price by providing for NZUs from the cost containment reserve to be released through a separate auction (the reserve auction). Once the trigger price is reached, the reserve auction will take place soon after the scheduled auction in which the price trigger is hit.

  • To bid in auctions, participants will need to pre-register once and submit an intention to bid form for each auction they wish to participate in. Potential bidders will undergo due diligence checks. Bidders will provide collateral to participate in auctions.

  • Bids will be in increments of 500 units and $0.05. Payment will be required before delivery.

  • An independent auction monitor will be appointed to oversee auctions.

Next steps

Consultation on the ETS auctions technical consulting document ends on 19 December 2019.

A subsequent discussion document will be released shortly on the volume of NZUs that will be available for auctioning, and the volumes and trigger price/s for the new cost containment reserve and price floor (if enabled). Decisions on the rules will be implemented in regulations in time for auctioning at the end of 2020 or early 2021. Observers will note that this is the first indication that there might be slippage in when auctioning will start – previous indications have all been for the end of 2020.
 

Introduction of averaging accounting for forestry

What you need to know

The forestry consultation document seeks feedback on proposed regulations to support the introduction and use of averaging accounting, bringing permanent forests into the ETS and operational improvements.

The key proposals relate to the introduction of averaging accounting under which participants will account for the long-term changes in carbon in their forest. Under averaging accounting, post-1989 forest participants (non-permanent) will earn NZUs up until their forest reaches its long-term average carbon storage and will not usually need to pay any NZUs back to the Government when they harvest.

Key matters to consider across all proposals

  • The setting of rotation bands (ie age at which forest is harvested) under averaging accounting, the allocation of default rotation bands, where in the rotation bands participants will harvest, and accounting for changes in rotation bands.

  • With the replacement of the Permanent Forest Sink Initiative (PFSI) with the new ‘permanent post 1989 forest’ activity, whether in applying the current Regulations there is anything else that needs to be considered, and consideration of penalties for clear-felling this type of forest.

  • Participants not needing to calculate changes in carbons stock where there is no change in carbon stocks to report (eg the forest doesn’t change rotation band during an emissions return period) and an option for MPI to do the calculations for participants.

  • The application of Field Measurement Approach (FMA) - the method used to calculate how much carbon is in a post-1989 forest - to post-1989 forests under averaging accounting and the collection of FMA data from the new forest categories.

  • Preventing One Billion Trees grant funded forests from claiming NZUs during a stand-down period.

  • The ability to relocate post-1989 forest which use averaging accounting by planting elsewhere (carbon equivalent forest land swaps).

  • Defining what a temporary adverse event is, and the process for claiming an exemption from surrendering NZUs if a participant’s forest is affected by a temporary adverse event.

  • Setting tree weed best practice forest management clearing exemption processes and standards.

Next steps

Consultation on the Proposed Changes to the Climate Change (Forestry Sector) Regulations 2008 document ends on 20 December 2019.
 

Get in touch

Get in touch with any of our contacts if you would like further details on the proposals and how they will affect your organisation.