In-principle decisions: further information

This page has information on the Government's in-principle decisions from stage two of the NZ ETS Review 2015/16.

Following the NZ ETS review, the Government made in-principle decisions on four proposals to improve the operation of the NZ ETS in the 2020s. Further information is provided below on the purpose and next steps relating to these decisions.

These proposals are designed to work together as a package.

The detailed settings for how these proposals are eventually implemented will also be informed by the Productivity Commission inquiry and our work to cost and test options for meeting our 2030 target.

For more information how these proposals fit within the climate change work programme see New Zealand’s climate change work programme - mitigation.

Auctioning

The Government has agreed in-principle to introduce auctioning in the NZ ETS, to align the NZ ETS to New Zealand’s emission reduction targets.  

Auctions are a way for the Government to sell New Zealand Units (NZUs) at the market price through a competitive bidding process. Auctions are a common feature of many emissions trading schemes internationally.

Emissions projections indicate that under current NZ ETS settings, New Zealand’s available carbon budget under the 2030 target is unlikely to be fully distributed to the market in the 2020s.  Auctioning will give the Government a tool to fully distribute the carbon budget for New Zealand’s 2030 target, and avoid putting more cost on our economy than necessary for meeting the target.

See New Zealand Emissions Trading Scheme and NZ's carbon budget in the 2020s for more information on New Zealand’s provisional carbon budget for 2021-2030 and its relationship with the NZ ETS.

Next steps

Regulations under the Climate Change Response Act 2002 (CCRA) are required to implement sales of NZUs by auction. We intend to engage with stakeholders to develop this regulatory framework.

These regulations will cover certain matters, including:

  • when auctions will start (including potentially a pilot auction) 
  • who can participate 
  • penalties for any breaches of the regulations 
  • the overall limit that would apply to NZUs auctioned (the NZU limit – see below)
  • any other matters relevant to the effective conduct of auctioning.

Before auctioning commences, the Government must set an NZU limit that takes into account both free allocation and auction volumes. This limits the amount of NZUs that can be sold by auction each year. The NZU limits must be set for five years into the future and extended by one year annually.  This will improve information available to the market about future NZU volumes.

The level of these NZU limits will be informed by the Productivity Commission inquiry and our work to cost and test options for meeting our 2030 target.

Following the establishment of regulations for auctioning, time will also be needed to build or commission the auction platform through which sales will occur.

The aim is to establish the auctioning mechanism by 2020, so that it is tested and operating before the 2030 target period starts in 2021.

A limit on international units

The NZ ETS is currently domestic-only but the Government expects international emission reductions, alongside domestic emission reductions and forestry, to play an important role in helping New Zealand meet its 2030 target cost effectively.

The Government has decided in-principle to limit NZ ETS participants’ use of international units when the NZ ETS reopens to international carbon markets. This means that if international units are again made eligible for compliance in the NZ ETS, participants will be able to use a mix of both international units and NZUs to meet their NZ ETS obligations.

This approach will:

  • give the Government a tool to balance the use of international units with the use of NZUs
  • make the NZ ETS more similar to emissions trading schemes in other countries, broadening the opportunities for carbon market linking available to New Zealand.

A limit is expected to:

  • help New Zealand obtain the right amount of international emissions reductions for meeting our 2030 target 
  • improve confidence to invest in domestic emission reductions and forestry.

In the past, an unlimited link between the NZ ETS and international carbon markets resulted in more international units being purchased than needed for meeting our targets. If this happened again, it would increase the economic cost of the NZ ETS on New Zealand beyond what is needed for meeting our target.

Next steps

Further work is needed to determine the details of how a limit on international units would be implemented in practice, and at what level it would be set.  

How the limit might be implemented will be developed in conjunction with an improved process for making decisions and announcements about supply volumes and settings in the NZ ETS (see below).

The level of the limit will be informed by the Productivity Commission inquiry and work by the Ministry to cost and test options for meeting our 2030 target.

The Government is actively exploring options for accessing international carbon markets in the future. Information about potential linking opportunities can be made available only when all Parties to these discussions are comfortable with doing so. Whether the Government, NZ ETS participants, or both will be able to purchase international units in future may depend on the results of these linking discussions.

New Zealand is also working domestically and together with other countries to consider the environmental integrity criteria for international units that might be used to help New Zealand meet its 2030 target.

A different price ceiling

The Government has decided to start work on developing a different price ceiling for the NZ ETS to eventually replace the $25 fixed price option. This will include assessing a volume-limited price ceiling incorporated into an auctioning mechanism.

The NZ ETS currently has a price ceiling in the form of a $25 fixed price option. It allows participants to meet their NZ ETS obligations by paying the Crown $25 instead of surrendering a unit. This was introduced as a transitional measure in 2009.

International carbon prices may rise above $25 in the 2020s, meaning that the $25 price ceiling could get out of step with international prices.

Next steps

Some of the elements of the fixed price option that will be investigated further include:

  • the price level, and whether and how it should increase over time
  • whether it should operate in a way that is volume-limited
  • whether processes need to be put in place to manage the price ceiling over time.

Coordination of decision-making

The Government has agreed in-principle to improve the way decisions and announcements about supply volumes and settings in the NZ ETS are made.

In the NZ ETS review 2015/16, business and other groups with an interest in the NZ ETS provided clear feedback that more regulatory predictability was needed for the NZ ETS to work effectively.

A new approach will be developed using a rolling five year period to provide a forward view of NZ ETS settings. This will build on the process currently outlined in the CCRA for the Government to set NZU limits relating to auctioning for five years into the future, and apply it also to the limit on participants’ use of international units and an alternative price ceiling.

These key settings and unit volumes will be set for five years into the future. This will be a rolling five-year period as each year these decisions will be extended for one extra year. This will give market participants more predictability and information, balanced with the need for the NZ ETS to be able to adapt to changing circumstances.

Next steps

A more detailed proposal for how this approach will operate in practice will be developed in conjunction with the further work on:

  • the detailed design of auctioning
  • a limit on international units
  • options for an alternative price ceiling. 
Reviewed:
13/08/18