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2 The overall approach to industrial allocation

The process for determining allocations

There are two parts to the process of determining allocations:

  • defining eligibility – who will receive an allocation (covered in section 3)
  • defining the allocation amount – how much they will receive (covered in section 4).

There are two potential ‘tracks’ for determining an allocation: a New Zealand track and an Australian track. They are illustrated in figure 1.

Figure 1: Alternative tracks to allocation

This image graphically presents the allocation process in the Climate Change Response Act 2002.

It emphasises that there are two “tracks” by which an activity can become eligible for allocation under the NZ ETS: a New Zealand track and an Australian track. The diagram shows that feedback from industry is needed to help identify which track an activity should progress on.

Under the New Zealand track a description of the activity would need to be developed first. This would be used as the basis for a gazette notice calling for data on the activity from industry.

The diagram shows that industry would need to submit historical data on emissions, revenue and output. The government would then use this information to test whether the activity met eligibility test in the Act.

If the data showed that the activity met the eligibility test in the Act then the government would use the data submitted to develop an allocative baseline for that activity.

Under the Australian track the diagram shows that where an activity is eligible for allocation in Australia that same activity can be made eligible for allocation in New Zealand. Under this track the same level of emissions intensity would apply as in Australia and the relevant Australian allocative baseline would be adapted for use in New Zealand. 

The end point of each track is a regulation that prescribes the relevant activity as eligible for assistance.

The diagram shows that each year industry would supply production data to receive allocation under the regulations.

As Figure 1 shows, these different tracks relate to both determining eligibility and determining amounts of allocation.

The proposed New Zealand track does not require Australia to have an emissions trading scheme. It can be used for an activity that is being conducted in New Zealand and is emissions intensive and trade exposed.

The proposed New Zealand track requires a number of steps, including:

  • identifying that an activity has the potential to meet the eligibility tests in the Act, either because its case for receiving allocation is being considered for eligibility in Australia or by taking into account preliminary data from industry (as requested under this consultation document)
  • defining the activity, including the start and finish of the process
  • publishing a Gazette notice that requests data on the activity
  • formally assessing the data against the emissions intensity and trade exposure tests, as set out in the Act
  • if tests are passed, developing allocative baselines for eligible activities on the basis of historical emissions intensity using the data gathered under the Gazette notice. The allocative baseline is an intensity measure and is defined in terms of emission units per unit of product (eg, tonnes of product).

The Australian track can only be used if Australia passes its proposed Carbon Pollution Reduction Scheme (or a similar scheme) into law. Where an activity has been defined as emissions-intensive and trade-exposed (EITE) in Australia the Australian track allows for it to be made eligible for an allocation in New Zealand by the development of a regulation.

In addition, under the Australian track the amount of emission units a firm receives would be based on allocative baselines defined in Australia. The Australian allocative baselines would be modified to take account of relevant New Zealand electricity allocation and natural gas ‘feedstock’ allocation factors.

Under both tracks, the actual annual allocation is developed by using the allocative baseline for the activity and multiplying it by the amount of production from the specified activity and by a declining rate of assistance.

The elements of the allocation process are outlined in more detail in sections 3 and 4 of this document.

The process for receiving allocations

Applying for an allocation

Regulations are required to establish the eligibility of an activity and to set the baseline(s) for allocation for that activity.

During the transitional period, applications for allocation may be made during the three months after a regulation comes into force. Once a regulation has been made, firms may apply for a provisional allocation between January and April of each year, based on the previous year’s output. If a provisional allocation is made, an adjustment must be included in the following year’s allocation to reflect the actual output from that year.

Further information on the application process will be provided in due course.

When will eligible activities receive allocation?

Eligible persons cannot apply for allocation until a regulation is complete, establishing that the activity being conducted is eligible to receive allocation. The timeframes to establish these regulations will vary from activity to activity. Key factors that determine how long it will take to develop a regulation include:

  • the difficulty of developing activity descriptions
  • the timeliness, quality and transparency of data supplied by industry
  • the number of activities.

The timing of regulations made via the New Zealand track will depend on the number and complexity of activities and the time required for industry to collect and submit data. The Government will make all reasonable endeavours to give firms certainty over allocation before obligations under the NZ ETS start in July 2010.

Industry will be able to influence the speed of the allocation process by providing thorough submissions on this consultation document and providing quality data in response to Gazette notices. Firms that are conducting an activity in Annex 1 (or conducting an activity that they think is eligible) should begin the process of collating data on emissions, revenue and output now, to prepare for the Government issuing a Gazette notice calling for data on their activity.

To mitigate against any unforeseen delays in providing allocation during the first year, allocation will be provided backdated to 1 July 2010 for those found eligible and the impact of the NZ ETS has been softened during the transitional period when firms will benefit from the progressive obligation to surrender only one unit for every 2 tons of emissions, and a fixed price of $25 per New Zealand unit.

Once regulations have been established, people conducting activities covered by the regulations will be able to apply for a provisional allocation at the beginning of each year in which emission costs are due to be incurred.

We will now look in more detail at how eligibility for allocations of emission units will be determined.