Outcomes from stage two of the NZ ETS Review 2015/16

This page has outcomes from stage two of the NZ ETS Review 2015/16 and next steps.

Outcomes from stage two of the NZ ETS Review 2015/16

As a result of stage two of the NZ ETS review, the Government has made in-principle decisions on a package of four proposals to improve the operation of the NZ ETS in the 2020s. The in-principle decisions will require further work and consultation before they are implemented. There were no immediate changes to how the NZ ETS operates as a result of these decisions.

The in-principle decisions included:

  • introducing auctioning of units, to align the NZ ETS to our climate change targets
  • limiting participants' use of international units when the NZ ETS reopens to international carbon markets
  • developing a different price ceiling to eventually replace the current $25 fixed price option
  • coordinating decisions on the supply settings in the NZ ETS over a rolling five-year period.

See the Cabinet paper: New Zealand Emissions Trading Scheme Review: Improving the ETS framework

Regulatory Impact Statement: Improving the NZ ETS framework for unit supply

In addition to issues addressed by these in-principle decisions, the review also identified other ways the NZ ETS could be improved. Further work will be undertaken on how to resolve these problems – see below for more information.

About the NZ ETS review

The NZ ETS review was an assessment of the operation and effectiveness of the NZ ETS conducted by officials. It began in late 2015 and was conducted in two stages.

The advice provided to Ministers outlining officials’ assessment of the operation and effectiveness of the NZ ETS concluded the NZ ETS Review 2015/16.

Findings of stage two of the NZ ETS review

Stage two of the review identified that some aspects of the NZ ETS need to be modified so that the scheme more effectively supports New Zealand to meet its 2030 and future emission reduction targets.

Key findings included:

  • the Government does not have the tools required to effectively manage the supply of units into the NZ ETS
  • current settings and management of the NZ ETS create significant regulatory uncertainty for participants
  • operational and technical issues are causing administrative inefficiencies.

A forestry package

Forestry is one of New Zealand’s key abatement opportunities. It is important that the NZ ETS sends the right signals to support investment in forests. The review identified that the current NZ ETS accounting approach for post-1989 forestry acts as a barrier to participation for some landowners and foresters, limiting the ability of the NZ ETS to encourage new planting.

New Zealand will also apply a new averaging forestry accounting approach to post-1989 forests for its 2030 target. This provides an opportunity to potentially introduce a new NZ ETS accounting approach to improve NZ ETS incentives for post-1989 forests.

The review also found that there are a range of possible improvements to forestry operational settings to reduce complexity for forestry participants and the Crown. There is also potential for better alignment between the NZ ETS and other carbon forestry schemes, such as aligning the administration of the Permanent Forest Sink Initiative with the Climate Change Response Act 2002 (CCRA).

There are strong links between any changes to NZ ETS forestry accounting and operational improvements. We consulted with the public on forestry and the overall framework of the ETS in August and September 2018 to help inform the Government’s final policy decisions. The first of two tranches of changes based on this consultation and the in-principle decisions were announced in December 2018.  See Proposed improvements to the New Zealand Emissions Trading Scheme.  The second tranche of changes is expected to be announced in early 2019.

Free allocation

The NZ ETS legislation, the CCRA, outlines a 1 per cent per annum reduction in industrial free allocation. This phase out is currently temporarily suspended, but there is no clear end date for the suspension. This is a source of regulatory uncertainty for free allocation recipients.

The Government has committed to maintaining free allocation at current rates at least until the end of 2020. When a phase out might begin needs careful consideration, given changes could have negative local economic and global environmental impacts.

Any future decision to phase-out free allocation will be clearly signalled in advance to the market.